For a long time, I refused cryptocurrency. In principle first, then because it was “too late”. And then for a few years now, I’ve watched this sector grow and grow stronger. Long the domain of speculators and enthusiasts, can these assets now interest a reasonable investor? And if so, which cryptocurrency to look into?
Let’s start with Bitcoin, the most well-known of the cryptocurrencies. The difficulty is that it is impossible to fundamentally value. Bitcoin has no intrinsic economic value. A company, for example, makes profits that it can re-invest or distribute, we can enhance it. Real estate provides rents, it is valuable. Farmland will produce a certain tonnage of grain per year etc. Bitcoin generates no income, produces nothing, and has no physical use. Its price simply reflects the hope of finding someone in the future to sell it to, or who will accept it in payment.
To understand Bitcoin let’s take a detour through gold. The industrial utility of this metal cannot justify its price. Whoever buys a gold bar does so in the hope of finding someone to sell that piece of metal to. In the meantime, this ingot will not produce anything, will not distribute coupons, dividends, rents, or any utility whatsoever. For millennia, men have attached value to this yellow metal, far beyond its physical utility. It is an almost universal social convention, one accepts gold as a medium of exchange, and as a tool to store one’s wealth. So it’s a reasonable bet to have some.
Bitcoin has become digital gold. Again by social convention. A much more recent phenomenon than physical gold, but one that has grown enough in the past 10 years to be taken seriously. As gold Bitcoin is scarce, as gold it is difficult and expensive to extract (“mining”), as gold central banks cannot print.
But in the absence of fundamental economic value, both Bitcoin and gold prices are determined by speculators with no recall force in relation to real economic utility. The fundamental investor struggles to navigate this.
However, in these times when the printing press is running at full speed, when inflation is on the rise, holding unofficial currency is interesting! Anything that protects against the risk of currency erosion should be looked at carefully.
Yes to diversification, but how? The ideal answer is a crypto that is useful, that has a value in use, that is not depreciated by inflation, and ideally that earns income beyond any expected capital gains.
What is this cryptocurrency whose fundamental economic value can be calculated, which produces interest, and which already weighs $ 400 billion in capitalization? It is Ether (ETH), the currency of the Ethereum blockchain. This currency, which is useful for paying for access to the Ethereum network on which tens of billions of dollars in financial transactions pass each month. Etehreum is also the network of reference for the digital art (NFTs) market which also represents tens of billions of dollars and which is growing rapidly. Finally, Ethereum is used extensively by certain online games, which are also experiencing strong growth and which generate significant income. All of these users must pay their transaction fees in Ether.
Long-term ETH holders can via a staking mechanism earn interest (currently in the range of 5% to 6% in ETH, a non-inflationary currency). So yes, we can go to certain cryptocurrencies, without falling into ecstatic bliss about the promises of the “future”, or getting locked into a short-term game of speculation that rarely wins in the long term.
High volatility is not a problem for the long-term investor
The sector is still young, it is advisable to turn to leading providers and to be extra vigilant if one ventures out of the largest cryptocurrencies. The important thing is to return gradually by giving yourself a long-term horizon, and by working your cryptocurrencies in the meantime to earn interest. Very high price volatility is to be expected, which will not be a problem for the long-term investor. With these precautions, we can take advantage of this new asset class to gradually diversify our assets.