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  • Writer's pictureManu Nedunkandathil, CFP

Why cryptocurrency is not for me

Updated: Aug 20, 2021

History repeats itself time and again, yet man fails to learn.

Of all the qualities a man possesses, greed is the one that takes him down. And to exploit this very same greed, time and again men of deceit have come up with new schemes to rob people.

Cryptocurrency is the new kid in the block which came into being in 2009 and has taken the world by storm in recent years. Everyone is talking about how this new currency is going to change the world and you will lose out if you don't invest in it.

However, to my knowledge, currencies have never been an asset class for investing. The same holds good for cryptocurrencies too. But before that, can these so-called cryptocurrencies be called currencies at all. To understand this, let us look at the definition of a currency.

Currency is a system of money in general use in a particular country. For any system to be called a currency it must meet two fundamental characteristics. One it should be a store of value and two it should be a common medium of exchange generally accepted. This means, if I hold a certain value of a currency with me, I should be able to meet my needs on the exchange of currency of equal value. However, today I won't be able to purchase even a needle on the street with any amount of cryptocurrency in my hands. It is still not a legal tender for exchange in most countries. This means it fails to satisfy the two basic conditions for a currency.

However, in the virtual world, cryptocurrencies have grown in popularity in recent years because it grants a degree of anonymity to the user. Governments have started to worry that these currencies are being used for drug dealing, money laundering and tax evasion, etc. Hence, government action against mainstream use of such currencies cannot be ruled out in the future, which will affect its demand which has been the main reason for its rise in recent years.

In spite of these facts, still, cryptocurrencies or digital assets find demand from newer investors. And to meet this demand many new currencies are being invented with ICOs (Initial Coin Offering) and crypto exchanges. But this is nothing new. The world has seen many such speculative crazes before and will continue to do so.

History is replete with many such events. However, one such notable event is the speculative bubble in the prices of tulip bulbs which happened in Holland in the early seventeenth century.

Tulip was alien to Holland till 1593 when it was introduced to the Dutch by a professor from Vienna. The Dutch were so fascinated by it that soon Tulip mania gripped the whole of Holland pushing the prices of Tulip bulbs ever higher. At the height of its craze which lasted from 1634 to early 1637, everyone from the rich and of the society to the poorest dabbled in Tulips. Every one imagined that the fascination for Tulips will last forever.

Much like what is happening today with cryptocurrencies, people who said that the prices of Tulips could not go possibly higher watched with chagrin as their friends and relatives made enormous profits. The temptation was too hard to resist. The prices reached astronomical levels by January of 1637.

However, just like everything else, Tulip bulbs too found financial gravity. And in February of 1637, the prices started falling like a pack of cards. Even government intervention and promise of settling all contracts at 10% of their face value had no effect. The prices declined till the Tulip bulbs were selling no more than the price of a common onion. The sanity in the markets was restored.

There are many such speculative events that have happened closer home too. However, the point is if you don't learn from history you are doomed to repeat it.

" Study the past if you would define the future."

- Confucius

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