An apple is an apple, and an orange is an orange.
A buy decision for an apple or an orange can’t rely on identical elements. Although the idiom is quite old, it holds value in the contemporary world where many investors, primarily the retail ones, fail to distinguish between cryptocurrencies, non-fungible tokens (NFTs), and central bank digital currencies (CBDCs).
Even within a single unit, say cryptocurrencies, not all components are identical. For example, Ethereum provides blockchain and linked smart contracts services, whereas Bitcoin is a blockchain-based digital currency that seeks to compete with fiat currencies like the US dollar.
A common thread doesn’t mean homogeneity
The common thread is between these is blockchain, a promising tech. Tech companies like IBM are offering blockchain services to their clients for implementation in virtually anything and everything. They promise ‘safer and profitable’ solutions to clients that can transform data storage and smoothen the supply chain. JPMorgan, Citi and many other major banks use blockchain, which decentralizes data and creates a publicly distributed ledger that no single entity controls. From storing sensitive information to registering land titles, blockchain has wide applications.
However, the pluses of blockchain cannot squarely translate into the commercial viability of products that use this tech. For example, NFTs are registered on a digital ledger, but this aspect cannot alone justify the values of some NFTs ranging in tens of millions of dollars. NFTs are a proof of ownership, and since it is stored in blockchain, it is virtually immutable. The craze, however, has resulted in speculative trading in NFTs – just like the 17th century Tulip Bubble, when tulip bulbs were traded for exorbitant prices in hopes of incessant price rise. The same bubble seems to be playing out again, this time in a digitalized version.
Failure on one count cannot mean failure on another
Calendar 2021 has been a strange ride for Bitcoin, the most popular cryptocurrency, and almost every other constituent group, including Ether and Dogecoin. First, the pessimistic tweets from a multi-billionaire CEO and then China’s crackdown brought Bitcoin from above $64,000-mark to under $30,000.
The hostile stance of prominent institutions, including various central banks and the Bank for International Settlements, has not let the bears leave the crypto space. But the critical aspect here is that this hostility toward one cryptocurrency, bitcoin – which bears the maximum brunt due to its popularity and news-making ability – quickly grips the entire group. Investors fail to realize that although all cryptos come with blockchain tech, their utility and viability can differ. Ethereum, for example, is a smart contracts enabler, and ether is used to make payments when one uses Ethereum services.
Other cryptocurrencies may be tied to a different offering, which can have a demand and utility different from bitcoin or ether. It simply means that a fall in the value of bitcoin must not spell doom for other cryptocurrencies. But it is happening, which must concern all stakeholders.
CBDCs are not cryptocurrencies, not all CBDCs are same
Cryptocurrency enthusiasts rely on a single attribute. They say cryptos can become the currency of the modern world. Bitcoin and others work without an intermediary like the central bank, and transactions are faster and cheaper due to limited restrictions. In contrast to this, CBDCs intend to have regulatory oversight.
CBDCs, issued by any central bank worldwide, will serve as the digital counterpart to paper notes. Similar to the crypto space, not all constituents within the CBDC world will be identical.
What the Fed’s or the Bank of Canada’s approach will be to CBDCs can be entirely different, and the tech underpinning each CBDC can be different too. For example, China’s digital yuan, which is being tested in some cities, has yet to become anything more than just a digital currency note. The People’s Bank of China issued it to commercial banks for distribution to the general public, and any use of distributed ledger tech is yet to be ascertained. In this regard, there is another promising player, the Facebook-backed Diem, which can soon launch stablecoins pegged to fiat currency. Again, stablecoins are a separate unit.
Best approach to investment
There is no best approach to investment. One investor can earn good returns from the same asset, where another may lose money.
But one must avoid some mistakes. In the crypto space, that mistake treats all that uses blockchain tech as one asset class with similar viability. In this regard, one has to understand that NFTs may be the modern-day Tulip Bubble.
Bitcoin may never displace fiat currencies, but Ethereum’s smart contract services or Diem’s fiat currency-backed stablecoins may one day see wider adoption.
The most significant fallout of treating the above as all apples or all oranges can be that a collapse of one can deal a body blow to others. A google search for blockchain, bitcoin, cryptocurrency and even CBDCs displays near-identical stuff. News articles on any development in one space regularly cite developments in other spaces, which confuses the reader and the amateur retail investor.
Eventually, if we fail to make a distinction between these and go on with the common approach of mixing apples and oranges, even promising breakthroughs like CBDCs that can genuinely make transactions faster and cheaper will never see the light of day owing to a blow to market sentiments for everything on the failure of one.