Many consider Bitcoin as a currency, but can we consider cryptocurrencies as such?
One of the most popular dilemmas in the world of trading is that relating to cryptocurrencies, whether to consider them as currencies, as a financial asset, or not. In this article we will shed light on the issue, through the comparison of classic financial instruments, in this case the currency market, with what is the world of cryptocurrencies, in particular the case of Bitcoin.
Can we therefore consider cryptocurrencies as a financial asset, or are they a different asset? In this regard, endless debates have arisen, the result of misinformation that completely distorts the real view of the facts and which creates a useless and meaningless dualism such as the one between classical financial instruments and non-traditional financial instruments. Also in this sense, non-traditional financial instruments are a completely different thing from cryptocurrencies, therefore clarity is a must and the controversies in this sense usually come from a public with little education on the matter and little awareness of what is a financial instrument.
What is a financial instrument?
A financial instrument, or better yet a financial asset, is that instrument which involves the exchange of a sum of money today to have the same sum plus an interest rate in the future. Basically, a pure financial instrument provides for the existence of an interest rate given the intertemporal perspective of the nature of the financial markets.
To better clarify the concept, the financial markets’ purpose is precisely to finance those who issue certain securities, for example, listed joint-stock companies issue shares against a sum of money which is paid to investors, the latter holders of the right to receive a dividend, i.e. that part of the profit destined for the shareholders. States finance themselves through the issue of bonds with which they raise capital against an interest rate which is recognized to the investor for the sum paid. As we can see, the existence of an interest rate is a necessary condition for establishing the existence of a financial instrument. Do currencies have an interest rate? Absolutely yes, they are the asset that incorporates the very essence of the interest rate, so much so that there are even very short-term interest rates that banks need to move liquidity, the notorious overnight rates .
From a trading perspective, we can see this interest rate when multi-day positions are maintained, i.e. for several days, where at the end of each day we are debited or credited with a sum corresponding to the difference of the interest rates of the currencies involved in the exchange held by us. In essence, the interest rate is the essence of financial instruments.
Are cryptocurrencies financial instruments?
Cryptocurrencies have no interest rate, do not embed any future cash flows and therefore are not to be considered financial instruments. This is one of the reasons why debates about the nature of Bitcoin arise, which in fact is not a financial instrument, but should be considered only as a market that trades a non-financial asset. Not having the basic characteristic of a financial instrument, not being centralized and not having a real regulation in this regard, cryptocurrencies are therefore to be considered yes as an asset but not a financial one. Many have made the equation: Bitcoin = digital gold, a real oxymoron. Although gold is listed through derivative contracts, i.e. through those contracts that replicate the price trend of an underlying, in any case it is not a financial asset but a physical asset, real, materially existing and universally recognized as a reserve valuable for millennia. Its value is recognized and the price is established on the financial markets via the derivatives market, surely it is to be defined as a particular asset, as well as most commodities.
Bitcoin, on the other hand, is not a real asset, and its value is such only if it is recognized by a counterparty otherwise it is equal to zero. Pay attention to the value and the price: if they coincide it means that we are dealing with a market where the value is decided by the price, therefore by the market. Bitcoin, like most cryptocurrencies, is a real market where supply and demand are the one and only determining factor. Pay attention again: Bitcoin is not being denigrated, but specifying its nature to better understand the risk, a risk that is in fact enormous considering the extent of the collapses we have witnessed lately.
Basically, cryptocurrencies are speculative assets whose value is mainly determined by the market and nothing more.
Cryptocurrencies are currencies?
We have therefore specified the fact that cryptocurrencies are non-financial and moreover speculative assets. What does all this mean? Means that they are to be considered as assets, but with due precautions. The value of Bitcoin as a real currency will occur when a consumer can buy a good using Bitcoin, without the latter necessarily being converted to obtain a real profit.
The fact that Bitcoin, as well as other cryptocurrencies, are not regulated and do not have a central body that guarantees intervention on it should there be monetary shocks, does not allow consumers to feel safe. The consumer and the saver have no perception of the true value of crypto precisely because there is no guarantee of its existence.
For the moment, therefore, crypto are speculative assets on which it is possible to bet on the future, but with the right management of operational risk on this asset. For example, selling a cryptocurrency as a safe investment because it has "fundamentals", is not ethically correct as well as academically false, so pay attention to the risk of investing in certain assets.
What does this mean? Quite simply: you can invest in cryptocurrencies but with due precautions, given that many have faced consistent losses, precisely because of the high volatility given by the speculative nature and above all by the lack of regulation about the nature of these assets.
Original article published on Money.it Italy 2023-01-12 07:57:00. Original title: Trading, la differenza tra crypto e valute reali
