Inflation is a problem that’s plagued many countries and India is no exception. This has come about because of excessive infusion of fiat currency due to unbridled spending by governments, far in excess of their revenues. Many currencies are staring at devaluation as a result. What’s more, geopolitical uncertainties have led some countries to look at conducting trade in currencies other than the US dollar (USD). In this light, is now the time to add cryptocurrencies to your portfolio?
A case for crypto
Sometimes, something may seem better not because it is better, but because others look bad in comparison. That is the case with cryptos, or cryptocurrencies, now, which look great compared to fiat currencies.
Many currencies are staring at devaluation due to a rise in inflation. The prime example, and one with global ramifications, is the USD. The currency is in a tight spot due to very high government debt arising from its fiscal deficit, continuing high spends by the government, private and consumer debt, defaults in debt servicing due to high interest costs, and so on. In 2024, apparently $8.9 trillion of US government debt is maturing, which needs to be paid back; that will be done by taking on new debt at higher interest rates, which will push up interest servicing costs for the US government.
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There is another trend which is impacting the USD – de-dollarisation. The US and its allies had frozen sovereign Russian assets worth $300 billion across the globe after the start of the Ukraine war. That made everyone sit up. If this can happen to a major country like Russia, it can happen to anyone, they figured. From that point on, countries wanted to move away from the dollar and started exploring settling payments for bilateral trade in their own currencies. This is happening at a very small scale now, but is expected to be mainstream in the future.
Due to these trends, dollar weakness is expected in the future and money could flow out of dollar assets into other assets like global real estate, global equities, gold, as also crypto assets. Cryptos being the smallest of these would most probably see a rapid rise, when the outflow starts happening.
The baggage that cryptos carry
Crypto assets have evoked very different reactions among people. For one, this is a digital-only asset which has no underlying asset (like gold, commodities, equities, etc.). This certainly does cause some unease. Also, the way such assets are created and controlled is difficult to comprehend and is a source of further queasiness.
This asset is volatile and prone to vertiginous rise and gut-wrenching falls. However, in the time it has existed, it has given good returns.
Cryptos, by design, have been created outside the ambit of government control. That upsets governments who see cryptos as a tool that can challenge the fiat currency and blunt the effectiveness of the government’s monetary policy . Hence, they have been opposing it vociferously.
Being outside government control, cryptos have a seamier side to them. They’re used on the dark net for all manner of illegal activities, like purchasing weapons, narcotics, money laundering, terror funding, etc. Governments have been using this as a stick to beat cryptos with.
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Most governments have not recognised Crypto assets. Hence, there are no regulators for these assets; investors are left to fend for themselves and have no recourse in case of any problem. For all the hype about blockchain technology and the infallible architecture, crypto assets have been stolen from investors and even exchanges. In 2022 and 2023, crypto assets worth $3.7 and $1.7 billion were stolen, respectively.
What doesn’t work for cryptos
Crypto assets have peculiar problems. They are held in digital form in a wallet. If the device where it is stored is corrupted or inaccessible, one will lose one’s assets. Proper backup at regular intervals is the solution. Also, if one forgets the password, the assets cannot be retrieved.
Cryptos are also volatile, and mostly outside the regulatory ambit, which means very little recourse when there is a problem. Further, it is a speculative asset that’s created in a complicated manner using massive amounts of computing power, which has an adverse environmental impact. And it is used for various nefarious activities.
Should one invest in Cryptos then?
Some of the problems can be addressed by investing in a Spot Bitcoin ETF, which has become available very recently. In a Spot Bitcoin ETF, the underlying asset is the bitcoin itself, which the institution holds.
The problems of storage, password, and liquidity are taken care of with this. Also, in a Spot Bitcoin ETF, there would be professional oversight and management by an institution. However, various other problems mentioned earlier would remain.
Considering the changing landscape, crypto could probably be one of the assets to look at, especially considering that it is outside government purview. Also, here there will be no devaluation due to excessive money creation. Hence, we need to evaluate our risk appetite and may allot a sliver of our overall asset pie, like 1-3%, to a crypto assets like Spot Bitcoin ETF, and later may consider other such assets on merit when Spot ETFs become available in them.
A good financial advisor should be asset agnostic, evaluate investment options on merit, and have the intellectual flexibility to consider assets based on changing situations.
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