Comparison of Cryptocurrency to Traditional Investments
Digital currency is quite different from traditional investments. Let’s start off with stocks and ETFs. Stocks are ownership contracts that bestow the rights to the profits of a company. As a stockholder, one has certain legal rights. Bitcoin is not an ownership contract of a cash producing company. There is no cash flow that Bitcoin produces as an asset. Bitcoin, the asset itself, is worth what the open market deems it is worth. The value of Bitcoin derives in part from investor perception of its properties as a trustless peer-to-peer payments network and gold 2.0 as well as from supply and demand, given that Bitcoin miners have to constantly sell their mined Bitcoin to support their operations. Supply and demand also dictates the price of a stock, but the stock’s demand derives in part from the future cash flow the stock will have rights to.
Moving on to precious metals, Gold and Silver have thousands of years of monetary relevance. It is known that supply and demand help price these assets as well. Gold’s supply is mined from the ground and controlled by the mining companies that decide to sell their quantity when they want to. This is also true with Bitcoin, as the new supply is given to the miners of the Bitcoin blockchain and sold on the market at their discretion.
Fiat Currency markets are unregulated, 24/7, and prone to central bank interventions. Bitcoin trades like a currency — somewhat unregulated, 24/7 settlement, and potentially prone to impact from central bank interventions when they decide to enter the market. However, it is worth noting that Bitcoin is much more volatile than most traditional currencies.
Supply and Demand determines the price of land in this world. The land itself is not cash flow positive, meaning owning land and doing nothing with it will yield zero cash. Two ways of using land to generate profit include 1) creating a farm that generates goods that can be sold and 2) building housing that can be rented out to tenants. Bitcoin can be understood as digital land within its blockchain. Space that is owned by you and only you can determine what to do with it to generate cash flow. Lend Bitcoin to someone for interest paid back to you or spend Bitcoin for goods and services.
Art collectibles are rare original pieces that have different intrinsic value depending who you are. A Michael Jordan rookie card might be valued at $50 to an art lover who hates basketball. That art lover might value a Jackson Pollock at $50 million while a basketball fan thinks he could create better artwork. The economic value of each item is how much it can be sold for on the open market. This might mean the Michael Jordan rookie card sells for $20 million and the Jackson Pollock artwork also sells for $20 million. They have truly the same economic value but are perceived differently by different buyers. Bitcoin is as valuable as whatever another person is willing to buy it for. That is the beauty of the market. Everyday a certain amount of Bitcoin is on sale for a certain price and the market validates the value of each coin. In the future, perhaps everyone will think Bitcoin is valuable because they can use it economically to purchase that rookie card or Jackson Pollock they wanted.
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CrossTower Inc. provides this content for general information purposes, to better inform you on your digital asset investment journey. We do not provide investment recommendations or provide tax advice. Please consult your investment professional or tax advisor if you require assistance in these areas.