Is Bitcoin the greatest innovation since the internet or the biggest bubble of our time? It’s true that cryptocurrencies are speculative investments, says Benjamin Pousty, content strategist with the Fidelity Labs blockchain and digital assets incubator. However, cryptocurrencies continue to attract investors to what seems like an allocation option of the future.
Bitcoin is part of an emerging, yet volatile, asset class. Pousty points out that bitcoins could serve as a store of value asset or alternative transactional currency. The cryptocurrency could potentially help the world’s unbanked or underbanked populations, as it can be moved securely and in minutes without a middleman.
As the current financial system relies heavily on third-party intermediaries, we know that inefficiencies, limited accessibility and long-transaction times can often lead to fraud, cyber-attacks and other hidden risks.
“Bitcoin is fully digital and does not rely on third-party intermediaries, which creates a level of cost-effectiveness,” Pousty says, because the digital asset is easier to move than paper or physical commodities.
Using the internet as an example, he compares the protocol technology that websites like Google and Facebook were built upon to the underlying protocol layer of the blockchain.
If the internet was meant to digitize the creation, distribution and movement of information, Pousty says, Bitcoin aims to digitize the creation, distribution and movement of value. Investors can buy bitcoin tokens, which meet a lot of the traditional criteria of a currency and have a finite supply of 21 million. “You’re basically making an investment in the finite amount of real estate available atop the Bitcoin blockchain,” he says.
Here’s how Bitcoin works: Bitcoin transactions are broadcast out to the Bitcoin network and validated by miners, or individuals on the network who process the transactions. Every transaction created since 2009 can be found on the Bitcoin blockchain, a public ledger updated in real time providing security through transparency. Essentially, the blockchain is the tracks on which bitcoin tokens move and where the transfer of value is completed and recorded.
“To change a record in the blockchain would require one individual or group getting 51% control of the entire Bitcoin network,” Pousty says, “But the block reward [the amount of bitcoins that miners earn for successfully validating bitcoin transactions] and the price of bitcoin tokens are so valuable today, that it’s in nobody’s interest to attack the system. It’s in the best interest of miners to compete to earn that block reward and for investors to see the Bitcoin network continue to function properly.”
Why should plan sponsors be optimistic about this digital currency? Pousty says its tremendous growth is the biggest reason, but the maturity of the asset class is also important. Bitcoin accounts for about 55% of the value of the digital asset class. “With a market cap of $95 billion, Bitcoin and another digital asset, Ethereum, account for over 70% of the total value of this asset class,” he says [as of the presentation date in October 2017]. While Bitcoin is a means of transferring value, Ethereum is the protocol built to create more decentralized applications.
Pousty says Bitcoin’s value comes from the fact that it is a powerful digital-native financial technology (it’s based on the underlying technology of blockchain), has no ties to the traditional financial system, meets the criteria of a currency and has a finite supply (only 21 million will ever be put into circulation). So, while Bitcoin might not be there yet, down the line it could be an interesting alternative portfolio allocation option.