Cryptocurrency Investing: Asset or Instrument of Speculation?

Tales From The Crypto

Cryptocurrency investing. Some call it asset building. Others claim it’s an instrument of speculation.

The increasing discussion of cryptocurrencies in financial markets and the news media has led to plenty of political action, strengthening both cases. Crypto evangelists applauded President Nayib Bukele’s move to adopt Bitcoin as legal tender in El Salvador. Conversely, the People’s Bank of China declared cryptocurrency transactions illegal. It remains to be seen how widespread the adoption of cryptocurrencies will become.

I find that discussions of cryptocurrencies conflate three ideas that are best considered separately.

Distributed Ledger Technology (DLT)

The first is distributed ledger technology (DLT), as exemplified by the blockchain, which underpins transactions in Bitcoin, the first cryptocurrency. Distributed ledgers address the lack of trust between two participants in a transaction. Records are not held privately in a central depository like a bank or an official exchange. Transactions are recorded publicly on a widely held (hence distributed) computer-based ledger. However, Bitcoin uses the blockchain in a very narrow capacity. DLT is capable of greater functionality, permanently recording all kinds of transactions and contracts between multiple parties. DLT will ultimately become an essential means of maintaining transaction records. However, it is now handicapped by the painfully slow rate at which transactions can be recorded. This rate will speed up as computing power improves, encouraging widespread adoption.

Issuing Digital Currency

The second idea is that of digital currencies issued by central banks. So-called ‘Central Bank Digital Currencies’(CBDC) have considerable appeal and are being considered in several countries. CBDCs allow people who cannot afford to hold accounts with private banks to have accounts at the central bank, bringing banking and payment options to a wider proportion of the population. CBDCs would also more accurately target government welfare payments.

Central bankers should be careful of the risks of further disintermediation. That is, there would be fewer intermediaries between producers and consumers of the private sector banks. In a stressful market, disintermediation might cause a bank run. whereby people rush to switch accounts to the central bank. Central bankers must also be mindful of the public sector being drawn into ‘picking winners’ when making lending decisions. CBDCs could be a valuable financial instrument if banks carefully mind these risks.

Cryptocurrencies as a Store of Value

The original cryptocurrency was Bitcoin. There are now a multiplicity of others, such as Ethereum and Litecoin. Crypto-evangelists argue that, with rising government indebtedness and increasing inflation, these tokens are better stores of value than fiat currencies, which are government-issued and not backed by a standard like gold. Cryptocurrencies are now the choice of online criminals. They use them for ransom payments and money laundering.

What’s the Bottom Line for Cryptocurrency Investing?

Despite the considerations above, I would argue that cryptocurrencies serve mainly as an instrument of speculation. They cannot be considered money in general circulation because they are not universally accepted.  Tax collectors do not accept them. And aside from acceptance as payment for illicit goods and services, they are too volatile to be a store of value. Some cryptocurrencies, the so-called ‘stablecoins,’ are linked to one or more fiat currencies. It escapes me how such a linked currency protects the holder against a collapse of those fiat currencies.

Crypto-evangelists argue that Bitcoin and the like should be considered assets like gold, fine art, or fine wine. They reject the argument that cryptocurrencies are worthless because they produce no cashflows. None of these instruments produces a stream of cash flows, which may be discounted at an appropriate rate to calculate a fair valuation. The only cash flow associated with them is the negative cash flow paid to buy them. Then, the buyer hopes for positive cash flow when selling them. In that sense, as investments, these rely upon the greater fool theory.

However, you cannot rely upon someone paying you more for your painting than you paid. But, at least you have the pleasure of looking at it hanging on your wall. Likewise, if you cannot sell your wine at a profit, you can enjoy a convivial glass with friends. Gold has industrial uses, may be made into jewelry, and has been accepted as value storage and payment for thousands of years. Cryptocurrency investing has none of these virtues.

Some people may speculate on cryptocurrencies in the same way that some bet on horses. It’s like betting on a hand of cards or on which raindrop will roll down a windowpane fastest. We should recognize that cryptocurrencies are only tools for speculation..

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Data Breach Response: Before and After the Breach
2. Introduction to EU General Data Protection Regulation: Planning, Implementation, and Compliance
3. Blockchain and Smart Contracts

This article was originally published on March 17, 2025.]

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