Whenever I meet someone who learns I work in finance, the first question I inevitably get is, “What are your thoughts on crypto?”
It’s not a surprise. After all, the price of Bitcoin ( CRYPTO:BTC ) has gone up 77-fold over the past five years, from around $745 in 2016 to a stunning $57,500 today. Given the potential for market-beating gains like that, there are clearly reasons for investors to think about gaining exposure to cryptocurrencies.
However, with such a new asset class, there are amany risks to consider as well. Those risks may mean crypto is not appropriate for you, or at least that it shouldn’t be a meaningful proportion of your overall assets.
Sifting through the main reasons to own crypto as well as the most glaring risks can help decide if you’re ready to take the crypto plunge. Can Bitcoin save you from inflation? Image source: Getty Images. First reason to own cryptocurrency: inflation protection?
Obviously, the main reason to own any asset is that it can go up in value, and much of Bitcoin’s original appeal is as a store of value to protect against inflation. Given the high inflation numbers we are seeing as the country opens up from the pandemic, inflation protection is on the top of many investors’ minds right now.
Outside of inflation-protected Treasuries , investors looking to hedge against inflation have traditionally bought certain commodities, especially gold; however, Bitcoin could be on its way to displacing gold as the preferred hedge against general hyperinflation for a new generation. In fact, Bitcoin is probably a far better solution than gold for those in less-developed countries. After all, those looking to store wealth or transact in a medium would have a far easier time with Bitcoin than attempting to transact in ounces of gold.
Already, we’ve seen El Salvador formally adopt Bitcoin as legal tender, and Panama recently introduced a bill that would have it follow suit. Crypto use has also surged recently in Afghanistan, after this summer’s Taliban takeover caused citizens to lose faith in the country’s financial system.
As a medium that’s easy to store, transact, and isn’t backed by any one government, Bitcoin is emerging as one of the more compelling ways to hedge against currency hyperinflation today. Enabling new innovation
Besides its use as a store of value, cryptocurrency also has the potential to enable entirely new digital finance (DeFi) applications. And these innovations have the potential to create serious wealth.
One of the more obvious ways DeFi can make a difference is by lowering transaction costs for traditional financial applications, such as cross-border remittances. In fact, this was one of the main reasons El Salvador adopted Bitcoin. The country uses the dollar, so its currency probably isn’t at risk of hyperinflation in the near term. However, President Nayib Bukele has stated that Bitcoin could save El Salvadoreans $400 million annually on saved remittance costs.
Besides streamlining traditional financial transactions, crypto is also opening up entirely new markets, most notably in nonfungible tokens. NFTs are digital works of art or digital items authenticated as “original” through the use of crypto-enabled smart contracts, on smart contract blockchains such as Ethereum ( CRYPTO:ETH ) or newer Ethereum competitors such as Cardano ( CRYPTO:ADA ) or Solano ( CRYPTO:SOL ). By being able to authenticate a particular digital image or item as an “original” on a blockchain, Ethereum and its descendants are now creating an entire new market for digital items where there was none before. Image source: Getty Images. NFTs are taking off in a big way, with major sports leagues such as the NFL and NBA developing their own NFT collectible programs, and Tik Tok now allowing famous Tik Tok-ers to sell “original” versions of digital clips. Hollywood is of course getting into the game, investing in NFTs it can sell to superfans of movies, TV, and music. In fact, film and television studio Fox just invested $100 million in its own NFT fund.
One of the more interesting DeFi innovation experiments is currently happening in Miami. Recently, the city created a crypto mining platform based on the Stacks ( CRYPTO:STX ) protocol, a smart-contract platform built on top of Bitcoin. Miamians can submit STX token bids for MiamiCoin ( CRYPTO:MIA ) tokens, with your odds of winning depending on how much STX you bid. MiamiCoins are mined and then distributed to the winners, with 70% of the proceeds going to the winning bid and 30% going to the city’s crypto wallet. Since it started in June, […]
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