The incredible rise in the price of cryptocurrencies in the past few months has caught the interest of almost every investor in the entire world. Even the most traditional investors have been introduced to the concept of cryptocurrencies. However, not all investors want to invest in it. For instance, Warren Buffet famously stated that he or his company will not invest in cryptocurrencies using any mechanism. Buffet clarified that he would not shoot them or take any position in them. This is because he believes that cryptocurrencies will ultimately come to a bad end. In this article, we will have a closer look at why orthodox investors believe that investing in cryptocurrencies is a bad idea.
- Cryptocurrencies do not Generate Cash Flow
Traditional investors consider a cash outflow to be an investment if it generated future cash inflows without the need to sell the asset. For instance, if a person buys a home, they can generate cash flow in the form of rent without having to sell the underlying asset. Similarly, if an investor buys equity shares in the business, those shares generate cash flow in the form of dividends. However, when it comes to cryptocurrencies, there is no cash flow is generated. The only gain that the investor hopes to make is if they find someone who is willing to pay a higher price for the currency on the market. This makes cryptocurrency investors vulnerable to the whims of the marketplace. The lack of periodic cash flows makes cryptocurrencies inherently speculative. Most people who hold these currencies are speculators hoping to make a quick buck. Hence, according to orthodox investors, buying into cryptocurrencies is like buying into the greater fool theory! The only possible way to make money is to convince someone to buy the same asset at a greater price.
- Cryptocurrencies are not Backed by Tangible Assets
Most orthodox investors believe that cryptocurrencies do not make good investments. However, a large portion of them also believes that cryptocurrencies do not make good currencies either. This is because, in order for currencies to be effective, they should have some underlying value. Traditional currencies such as gold and silver had value because they were considered to be precious metals and emerged as currencies in almost all parts of the world. On the other hand, fiat currencies derive their value from the power of the government. It is illegal to not accept these currencies in the country where they are issued. However, there is no tangible asset or government decree which assures the value of cryptocurrencies.
- Cryptocurrencies are Prone to Hoarding
Another reason why cryptocurrencies are not considered to be good examples of currency is that they are prone to hoarding. The job of a currency is to stay in circulation. Currencies enable the transaction of other goods and services. They are just the medium of exchange and do not represent value. However, when it comes to cryptocurrencies, investors want to hoard large amounts of them. This is because they believe that these currencies will increase in value over a period of time. If an investor believes that their currency will triple in value in a couple of years, they are unlikely to spend it. Hence, it would be wrong to state that cryptocurrencies are the currency of the future. The way they have currently used hints at the fact that they are being used as speculative financial instruments.