Have cryptocurrency and/or cryptoassets become a proper asset class in the financial world? It's hard to answer. But, sitting at the end of the first 1/5th fo the 21st Century, it seems like crypto is on its way to becoming a real asset class if it's not already there.
There isn't some special or sacred list in finance houses in London's financial district or on Wall St. in NYC that has a list of all asset classes - it doesn't work that way. What's considered a proper asset class and what's regarded as an alternative asset class (and further distinctions at various levels of granularity) is more based on collective consensus.
Common consensus may make sense, but whose consensus are we talking about. Generally speaking, whether a financial instrument is considered a proper primary asset class (like stocks, bonds, and cash) is determined by the conglomeration of the following people's/org's opinions:
It's the interplay between individuals in each of the above categories that determine whether an asset class is going to be considered a core/primary asset class in the general conception.
Another critical thing to think about is the size of the crypto market. The market cap of all cryptos can be viewed against the market cap of individuals asset classes and the entire finance industry as a whole. Questions like the following might be asked to understand better how big the overall crypto market is relative to all other finance-related markets:
Although there's no hard and fast way to determine whether anything is a core asset class definitely, crypto seems on its way to getting there. It seems likely that one day, gold will remain an alternative asset, but crypto will be a core part of most people's long term investing and retirement portfolios. One day, financial advisers may even find it imprudent to not include crypto as part of a proper diversified investing strategy.
Making payments with intangible currencies used to sound like a scam. However, with the increasing acceptance of cryptocurrencies (digital money) Litecoin has become more prominent.
What is Litecoin?
Litecoin (LTC) is a digital currency (altcoin), released on October 7, 2011, that allows payments to individuals without the use of third parties like banks. It is an open source system without a central authority developed by Charlie Lee, a former Google employee, and released to the public on October 7, 2011.
Litecoin is incredibly similar to Bitcoin - no white paper for Litecoin was even produced in part because of its similarity to Bitcoin. Similar to Bitcoin, Litecoin is open-source and it is not government regulated. However, it is secure because each user has the ability to verify each transaction before a new block (a string of blocks is a blockchain) is formed, similar to how Bitcoin works.
Litecoin vs. Bitcoin
There are few key differences between Litecoin and Bitcoin that you should be aware of. These differences include:
4 times the number of coins: There will be 84 million LTC vs 21 million BTC
1/4 block confirmation time: 2.5 min for LTC vs 10 min for BTC, making the use of LTC faster for transactions (very desirable for something attempting to be the main transactional cryptocurrency)
Proof of Work (PoW) uses scrypt: Scrypt is a password-based key derivation function (KDF) that makes it (1) less practical to use ASIC devices for LTC mining and (2) to carry out attacks against the Litecoin network
The above changes stemmed in part from the fear that the Bitcoin network is too cumbersome and dominated by large-scale bitcoin miners using purpose-built ASICs to mine BTC. Litecoin's aim is to be "lite" in the sense that mining is easier for everyone, transactions are faster, and more LTC exists in circulation. In this, Litecoin is attempting to be the more transaction cryptocurrency and is considered by some to be the "silver to Bitcoin's gold."
Success of the Litecoin
Though not the first cryptocurrency, it has been very successful. In November 2013, Litecoin’s aggregate value experienced a 100% increase within 24 hours. As Bitcoin rises in value, reputable altcoins such as Litecoin have been able to ride Bitcoin's coattails to new highs.
Presently, Litecoin is among the top five cryptocurrencies in the world. It is praised for its speed as it takes about two minutes for transactions using the Litecoin network to go through.
How to Acquire Litecoin
You can get them by either mining them (similar to mining Bitcoin) or simply buying them. To buy, you can either use fiat currency or another cryptocurrency or cryptoasset (usually Bitcoin).
To mine means to contribute computer power to validating transactions on the Litecoin network and being rewarded for the exertion of this effort. The miner is required to solve complex mathematical problem/puzzle as part of the mining process. As with Bitcoin, the incentives paid out for mining decrease over time in order to maintain a stable supply of LTC.
Future of Litecoin
Litecoin is a rapidly growing cryptocurrency which has been described as the more transaction-friendly cryptocurrency. In this, Litecoin is able to differentiate itself from Bitcoin and argue that the value-add is in the transactional capabilities. Some in the cryptocurrency and cryptoasset industry believe that Bitcoin will over time be used for large-scale clearing transactions (more rare and large) while Litecoin will be used for daily transactions (far more numerous and relatively small). Time will tell if this dynamic plays out or if the Bitcoin network is able to improve over time to become more flexible and more accommodating to large numbers of small-scale transactions without requiring extremely large computing resources deployed around the globe.
Why you should have bought Bitcoin in 2015, and a way to approach any similar crypto purchases (Monesh Pabrai's Dhando way)
The below is a dated article from 2015 regarding Bitcoin. The analysis is an unsophisticated binary analysis that relies more on qualitative explanations than on quantitative approaches/methods. Crypto has come a long way since the article - it was written pre-crytpo proliferation, when Bitcoin was basically the only cryptocurrency really around.
I wrote about Bitcoin previously. You can see my original article Bitcoin here. I have learned more about Bitcoin, more about investing, and I have been able to look at Bitcoin through a different lens since writing that article.
The main part of my increased knowledge about Bitcoin has come from one of my favorite, if not my absolute favorite, podcasts called EconTalk. On an episode of EconTalk, host Russ Roberts interviewed Bitcoin evangelist and Xapo CEO Wences Casares. The interview was both interesting and informative. You can access the interview as well as a good amount of extra learning material here. I highly recommend that you listen to the interview and read some of the material on the website if you are interested in Bitcoin or are planning to make a purchase.
In the interview, Casares discusses many things but what I want to focus on here is Casares's postulation that purchasing Bitcoin is a very low-risk/high-reward endeavor. Casares believes that there is a non-trivial chance that Bitcoin will grow in popularaity and become a global currency. Even if 1% of global trnsactions are done in Bitcoin, Casares argues rightly that Bitcoin's value will grow immensely in value. This is easy to understand. If 1% of global transactions will be done in Bitcoin at some point in the future, the total value of all Bitcoin in existence wold equal (0.01)(x), x being equal to the total value of all of the transactions done in that future year. If we include black market transactions, the value of Bitcoin will be even higher. It is important to remember that an inherent property of Bitcoin that separates is from every other national currency in existence is that Bitcoin are generated at a predictable pace and after a certain year, no more Bitcoins will ever come into existence. Therefore, Bitcoin cannot be deflated like the US Dollar, the Euro, the Yen, or any other national currency can. We can see that as the value of global transactions rises, the total value of all Bitcion in existence should rise (assuming Bitcoins comprise a stable percentage of all global transactions). So, if Casares is correct in saying there's an non-trivial chance of Bitcoin taking off and becoming a means of exchange for a significant (even 1% is significant) portion of global transactions, the value of each individual Bitcoin will rise tremendously. Casares believes that in the next few decades a single Bitcoin could be worth $1 million USD. That definitely sounds crazy in 2015, but it isn't at all crazy if Bitcoin takes off.
Of course Bitcoin has a very high probability of not taking off. Casares acknowledges this, but this acknowledgement doesn't stop him from recommending that individuals should purchase a few Bitcoin. He argues that purchasing a few Bitcoin will cost less than $1000 as of the writing of this post (this will obviously change as Bitcoin fluctuates on a daily basis). A person who takes Casares's advice now has two possibilities for his or her future as depicted by the tree below.
The above options are different than investing in stocks, real estate, or commodities. Investing in those things requires a large up-front investment and historical growth rates for those investments are nothing spectacular. With Bitcoin, a very small investment is more than sufficient to position you to take advantage of a potential meteoric rise in the value of Bitcoin. If Bitcoin takes off, it will be much more valuable than it is today. It could potentially make you a millionaire off a $1000 investment in a decade or two. Thinking about it this way reminded me of great investor and author Monesh Pabrai and his book The Dhando Investor. In it Pabrai describes the concept of Dhando, a concept that echos Warren Buffet's investing style. The concept of Dhando mean taking calculated risks that have extremely limited downside potential while having extremely amazing upside potential. By using the concept of Dhando with skill an investor can take risks that are of a very particular variety, the kind where making a mistake doesn't mean disaster. To be Dhando is to be like Pabrai or Warren Buffet. To be Dhando is to take those risks that have very little downside but very big upside potential.
Casares's recommendation had Dhando qualities. It is a recommendation that is geared toward a Bitcoin investor entering into a position where his or her downside is limited but where the upside is great. Although the chances of winning here are slim, it is Dhando because it preserves your wealth and positions you into a place to profit should things go well.
This is now how I view investing or purchasing Bitcoin. I don't know much about Bitcoin mining and I almost have no use for Bitcoin for use in making transactions at this stage. I view Bitcoin as a Dhando endeavor where I can place my bet and think of it no more. In a decade or two I'll either be rich or I'll be indifferent about it. It takes a small amount of time and about $1000 for me (for you it might be a different amount - BUT it should always be an amount that allows you to remain Dhando - meaning an amount that you will be pretty much indifferent about losing should Bitcoin fail totally).
Bitcoin and Crypto: Similar to precious metals and commodities, they may add diversification to your portfolio but aren't good standalone investing strategies
If you're here, then you probably already know something about the digital currency called Bitcoin, which has grown in popularity over the last few years. Therefore, we won't discuss what they are, how cryptocurrencies like Bitcoin are obtained, or how they are mined. We will be attempting to answer a simple question: Should you invest in Bitcoin?
More precisely, the problem should be: Should you PURCHASE Bitcoin? This is because Bitcoins can be either purchased or obtained through mining. I won't be discussing Bitcoin mining here because I have only done minimal research on the topic, and your success depends greatly on how you approach the endeavor.
So, should you buy some Bitcoin? Should you spend your US Dollars (or whatever form of currency you use) to purchase this new and unregulated digital currency?
Currency is generally not a good investment for most investors, and Bitcoin and other cryptos are sort of like currencies
For the vast majority of investors, investing in currency or currency trading is a fool's game. There is a lot of risk and uncertainty, and there are always people who are playing the same game but are more informed than you. What makes you think that you will be better able to predict the movements of the Yen or the Euro than another currency trader with more education, a faster computer, and better software? That's what you have to do to succeed in currency trading because the only way you make money in currency trading is when you make the right "bet." Bitcoin is just another type of currency. It's not government-issued or government-regulated, but it is a currency nonetheless. The same principle of currency investing that applies to the plethora of government-issued and government-backed currencies apply to this new digital currency called Bitcoin.
I did say you were making a "bet" when currency trading. You might say, "don't you make a bet on any investment, be it a stock, a bond, real estate, etc.?" The answer to that question is a resounding yes. However, when you purchase some investments, it's a different type of bet you're making.
As we discussed in our article on investing in precious metals like silver and gold, if your gold coin goes up in value it only goes up because of the forces of supply and demand. If my share of Tesla Motors goes up in value, it may be for the same reasons of supply and demand, but it also might be because the underlying value of the company increased. That's an important difference.
It's the same thing with currency. If the value of the Euro goes up, it's only because of the forces of supply and demand. Maybe more people want to hold Euros (eg. interest rates in the Eurozone increase) or the supply of Euros decreases (eg. The ECB decides to print fewer Euros). There can be many other events and factors that affect the supply of and demand for Euros. Either way, there is no underlying value to Euros besides the paper they are printed on. They are worth what we say they are worth. This is profoundly different than the underlying value of a company like General Electric, which makes all kinds of things that people want to buy. If you own a share of General Electric, you own a share of all of its business and you own a share of an income-generating organization.
Getting back to the main point of this subsection, currency trading is just like making a bet on what the future value of a currency will be. If you buy Bitcoins with US Dollars you hope that sometime in the future the Bitcoins will be worth more than they are today. You hope that your Bitcoins will be able to buy more dollars than a number of dollars you used to buy the Bitcoins.
Note: We're ignoring inflation above for simplicity purposes, but you'd want to consider inflation in any such discussion, crypto-related or otherwise
Bitcoin and other cryptos don't generate income
This was briefly addressed above. Bitcoins are just a "thing." You hope that "thing" will be will be worth more in the future. That's the nature of your Bitcoin investment.
I would contrast this with the nature of many other types of investments. If you purchase stocks, you are hoping that the underlying value of the company (based on many factors) improves. If you purchase bonds, you are effectively making a loan to a government or a company and you are hoping that you are repaid an amount greater than your original investment adjusted for inflation. If you purchase real estate, you are hoping that the price of your real estate goes up. That real estate price is dependent on supply and demand for real estate in the community, but it's also dependent on the rental income your real estate can generate and the improvements you make to the property. In the above three examples, the investments are tied to some kind of cash flow: corporate profits or dividends, interest payments, or rent payments.
With investments in currency, there is no income and there is no cash flow. You will sit with that currency until you are ready to sell.That's why investors who aren't overly cocky about their abilities and who have a medium-term or long-term approach prefer to invest in equities, bonds, and real estate rather than currency. Bitcoins are just another type of currency and they have all of the same drawbacks when it comes to investing that any traditional government-issued or government-backed currency would have.
Bitcoin and other non-currency-backed cryptos will add serious uncertainty (in the form of volatility) to your portfolio
The final reason why you should be very cautious in deciding whether to purchase Bitcoin is that there is a lot of uncertainty and most Bitcoin purchasers seem to have less information about what they are purchasing than a traditional investor in equities would have.
Before you purchase a stock you research the company. You look at their financials and their management. If you are a smart investor you look at the actual company itself. You might walk into a store, look at their product, and really think about what this company makes. You then make a decision based on this information about whether investing is a worthwhile risk.
With Bitcoin, you are investing in a digital currency. There's not store to walk into. You know that the supply is increasing (for now) and that the difficulty of creating new Bitcoin (mining) is correlated with the number of people attempting to create them (attempting to mine for them). You know that you need relatively powerful computers to mine Bitcoin. You hear the news stories about people making money by purchasing or mining Bitcoin. But, how much do people really know? To me, it seems like many people are engaging in classic speculation.
There's no way to know whether Bitcoin will collapse tomorrow or whether it will increase in value by ten thousand times. There's even no way to know if people will accept it in the stores you shop at. There's no way to know what the government will say about Bitcoin. There's no way to know if a competing digital currency that is better in every way will come out tomorrow and Bitcoin will become completely worthless.
Even though it's risky, adding Bitcoin and other cryptos to your portfolio might have a benefit or two
Bitcoin might become something you might want to purchase in the future, even if just for using it as a means of exchange. Bitcoin might or might not last, but it's likely that some kind of virtual currency (be it Bitcoin or another virtual currency that does or doesn't exist yet) will become widely used. Throughout history, currencies change and there's no guarantee that the US Dollar (or any other currency that's widely used) will remain popular. It might just be the case that virtual currency will be attractive and used as a possible means of exchange. It might just be that virtual currency will be like money in the future.
Therefore, we can't completely say that you should never hold Bitcoin or virtual currency. However, if we do hold it, we should hold it because it is a useful and efficient means of exchange, not because we are deluded enough to think that holding currency in general or virtual currency specifically is a wise investment compared to the plethora of other investment options available to investors novice or expert.
And now, given the rise of cyrptocurrencies and crypto assets to quasi-mainstream financial assets, we're dedicated to providing quality, relevant, and interesting material on cryptocurrencies and cryptoassets. Articles on Bitcoin, Ethereum, Ripple, Cardano, and many more cryptocurrencies and cryptoassets can be found on Pennies and Pounds - all that in addition to a plethora of information on what cryptoassets are, how the entire crypto industry came to be, blockchain/immutable ledger technology, mining, proof of work, proof of stake, and how to prudently invest in crypto if you are so inclined (based on your risk tolerance and ability to withstand the volatility that will come with a crypto portfolio).