The recent price action in digital assets has caught the attention of investors and the business community alike. As such, more and more investors are asking how they should think about them as both investments and currencies. A decision to allocate to digital assets and cryptocurrencies will depend on an investor’s risk tolerance – put differently, any investor in these assets needs to be prepared for the value to go to zero, according to David Lebovitz, Global Market Strategist at JP Morgan.
What has been going on with cryptocurrencies?
“Cryptocurrencies are extremely volatile – Bitcoin has seen extreme bouts of volatility over time, and in some cases took years to recover these losses. Furthermore, correlations between cryptocurrencies like Bitcoin and traditional assets like stocks and bonds are incredibly unstable, making it difficult to predict whether they will ‘zig’ or ‘zag’ during periods of stock or bond market stress.”
“Despite the volatility of these assets, there is tremendous value in the underlying technology. Blockchain looks set to become an increasingly common way of processing transactions, and many developed market central banks are now actively discussing the idea of central bank digital currencies (CBDC).”
“It is difficult to see how Bitcoin is a unit of account, medium of exchange, or store of value, further undermining the argument that it is a currency in the traditional sense. For example, Visa processes more than 3,000 transactions per second, while the Bitcoin network processes just more than three; taking this a step further, as the size of a block increases, transaction fees rise and processing times increase. Until this changes, the ability to widely transact using cryptocurrencies will remain limited – nobody wants to wait for a block to be mined just so they can get their morning cup of coffee.”
“A decision to allocate to digital assets and cryptocurrencies will depend on an investor’s risk tolerance – put differently, any investor in these assets needs to be prepared for the value to go to zero. An investment in cryptocurrency might be appropriate for some, but for those who view it as a panacea in a world of uncertainty and historically low interest rates, a bit of caution may be warranted.”