Remember the guy who paid 10,000 bitcoin to have two pizzas delivered? The transaction, worth $41 when it took place on May 22, 2010, would grow to be worth $57,700 within a year. This past May, on the eleventh anniversary of what soon became known as Bitcoin Pizza Day, 10,000 bitcoin was valued at approximately $380 million. They were worth twice as much the previous month.
This story illustrates the mania surrounding Bitcoin and other cryptocurrencies. And it brings up some important questions about these new digital tokens’ utility as currency and as an investment. Are cryptos like Bitcoin a currency you use for purchases? Or are they an asset you should invest in like a stock? The way I see it, they’re a bit of both. And the rapid adoption of crypto points to what the future of spending and investing could look like.
What is crypto and how does it work as a currency?
Cryptocurrency is digital money that is decentralized, meaning that it has no central issuing authority like a bank or government. Transactions are made anonymously and recorded and secured using blockchain technology, which is similar to a bank ledger.
Purchased through crypto exchanges and stored in the user’s digital wallet, crypto facilitates faster, more confidential transactions without the typical fees associated with card payments. The downside? Mania-driven price volatility.
While crypto can be exchanged instantly between digital wallets, constantly shifting values make transactions a bit like gambling. Why spend your bitcoin today if it could double in value within just a few months? Conversely, why not get rid of it in case its value suddenly drops substantially?
To see how crypto works as a currency, we can look to El Salvador. The country became the first to adopt Bitcoin as legal tender in September of this year, purchasing 700 bitcoin and promising $30 worth for all Salvadorans who sign up for the cryptocurrency wallet app, Chivo. The rollout has not been free of headaches with reports of technical issues and attempts of stolen identity. And pricing volatility persists; Bitcoin’s value dropped sharply after adoption but recently surged to its highest levels since May. Where it goes from here is anyone’s guess.
Meanwhile in the U.S. where crypto is not yet a legal tender, a third of small businesses accept cryptocurrency payments including retailers like Overstock.com, AT&T and Starbucks. But, since the IRS considers crypto an asset not a currency, consumers are on the hook for any capital gains tax on their crypto transactions, making any purchase made using crypto a taxable event.
Aside from the current tax consequences of using Bitcoin as currency, I can’t help but imagine future possibilities. Say you want to purchase something large like a house or an automobile and have bitcoin to spend. Since crypto circumvents traditional banking methods like cashier’s checks and money wires, it presents a faster way to access cash for that purchase. Unlike traditional assets that require a lengthy process of verification and clearing, Bitcoin can be liquidated and transferred fairly quickly and easily from anywhere in the world.
The way crypto works as currency could have a significant impact on the future of investing. By leveraging technology that decentralizes the cost and services model for investing today, crypto sets the stage for more real-time access to assets for use as currency.
Crypto as an asset
Cryptocurrency lending has emerged as another way to leverage your crypto portfolio into cash. Similar to a securities-based loan like a mortgage, cryptocurrency loans are backed by borrowers’ crypto holdings. Borrowers retain ownership of–but not access to–their crypto assets used as collateral. If they default on the loan and the value of the assets drops, borrowers can end up owing a lot more than the original amount.
While securities-backed loans like home equity lines of credit are pretty safe bets, crypto’s volatility make it less reliable as loan collateral. Borrowers could end up in the clear if crypto prices trend upward, but they could also get burned pretty badly if the value of their holdings drops significantly during the lifespan of the loan.
Still, the idea of leveraging crypto as an asset is something to consider because it introduces a way for people to view their overall investments. Today, it can take several days and multiple steps to convert stocks into cash. With consumers leveraging their crypto assets to pay for things like patio furniture, why wouldn’t they expect at some point to be able to use traditional assets to pay for larger purchases like a new patio?
Crypto’s influence on future spending and investing
The crypto market represents trillions in capital that isn’t being invested traditionally. With applications in payments and lending, crypto is introducing the concept of assets becoming currency through access in real time. By leveraging the digital processes that enable crypto transactions today, investment platforms of the future could have the capability to instantly convert a traditional asset into usable currency for real time use. Crypto is paving the way for people to use all their assets, bitcoin or otherwise, as currency that can be immediately transferable between parties. It presents a radical change to how people could save, invest and use their money in the future.
We do have a ways to go, though, before the technology and systems are in place to fully realize this vision. Unlike regular investments, the value of crypto is more connected to the mania in the market than the normal KPIs that underscore company stock evaluation and speculation. Despite its potential, cryptocurrency as assets cannot make any real progress until its value becomes more stable. Today, the crypto ecosystem is confined with consumers buying into and selling out of it, driving wild price fluctuations. Through increased adoption and regulation, this is likely to change and will have powerful implications for spending and investing in the future.