Chris Green: Crypto – a failed currency, or a revolution in investing?

Chris Green joins CNR as our new columnist, and he looks at recent comments from the boss of the Bank Of England for his first contribution…

Last week’s revelation from Bank of England chief Mark Carney that Bitcoin has, in his eyes, “pretty much failed” as a currency comes at a pivotal time for the crypto marketplace.

Both traditional and new investors are turning their attention to cryptocurrencies in the face of big gains and a booming choice of options to invest in. To have one of the world’s most respected central bank chiefs deliver such as damning verdict on the crypto world’s poster child is definitely a setback. But, more importantly, is he right?

Yes, he is right. But, the basis for his view is wrong.

However, don’t take that as negative sign. Rather, his statement is a reflection of the financial sector’s pre-conceptions based on the traditional and legacy concept of a currency. And that’s the problem. Cryptocurrencies are being held to the same standard as fiat currencies when they are not the same thing. We may as well be criticising oranges because they have pretty much failed as potatoes.

This is the bigger issue. So-called standard benchmarks for determining the value and success of any given currency do not map as neatly to a cryptocurrency as they do a fiat one. They are not the same, and so to fully appreciate the role, value and measure of success for a cryptocurrency we need a new standard with which to measure and judge the relative success of Bitcoin or any other currency or utility token.

A cryptocurrency is not a store of value in the traditional sense. It is usually not anchored to a physical measure such as the GDP of a nation, the gold standard, oil reserves or something else tangible that can stand as the basis for an assessed on-going value that fluctuates based on market forces and geopolitical outcomes.

Rather, these currencies are predominantly used as an investible security, or as a speculative parking space for investment funds. As an investible and tradable security, Bitcoin and other cryptocurrencies are proving to be far more resilient than fiat competitors. The numbers speak for themselves.

The FTSE 250 rose 21.8 per cent over the course of 2017. Popular tech stocks also had a strong 2017, with Facebook up 54.65 per cent year-on-year, Apple up 47.71 per cent, Amazon up 58.17 per cent and video streaming darling Netflix up 55.66 per cent. While market index trackers have long been seen as a safe bet for investment that will invariably deliver a gain, they are underperforming compared to cryptocurrencies.

Across 2017, Bitcoin rose 1,300 per cent, even with its pre-Christmas decline. Meanwhile, Ethereum delivered a 5,700 per cent rise across the same period. Holding a single Bitcoin from the beginning to the end of 2017 would have delivered a paper profit of around $13,500. The same test for one Ethereum would have produced a gain of $750. Modest compared to Bitcoin, but still outpacing most popular stocks and the main market indexes.

Cryptocurrencies are not yet used as a mainstream medium of exchange, as is the case with the Pound, Dollars, the Euro, Yen and so on. This past weekend, I had the opportunity to purchase a burger from a street food trailer using Bitcoin. Nonetheless, this is still the exception rather than the rule. Crypto is, for now at least, a currency you invest in and hold rather than a currency you spend.

Ultimately, it is this strong performance and rapid growth rate of decentralised cryptocurrencies that will contribute to the long-term viability of tokenised securities as an investment vehicle. Performance that will appeal to both currency traders as well as equity investors.

Has Bitcoin et al. really failed as a currency? Of course it hasn’t. Rather, these currencies have defined how a digital token economy can and should work. The soaring market value of these tokens has ensured that they will be around for the long-term, and so our financial leaders need to update their thinking to avoid applying a ‘one size fits all’ mentality to the concept of ‘currency’.