Works of art are similar to cryptocurrencies, but not commodities. The latter are linked to production and consumption cycles and have less unpredictable supply and demand flows
Investing in cryptocurrencies is very different from a classic investment in shares or bonds: let’s explore these differences in detail to make an informed choice.
Should you invest in stocks?
Stocks represent an ownership stake in a company and offer a portion of its profits which are often distributed in the form of dividends.
So the stock price is based primarily on the company’s performance, sustainability, and dividend growth over time, as well as its financial health and industry growth prospects.
However, since the valuation process must discount future cash flows, the value of a stock is estimated by bringing the expected future cash flows to date using the interest rate.
This explains why stock prices change over time as economic growth rates and conditions change.
Should you invest in bonds?
Bonds represent a portion of a company’s debt and the company pays interest on the principal in the form of coupons.
The price of bonds is not based on company performance, but on whether the borrower can pay the interest and ultimately repay the loan.
So the bondholder is not very interested in the prosperity of the company while the shareholder is.
Also in this case the evaluation process involves the discounting of future cash flows using the interest rate and this explains why the price of bonds also changes over time based on changes in rates and conditions of economic growth, even if in a much less sensitive way than actions.
And similar reasoning can be done for houses.
Cryptocurrency Evaluation
Cryptocurrencies, such as Bitcoin and Ethereum, do not represent ownership or debt interests in a company and do not generate future cash flows. Their evaluation mainly depends on:
- Supply and demand: The price of cryptocurrencies is strongly influenced by the dynamics between supply and demand. This may be subject to high volatility due to speculation, adoption by institutional investors, government regulations, and market news.
- Utility: The perceived usefulness of a cryptocurrency and its degree of adoption can significantly influence its value.
- Security and technology: The security of the underlying blockchain and technological developments can influence investor confidence and, consequently, the demand and therefore the value of the cryptocurrency.
- Scarcity: Some cryptocurrencies, such as Bitcoin, have a limited supply, which can create a scarcity effect by increasing perceived value if demand grows.
Works of art are in a similar condition to cryptocurrencies, but not commodities. The latter are often linked to real production and consumption cycles and therefore have less unpredictable supply and demand flows.
Cryptocurrencies are much more volatile than other assets because their intrinsic value cannot be estimated with the tools of financial theory.
So while classic investments, if well diversified and long-term oriented, offer some guarantee of success if the choices are based on the analysis of the fundamentals and growth prospects of the economy, investments in cryptocurrencies can be both short-term (trading) and long-term (holding), but there are no selection and evaluation criteria that offer guarantees of success.
In summary, while stocks and bonds can be valued through established methods based on future cash flows and business fundamentals, cryptocurrency valuation is predominantly based on supply and demand dynamics, perceived usefulness, and other less tangible factors.
Original article published on Money.it Italy 2024-06-10 07:01:00. Original title: Le scelte consapevoli da fare se si vuole investire seriamente in Bitcoin
