Cryptocurrencies – a scam or the future?

Rupert Carlyon is the managing director and founder of kōura Wealth Limited,manager of the kōura Wealth KiwiSaver scheme that has launched New Zealand’s only cryptocurrency KiwiSaver fund.

OPINION: Cryptocurrencies are a hotly debated topic.

The problem with cryptocurrencies is that everyone seems to have a pretty extreme view; you are either a crypto sceptic, or a crypto believer, and there are not many sources of information that fall in the middle.

Warren Buffett, arguably the world’s most famous investor, has said that he would not purchase all of the bitcoin in the world for US$25 (NZ$40), due to the fact that they do not produce anything. His business has gone even further and refers to cryptocurrencies as “rat poison”.

There has been a recent spate of articles talking about how Blockchain is a failed technology – alongside pieces that say true believers of crypto’s mission are holding on even though the market has crashed.

This is similar to many new technologies that appear to change the status quo and more often than not, the naysayers are people that have not yet done the research to fully understand the potential of these new technologies.

Back in 2005, no one would have thought that Google would dominate the internet with their search engine, or that an Apple iPhone launched in 2007 would change computing and how we communicate.

One of the most common criticisms of cryptocurrencies is that they do not do anything tangible as they do not produce anything. But that is fundamentally wrong.

Cryptocurrencies have some extremely important uses:

Money transfers

For many people transferring money can be extremely expensive.

World Bank estimates that the average transaction fee to send money internationally to developing economies is over 6%. This is an exorbitant rate that acts as a significant tax on people’s hard-earned money.

By using cryptocurrencies the transfer fees can largely be eliminated.

The main reason that El Salvador adopted Bitcoin as a national currency was to facilitate international inbound payments – 20% of the El Salvadorian economy is based on money coming in from people working offshore and sending money home to family.

However, their use of Bitcoin as a national currency has not been without issues, largely due to the volatility of the underlying asset.

Smart Contracts/Decentralised Finance

Smart contracts use a blockchain to store the details securely, and it can automatically trigger when certain things happen, removing the need for a middle person (or regulatory body).

These blockchains are then enabled by cryptocurrencies. For example, digital art ownership registers are stored on the blockchain and ownership is transferred from one owner to another on the blockchain and can even facilitate a payment to the artist on the way through as part of the transaction.

There are numerous other examples of live contracts including insurance, lending and real estate that are starting to use smart contracts to remove third parties (and therefore costs) out of the supply chain.

An alternative place to keep your savings

Usually Governments control money and have power over its distribution and supply.

In countries with less stable or trustworthy political systems, it is easy to see why citizens may prefer to hold their hard-earned savings in cryptocurrencies rather than in local currency which can be devalued or seized at any point in time (think Russia, Zimbabwe, Venezuela or even China).

In understanding cryptocurrencies, it is crucial to understand the core fundamentals of money and what it really is.

Money is effectively a socially acceptable standard by which things are priced and with which payment is accepted. It has gone through many incarnations from animal skins, precious metals, and paper notes to computers inside banks. I would argue that cryptocurrencies, in effect, are no different.

It is impossible to argue that for a very long time, cryptocurrencies have been the wild west of finance and there have been innumerable scams and hacks.

People have invested in cryptocurrencies based on their names (think Doge – Coin) or to earn a “safe return” of over 30%, or even just to get on the train of a new coin being freshly minted. The number one rule in finance is that if it seems too good to be true then it often is. More research and work from investors might have allowed individuals to avoid some of these scams.

The volatile nature of cryptocurrencies make it harder for people to use them in everyday transactions. Until we see a stabilisation in their prices, it is hard to see them being used in mainstream finances. It’s also important to remember that, as Forbes reported, there is a huge gap between the industry and regulators when it comes to being on the same page.

Cryptocurrencies are still in their infancy, and like all new products in the early stages, they have both their naysayers and supporters.

However, what is clear is that they do have some great uses that are not going to disappear.Which cryptocurrencies are going survive though is the big question that no one knows the answer to. The answer may even lie in stable coins.

If you are thinking of investing in cryptocurrencies make sure you do your research. Be certain on why you are investing in the cryptocurrencies that you choose, and that you understand how those currencies are being stored.

Remember that these are highly risky and volatile assets and like any risky assets are only appropriate for a small portion of a broader investment portfolio.

Investing in cryptocurrencies carry a significant amount of risk, and investors should ensure they seem advice and review relevant risk factors ahead of investing. For a product disclosure statement, see www.kourawealth.co.nz.