A brief look at cryptocurrency

By Larissa Fernand |  24-04-21 | 
 
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About the Author
Larissa Fernand is Senior Editor at Morningstar.in. Follow her on Twitter @larissafernand

From writing it off, to suggestions that it should corner around 2% of your portfolio, the conversation around cryptocurrency has completely changed.

Kristoffer Inton, director of equity research, basic materials, for Morningstar, shares his views.

The origin…

The concept of cryptocurrency has been around for years, but the modern cryptocurrency boom began with the launch of bitcoin in 2009. There are now thousands of cryptocurrencies in existence, but some of the most popular ones include bitcoin, Ethereum, Litecoin, and Ripple.

The basic idea is that units of cryptocurrency are created through mining, in which computers solve complicated math problems to generate coins.

The original motivation for this currency was that it's not regulated and under the radar. This is why it's curious that companies like Facebook (notorious for tracking everything their users do) and governments have been getting into the crypto game.

To get back to basics, read What is bitcoin?

The future…

I don’t see cryptocurrency being used for day-to-day transactions. And in fact, it seems that it's being referred to as one less and less. Because there's no consumer demand for cryptocurrency for anything other than investments, its price is entirely predicated on future demand.

If everybody decided that gold wasn't a good store of investment, there would still be a consumer demand for jewellery. But if everyone decided that a cryptocurrency wasn't a good store of investment, there's no real price floor to catch the fall. That makes it super-volatile, and that volatility makes it even more difficult to confidently say X bitcoin is equivalent to X dollars for transactional purposes.

We're only a little over 10 years into cryptocurrency. We don't have the hundreds of years of historical knowledge that we do for gold. But based on the growing acceptance of cryptocurrency by financial institutions and regulators, there are signs that it might be around for a while.

Additionally, it will be interesting to see if anything other than bitcoin emerges as the top player. Because there's so many cryptocurrencies out there, it's unclear if there's any real reason why bitcoin is the one that's really survived and thrived beyond being the biggest and most well-known.

Cryptocurrencies and Bullion: How they compare

Portfolio positioning …

Crypto is probably best considered as a speculative asset. Some of those experts think it works well as a diversifier because it doesn't seem to be moving with a larger economy. That being said, its short history makes it difficult to stamp that quality with significant certainty.

When evaluating whether or not cryptocurrency is good for your portfolio, address these questions:

  • How much are you willing to lose? There's always the possibility that speculative assets could lose all their value.
  • What does the risk profile of your portfolio look like? Adding speculation to something already risky is different than a portfolio of lower-risk assets.
  • What does your financial situation look like? Someone that needs asset preservation, like being near retirement, would have a different financial need from someone young in their career.

Also read, Does your portfolio need bitcoin?

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