Dr. Shahadat Hossain: Cryptocurrency has attracted significant attention from investors, regulators and the media since Bitcoin was first introduced by Nakamoto in 2008. A cryptocurrency (also called crypto currency or crypto) is a digital currency designed to work as a medium of exchange wherein individual coin ownership records are stored in an online ledger existing in a form of computerized database with strong cryptography to secure online transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership.
What cryptocurrency is?
Cryptocurrency has attracted significant attention from investors, regulators and the media since Bitcoin was first introduced by Nakamoto in 2008. A cryptocurrency (also called crypto currency or crypto) is a digital currency designed to work as a medium of exchange wherein individual coin ownership records are stored in an online ledger existing in a form of computerized database with strong cryptography to secure online transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership.
This is a peer-to-peer (p2p) electronic cash system that allows online payments to be sent directly from one party to another without going through a financial institution. Users are able to generate cryptocurrencies through the process of mining. Unlike other currencies/financial assets, cryptocurrencies are not controlled by any higher authority, have no physical representation and are infinitely divisible.
State of cryptocurrency market:
According to CoinMarketCap.com (a market research website), more than 6,700 different cryptocurrencies are now being traded publicly and their total market capitalization worth more than $1.06 trillion. A few examples of cryptocurrencies are Bitcoin (BTC), Ethereum (ETH), Tether (USDT), Polkadot (DOT), Chainlink (LINK), Litecoin (LTC), XRP etc. Among them, Bitcoin accounts for a large majority of the values. Also, Bitcoin is the first decentralized cryptocurrency released as open-source software in 2009.
| ব্যাংক, ব্যাংকার, ব্যাংকিং, অর্থনীতি ও ফাইন্যান্স বিষয়ক গুরুত্বপূর্ণ খবর, প্রতিবেদন, বিশেষ কলাম, বিনিয়োগ/ লোন, ডেবিট কার্ড, ক্রেডিট কার্ড, ফিনটেক, ব্যাংকের নিয়োগ বিজ্ঞপ্তি ও বাংলাদেশ ব্যাংকের সার্কুলারগুলোর আপডেট পেতে আমাদের অফিসিয়াল ফেসবুক পেজ 'ব্যাংকিং নিউজ', ফেসবুক গ্রুপ 'ব্যাংকিং ইনফরমেশন', 'লিংকডইন', 'টেলিগ্রাম চ্যানেল', 'ইন্সটাগ্রাম', 'টুইটার', 'ইউটিউব', 'হোয়াটসঅ্যাপ চ্যানেল' এবং 'গুগল নিউজ'-এ যুক্ত হয়ে সাথে থাকুন। |
Till to date (26 January 2021), Bitcoin has a current supply of 18,602,750 and the last known price of Bitcoin in this date is USD 35,334.45856152, with its market capitalization of USD 601.97. It is currently (11:55 PM, 26 January 2021) trading on 9828 active market(s) with $59,889,497,448.14 traded over the last 24 hours. Ethereum has the second market share in the cryptocurrency market that has a current supply of 114,287,292.3115 on the same date and time. It is currently trading on 6058 active market(s) with $35,765,719,158.49 traded over the last 24 hours.
Although cryptocurrency market is new, in the last few years, the market experienced a rapid growth both in its market capitalization and the number of coins offering. The main cause of the growth cryptocurrency use is their low transaction costs, p2p transaction system via website, and free from government intervention. Now, the young generations are increasingly showing interest in these digital currencies, particularly who have knowledge of digital currency market and familiar with digital technologies.
Although investment in cryptocurrencies and use of these currencies as the means of exchange is implicitly prohibited, many countries have lifted restrictions on cryptocurrencies. Examples are USA, UK, and a few EU countries. Even our neighboring country India has opened the market for cryptocurrencies for their investors. However, still there is a debate whether cryptocurrencies are god financial instruments or can be used as a “safe haven for the investors”.
Are cryptocurrencies financial assets?
Now let us explore whether cryptocurrency is a financial asset. Financial assets are liquid assets that get their values from the contractual rights or ownership claims. Examples of these assets are stocks, bonds, bank deposits, mutual funds, and cash. Unlike land property or other tangible physical assets, financial assets do not necessarily have inherent physical worth or a physical form.
Instead, their values reflect the factors of supply and demand in the marketplace in which they are traded, as well as the degree of risks they bear. They are intangible, only stated in a dollar/taka listed on a computer screen or a piece of paper. Such a listing of value represents a claim of ownership of an entity, like a company or physical assets, or contractual right of payment such as interest payment from a bond or debenture. Therefore, financial asset derives its value form a contractual claim on an underlying asset.
Unlike conventional financial assets, the value of cryptocurrency is not based on any tangible asset, a country’s economy, or a firm, but instead is based on the security of an algorithm which is able to trace all transaction. It does not have physical form as paper money and is typically not issued by central bank. Hence, cryptocurrencies typically use decentralized control as opposed to currency control by central bank.
Besides, the cryptocurrency is minted or created prior to issuance by a single issuer and is considered centralized but implemented with decentralized control through distributed ledger technology called blockchain. Blockchain serves as a public financial transaction database spread across many computers that manages and records transactions. Therefore, unlike other financial assets, cryptocurrencies are not controlled by any higher authority, have no physical representation and are infinitely divisible.
However, cryptocurrencies are considered highly volatile and risky asset class, the price of Bitcoin are often increasing and decreasing by over 10% in a day, fearing with the speed to which this soaring is occurring. Figure 2 shows the prices of top five cryptocurrencies in US dollar. The figure shows that the prices of all these five cryptocurrencies (BTC, ETH, XRP, LINK, and LTC) are volatile although the price of LINK has shown a dramatic rise in the COVID-19 pandemic period. Market commentators, academics, regulators, and policy makers are raising concern about the potential for an inherent bubble within cryptocurrencies.
Also, there is now an increasing fear among the market analysts and researchers that investors are investing in cryptocurrencies without considering their market fundamentals. Instead, they are showing herding behavior. Herding behavior means imitating the investment decision of others without considering the market fundamentals of the investment. The previous examples of market bubbles such as Dutch Tulip Mania in 1630s, dot com bubble in the early 2000s and housing market crisis n 2007-08 are the examples of such bubbles that were according to researchers, were the results of herding behavior.
Most of the cryptocurrencies in the present market are showing extraordinary return and extreme volatility without justifying the facts of the market and news. Due to this herding behavior, many cryptocurrencies observed extreme volatilities and trends in the last few months. It may affect the inherent risk-return trade off related with the investment in these currencies. As these types of market behaviors caused many bubbles and crushes in the market, it is still a big question whether cryptocurrencies are safe asset class for the investors.
Besides, the risk of information asymmetry is high in cryptocurrency investing due to the lack of quality information for the investors. Some inexperienced investors venture into Bitcoin or other cryptocurrencies without fully understanding the risks of the currencies and their market. Sometimes, they are influenced by others regardless of their own analysis and judgement. This may also create potential herding behavior.
In addition to these, investors need few more issues to consider before selecting cryptocurrencies as a safe haven for investment. Regulatory mechanism is not yet developed adequately to protect the investors and all market participants. As these currencies are forerunner in the FinTech evolution, and the underlying technological features for cryptocurrency platform is rapidly changing, the regulators are still lack behind such development. In most of the countries, authorities are developing regulatory sandbox.
Also, high dependency on digital technologies poses a new threat of hacking and stealing. The platform and blockchain technology used for cryptocurrency transactions have a higher risk of cyber threat and hacking, stealing currencies or valuable information of the clients. The characteristics of anonymity of the investors worsen its risk of illicit use of hacking. Therefore, these speculative investment vehicles need a clear understanding of their regulatory concerns and technological features.
Considering all these, my viewpoint is that cryptocurrencies are not yet financial assets or safe haven for investment. Although they meet the definition of intangible assets and would be recorded at acquisition costs i.e., at the price paid or consideration given for acquiring them, they are subject to an impairment test. Before considering them as an asset class, there should be sufficient (technological, market and regulatory) infrastructure so that the currencies show legitimate values of the assets, make them credible investment vehicle, and all sorts of cyber threats are eliminated.
May be restrictions from cryptocurrency investment withdrawn in our country in the future as the global market is going to be more border less. In that case, we have to consider these concerns and prepare ourselves ready to tackle these concerns.
Author details: Dr. Shahadat Hossain in an Associate Professor of Finance, University of Chittagong. He obtained his PhD from Curtin University (Australia), Specialised MSc in Microfinance from Université Libre de Bruxelles (Belgium), MBA and BBA in Finance from University of Chittagong. His E-mail address is: shahadath@cu.ac.bd
