Reservations about the viability of cryptocurrencies are rooted in the perception of money as a medium of exchange, a unit of measurement and a store of value. Critics of bitcoin point to a lack of stability and speed in trading, but there are many good reasons for business leaders to invest in it.
In terms of exchange, cryptocurrencies are cumbersome compared to credit cards and conventional currencies. While Visa and PayPal can execute 24,000 and 194 transactions per second respectively, bitcoin can only complete seven transactions per second. In addition, in order to be adopted as a medium of exchange, money must be widely trusted and have a large mass of users.
As a unit of measurement, critics argue that the value of cryptocurrencies is highly volatile, limiting the ability of businesses to carry out their activities and plan their future moves. According to a report by JP Morgan, “bitcoin volatility on a quarterly basis or its real price movements is 87% versus 16% for gold.”
However, such currencies can be a reliable store of value and offer solutions to a number of problems – especially in emerging economies.
They offer an alternative to putting your savings somewhere. Unlike conventional currencies, they do not contain the risk of inflation, so they maintain their purchase value in real terms. In this respect, they can avoid the risk of devaluation created by economically wasteful governments. They can also provide stability and transparency in politically unstable environments.
Finally, many emerging markets rely on remittances. Remittance flows to low- and middle-income countries reached a record high of $548 billion in 2019, higher than foreign direct investment ($534 billion) and development aid (approximately $166 billion).
Cryptocurrencies allow people to send money at significantly lower costs than other currencies. Transaction costs can be 50% to 90% lower than with traditional methods.
Clearly, there are compelling arguments in favour of cryptocurrencies as a means of storing value, something similar to digital gold. However, it is not so clear whether they can solve structural problems as means of exchange and units of measurement.
It can be argued that a reconstruction of the global financial system or architecture has already begun, with China being the largest trading partner, foreign direct investor and lender of developed and emerging economies, and the second largest lender to the US government. Although, after a decade of expansion, China has begun to decline.
In addition, the Chinese political class supports its own digital currency, a virtual yuan. It is issued and controlled by the central bank, unlike peer-to-peer cryptocurrencies, and can become a competitor to both bitcoin and the dollar. The Fed also recently announced that it is considering issuing a digital dollar. The fact that dominant global economies can issue digital currencies does not allow business leaders and market watchers to completely erase the future of new currencies.
In December 2020, MicroStrategy – a business analytics platform – had $1.8 billion in bitcoin on its balance sheet. Other companies are expected to follow, assuming that the price of the currency will rise and – according to the “biggest idiot theory” – will be able to sell their bitcoins at a profit, gaining a significant benefit. Others may conclude that they need to have some bitcoin to satisfy those customers who want to trade with it. How much they buy will depend on the needs of their customers.
However, there is a third reason to seriously consider buying bitcoin and that is hedging. Even if the leaders of a business do not believe in the long-term effectiveness of the currency, they must ensure that they will not be at a disadvantage against the opponent. If the value of bitcoin continues to rise in value, a significant increase in a competitor’s balance sheet could, in effect, put the company at strategic risk, or be eliminated, or redeemed.
In this case, the bitcoin market today will prove to be prudent risk management, regardless of what management and the board believe about the long-term effectiveness of cryptocurrencies. Business leaders, on the other hand, must always be on the lookout for the risk of not having bitcoin to offset the risk of having it.