Stocks have existed for more than a century. Bonds have been around for a few centuries. Commodities are centuries old, and currencies have been exchanged since time immemorial. Now, a new asset class called “Cryptocurrencies” is gaining immense popularity worldwide. Work on blockchain technology began in the early 1990s but was later used and designed by a person (or a group of people) under the pseudonym “Satoshi Nakamoto.” In 2008, Satoshi Nakamoto released a white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System,” introducing the world to Bitcoin.

This open, decentralized digital software has been gaining favor ever since. Before we talk about the potential and impact of cryptocurrencies like Bitcoin, Ethereum, etc., it is worth mentioning that the returns of Bitcoin and other cryptocurrencies have beaten equity investing. Bitcoin has given a return of 10,869 per cent since 2015 against 102 per cent of Standard & Poor’s 500, 184 percent of NASDAQ, and 59 percent of gold. Bitcoin has emerged as the clear leader. Therefore, having a small portion of cryptocurrencies in one’s portfolio could be intelligent and worth the research.

The die-hard equity pundits have been denouncing cryptocurrencies for many years as a giant scam, however, slowly, a few hedge fund managers and institutions have had a transformation in their mindset and have started allocating their capital to cryptocurrencies and have even invested their treasury money into crypto assets! This is a significant change and indicates a gradual shift in the attitude of influential investors. Many naysayers missed out on the meteoric rise and gains from crypto assets and are now left with a painful feeling of being left out. World economics are run by “fiat money,” essentially government-issued currency not backed by any commodity. This allows governments the flexibility to print money and keep control over their economies.

Governments have resorted to “debasement,” which lowers the value of their currencies and increases the chances of inflation. Gold, traditionally, has been seen as a hedge against the debasement of money and inflation since it is a store of value and a preserver of purchasing power. Bitcoin has been called “Gold 2.0” and even “Digital Gold” since it has certain characteristics that compete with and complement the intrinsic nature of gold.

Interestingly, Nakamoto set the total limit of Bitcoin at 21 million, meaning there can only be 21 million Bitcoins in circulation at any time. There are several advantages of this limit that sets Bitcoin apart. Some of these are:

• Every single transaction can be proved and is recorded in Bitcoin. This cannot be done for gold or other currencies.
• Since the number of Bitcoin is limited, it is immune to any form of debasement and, therefore, a preserver of the purchasing power of the world and a store of value.
• Other positive fundamentals of Bitcoin include an increasing number of transactions in the world, a rise in people using Bitcoin as ‘wallets,’ and the growth of individuals, corporations, and financial institutions embracing it for their investments.
• Cryptocurrencies are harnessing the benefits of the “Network effect,” a concept derived from Metcalfe’s Law, which posits that a network’s value is proportional to the square of the number of its users. As more individuals participate and accept Bitcoin, the value of the cryptocurrency keeps growing. For example, if you are the only person using Google, then it will not be valuable. However, once millions of people use Google, it becomes useful and helpful.
• Cryptocurrencies, particularly Bitcoin, can be bought seamlessly; compared to securities, one does not have to worry about which company will eventually succeed and work.
• Bitcoin has an open, decentralized digital protocol similar to the Internet and is significant. Therefore, it has a robust and reliable computing network, which allows for a high hash rate – meaning that the network’s processing power is high – creating greater security for the Bitcoin blockchain.
• Bitcoin is portable, transferable, and divisible. As an asset, it is durable and difficult to hack or fake. The wallets are encrypted and secure.
• The verification of transactions is done by “miners” rather than a clearing house or exchange, as in the case of securities. Therefore, the process is quick and secure as well as inexpensive.
• Bitcoin can be exchanged for other goods, services, cryptocurrencies, and tokens.

These positive characteristics have led to crypto coming into vogue and accepting Bitcoin internationally. However, there is also a chorus of experts who still need to become comfortable owning cryptocurrencies. They cite many reasons. Some of them are enumerated below:

• Some experts argue that cryptocurrencies can be a conduit for crime and money laundering. They cite that hoarding the crypto asset could be used to destabilize the dollar. There is a fear that non-state actors could attack the network to subvert economic functioning.
• Bitcoin has not yet achieved the status of mainstream currencies such as the US dollar, Euro, or Pound. It is thus still a far cry from a replacement to any of these is still a far cry away.
• Bitcoin is not regulated correctly yet, and the regulatory uncertainties create an atmosphere of risk around the asset. Proper regulation protects investor interests, which traditional financial institutions, banks, and money managers comply with.
• Since no central bank handles Bitcoin and cryptocurrencies, the traditional role of central banks to set quantitative easing or tightening as and when the economy requires cannot be implemented. Central banks actively support economic growth and inflation control.
• Since the supply of Bitcoin is limited and fixed, it could lead to deflation if demand is not kickstarted with additional liquidity.
• There is enormous volatility in the price of Bitcoin and cryptocurrencies, which creates instability. • The wild price swings attract a lot of speculators and not holders who spend.
• We have not yet seen employees getting paid in Bitcoin, which would prompt more sellers of goods and services to price their products in cryptocurrency. Due to the reluctance of most retailers to accept cryptocurrencies, they currently cannot serve as a fully functional medium of exchange.
• A plethora of cryptocurrencies have now sprung up, distracting from the leading players like Bitcoin and Ethereum.
• People believe that crypto wallets can be hacked.
• Bitcoin is facing an attack over energy use. To verify transactions, “miners” have to solve highly complex math problems, which require superior computer systems that consume vast amounts of power and use a lot of electricity. This means that many fossil fuels are being used to generate that power. There is a demand from investors to comply with better ‘green’ standards and use alternate power generation options.

Experts of the stock markets and fund managers have traditionally ignored cryptocurrencies. They have argued that crypto assets have no price-earnings ratio, return on equity, or cash flows to value them, so they have preferred to stay away from them. The valuation thesis of conducting a bottom-up analysis, i.e., trying to value a company based on its fundamentals, needed to be more robust and questionable for crypto assets. Further, Bitcoin and other cryptocurrencies display massive daily volatility of up to 15–30 percent, so they decided not to jump onto the bandwagon.

Also, market pundits needed help deciding if Bitcoin was a commodity, currency, or security. Among other reasons, one was only a few understood blockchain technology. Legendary investors have compared Bitcoin with gold, which has set several companies, individuals, and fund managers into motion, rushing to buy crypto assets.