Tuesday, December 5, 2017

Cryptocurrency – An Introduction

If you have been reading the financial news lately, one word keeps popping up almost everyday, and that word is “cryptocurrency”. Whether people are talking about Bitcoin, Ethereum, Dogecoin, etc., they are members of the same cryptocurrency family.

What Is Cryptocurrency?

“Cryptocurrency” is a portmanteau of the words “cryptography” and “currency”. As the name suggested, cryptocurrency (crypto for short) is a digital currency that uses encryption technologies with regards to its creation and regulation of its use. Most, if not all, cryptos are non-regulatory and decentralised; in other words there is no central regulatory body (such as governments and central banks) or any-body overseeing it.

Crypto is an early example on the use of blockchain technology, in which each record and/or transaction is stored as a block, from the creation of the crypto coin right up to the latest transaction. It is secured in a way as the makeup of data in a block is dependent on the one before, and that one before is in turn dependent on the one before, and so on. Right now the use of blockchain is instrumental in financial technology, or fintech.

The first crypto was Bitcoin, created back in 2009 in the aftermath of the Global Financial Crisis. As of now there are more than 1,000 types of cryptocurrencies.

A Whole New Asset Class?

In my ebook, I had mentioned briefly that each asset class is different from one another in terms of their characteristics.1 Asset classes occupy the highest degree and order of all the financial instruments due to their different correlation.

So for the case of crypto, it could be viewed as cash on the surface, since it shared similar characteristics such as liquidity. Crypto is border-neutral, meaning I could use it anywhere in the world without considering the forex rate, provided the goods and services are priced uniformly across the globe.

It could also be seen as a commodity since it is mined (digitally) and some coins (e.g. Bitcoin and Litecoin) have a planned final total number in the future, much like the finite resources of gold, silver and oil on this planet.

To make things more exotic, there is even a corporate bond denominated in Bitcoin.2 And, as I was writing this post, an oil-backed cryptocurrency is coming up.3

So how crypto fits in the overall scheme of things in terms of asset classes would probably depend on how each investor views it. If an investor thinks crypto is the way things are going for currencies, then he/she may put it in the Cash component, while if another investor view it as a store of value given the limited circulation of some cryptos, then it could be under Commodities. Or some may not view crypto as an asset class at all; it is just for speculation and trading. More so, others may think these are all fads and bubbles, and would die off or burst someday.

So Are Cryptos Suitable for The Bedokian Portfolio?

I have to admit that it is still a little bit early for me to answer this question. At the moment there is no right or wrong answer, just different perspectives. If you share some of the viewpoints as I had described in the previous paragraph, then by all means treat them accordingly.

If you really wish to play safe, then bring it out of your Bedokian Portfolio and invest/trade in them separately.

1 – The Bedokian Portfolio, p11

2 – Nakamichi , Takashi. Bitcoin Bond Debuted By Japan’s Fisco. Bloomberg. 17 Aug 2017. https://www.bloomberg.com/news/articles/2017-08-16/bitcoin-bond-debuted-by-japan-s-fisco-after-cryptocurrency-laws (accessed 4 Dec 2017)


3 – Ulmer, Alexandra & Buitrago, Deisy. Enter the ‘petro’: Venezuela to launch oil-backed cryptocurrency. Reuters. 4 Dec 2017. https://www.reuters.com/article/us-venezuela-economy/enter-the-petro-venezuela-to-launch-oil-backed-cryptocurrency-idUSKBN1DX0SQ (accessed 5 Dec 2017)

11 comments:

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