Crypto-Currency, which has been in the talks all around and is believed to have a seismic impact on bringing about a disruption in the Finance world, is a knowledge area explored by many enthusiasts lately, provoking the interest of many investors.
But what exactly are Crypto assets, and how do they work?
Crypto Assets, by definition, are cryptographed assets commonly known as cryptocurrencies like Bitcoin, Litecoin, Ethereum, etc. These assets live on blockchains. While blockchain is a shared ledger that anybody can access, producing blocks requires specific qualifications. It is often stated that blockchains are immutable. But that is not correct. It is the alignment of incentives of miners or block producers and the rest of the stakeholders that facilitates immutability. And this is possible because blockchain native tokens such as BTC and ETH are valuable. If a native token of a public blockchain is worthless, that blockchain cannot be immutable and will constantly be under attack, given those attacks are profitable. Addresses or accounts on blockchains are public-private cryptographic key pairs, and assets cannot be spent without private keys thus, unauthorized access to assets is prevented.
Here are the key takeaways from an insightful interview with Saurabh Deshpande, a research analyst at The Block, a prominent source of research, analysis, and news in the digital asset space.
“A better word for cryptocurrency is probably crypto assets/digital assets since not all of them are intended to be currencies. They serve multiple use cases, currency and utility being the most prominent ones”.
Crypto assets are not widely accepted as currencies. For instance, transaction fees in the Ethereum ecosystem are paid using the cryptocurrency Ether, also known as ETH. With these native assets, the blockchain may be protected and given properties like immutability, but no blockchain is immutable by default. It is challenging to manipulate miners since their inherent assets align with their incentives. The blockchain can be worthless if the native token is removed.
On the other hand, some crypto assets (tokens) are used as utility tokens in the projects’ ecosystem. For instance, the Chainlink ecosystem’s utility token LINK is used to pay for data requests made to Chainlink node operators. Utility tokens are connected to the fundamental purpose of what the corresponding project is trying to achieve.
“Bitcoin is better than traditional assets and is better insured.”
BTC is censorship resistant. It cannot be taken away from you or rendered useless overnight by any government. A single entity or a cabal doesn’t control bitcoin. Its monetary policy is likely to remain intact for the foreseeable future.
Since the USD is controlled by one country and its policies impact other countries, nations with weaker currencies are likely to perceive bitcoin as a better option than the USD, adding that it has survived situations where the likelihood of survival was extremely low.
Since the hype around bitcoin and cryptocurrency began, most governments and financial institutions have avoided association with Crypto. With the legal status of cryptocurrencies in dispute, how does utilizing crypto assets as a method of trade influence the current financial systems?
Fiat systems, essentially, are based on the trust people have in their respective governments since it’s used to purchase goods and services and pay taxes. Still, for countries with unstable governments, the currencies tend to be weak and lose purchasing power against stable currencies. This is where Bitcoin can help people; Saurabh added, “Until the previous cycle, Crypto assets were not big enough for governments to care. But when an asset class soars beyond $2trn, it becomes difficult to ignore.”
Governments will try to restrict the use of bitcoin and other crypto assets as a form of payment or resist allowing crypto assets as legal tender. But BTC likely achieves a critical mass from smaller nations with weaker currencies. Regulatory bodies like IMF have been sending messages to smaller countries to resist giving legal tender status to BTC. However, if the success of using BTC as a legal tender is proven in countries like El Salvador, more countries are likely to follow.
Role of Crypto Assets in helping a country’s economy as a whole –
Crypto assets infrastructure is not yet ready to burden the load of a large country like India. Scaling, ease of use for the average person, etc., must be improved before the whole economy can run on crypto assets.
As far as NFTs are concerned, they somewhat proved –
- Counterfeiting can be easily solved (time and cost to authenticate can become trivial)
- Artists can be fairly compensated, and grey markets may be simply institutionalized.
Advice for users looking to invest in Crypto –
- Regulation. Figure out what the local laws are.
- You should be able to stomach the volatility. If you can’t handle your portfolio being halved in a week, don’t invest in crypto assets.
- Have a few concentrated bets that you can consistently keep track of.
- Avoid getting rekt. If a staking contract promises a high yield, find out where it comes from and whether it is sensible. Avoid all the next Lunas and USTs.
Disclaimer: The author’s advice is based only on current statistics.
Saurabh ended our interview with his thoughts about the immediate future of Blockchain Technology. “Asymmetric returns come with relatively high risks. But be assured on a long time horizon (2-3 years), the risk-adjusted returns of crypto assets will likely be higher than any other asset class, especially given that we have already seen drawdowns ranging from 70%-90% in all the significant assets.”
Follow Saurabh Deshpande on https://twitter.com/desh_saurabh for more insights into the world of cryptocurrency.