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Should you invest in cryptocurrency?

30 Jun 2021

By Thiwari Werayasobprasong

Here is what you need to know from AIT School of Management’s FinTech expert before gaining or losing millions overnight.

As of mid-June 2021, there were more than 5,600 crypto coins in the market, with a global market cap of US$1.69 trillion – with US$742 billion belonging to Bitcoin. Last year in mid-April, Bitcoin (BTC) was worth a little over US$6,600. 12 months later, the coin’s value increased almost ten-fold, peaking at over US$63,000 per coin.

Two months later, however, the value of BTC dropped by more than half. Whereas owning just one BTC meant having US$63,000 in April, it meant less than US$30,000 in June – or being over US$33,000 poorer by doing nothing!

Earlier in May, Reuters reported that China had banned financial institutions and companies that handle payments from providing services related to transactions in cryptocurrency and had warned against speculative crypto trading, seeing price volatility as “seriously infringing on the safety of people’s property and disrupting the normal economic and financial order,” said the statement.

“Regulators are growing increasingly cautious about retail investors diving into crypto, particularly when they risk losing their life savings, as we saw in the 2018 crypto crash,” said Benjamin Quinlan, Chairman of the FinTech Association of Hong Kong, CEO of Quinlan & Associates, and Adjunct Faculty at AIT School of Management, as he cautioned the hype around crypto trading.

What good is cryptocurrency?

Cryptocurrency is digital money based on blockchain technology – a distributed ledger which decentralizes the way money is produced and transacted. Its value is determined by its users, not a central entity such as a national bank or a government. By design, the information stored on blockchain is nearly impossible to be tampered with. It takes up to 10 minutes to verify via its vast peer-to-peer (P2P) network every time a transaction is made. Cryptocurrency has been around since 2009, with Bitcoin being the first currency applying this technology. Currently, there are over 5,600 different cryptocurrencies in circulation, with the global market cap of US$1.69 trillion.

Cryptocurrency can be used to buy regular goods and services from vendors who accept it. Since its value is not controlled by a single authority, however, its price tends to swing dramatically, with considerable influence from social media. Given its inherent price volatility, the FinTech expert, Benjamin Quinlan, explained how this naturally makes people reluctant to spend it, especially if they expect its value to keep rising. As a result, cryptos are mostly used for speculative investment purposes. In addition, Quinlan noted that it is expensive and slow to transact in Bitcoin, meaning that it is unlikely that it will replace government issued fiat currencies.

The good thing about crypto is that it can be traded without traditional intermediaries, making it relatively easier and faster for new investors to get started. Realizing the benefits of blockchain technology, governments are also creating their own cryptocurrencies instead of completely stamping it out.

“What you’re seeing is growing use of stablecoins, backed by or linked to particular fiat currencies, such as USDT (which is the crypto pegged to US Dollar), to be used for payments. There are also Central Bank Digital Currencies (CBCDs) currently in development, such as the Chinese government’s e-CNY, aimed at digitalizing fiat money. As a result, we are seeing a growing interest by governments to transition from paper money to digital money,” said Quinlan.

NFT and Defi

Cryptocurrency is not the only application of blockchain technology.

Recently making the headlines are news of digital items such as memes or even original source code of ‘world-wide-web’ being auctioned as an NFT for an unimaginable amount of money.

NFTs (Non-Fungible Tokens) are a unit of data stored on blockchain to certify digital assets as being unique or being the first digital copy of its kind.

“NFTs are here to stay. The concept around collectability has now been applied to the NFT world by creating scarcity – there is only one copy of the original. But, at the end of the day, it doesn’t give you copyright, so you only have the right to say that you own the first one,” said Quinlan, as he weighed in on the NFT craze.

Equally growing at a fast pace is DeFi (Decentralized Finance), which seeks to replace traditional financial intermediaries with Smart Contract on blockchain, allowing users to grow profit through ‘yield farming, staking, and lending’ crypto assets – similar to lending money for interest. Instead of placing your trust in financial institutions, however, DeFi users put their trust on blockchain technology to ensure their capital will be protected.

The CEO of Quinlan & Associates thinks there is a lot of growth potential in the DeFi space, but regulatory weariness remains high. Quinlan explained, “The nature of DeFi means that it’s very hard to regulate. It’s really hard to work out who’s involved in that ecosystem. The maturity of cybersecurity software and the ability to track down market participants (and instances of market abuse) will likely improve over time, but until then, the Defi ecosystem will continue to exhibit robust growth in the coming years until regulators work out the way to effectively regulate it.”

Potential of blockchain technology in finance

“I remain very bullish on Digital Securities. I do think there is a big benefit, particularly with respect to instantaneous trade settlement and clearing when compared to a traditional stock exchange. You are seeing a lot of stock exchanges around the world dematerialize (or announcing their plans to), so that means even traditional stock exchanges are moving from paper and script-based representations of shares to digital forms. This provides a good prelude to seeing the digital securities space take off,” noted Quinlan on blockchain’s potential besides being used for high-risk investments.

Quinlan added that the Australian Stock Exchange has been exploring the benefits of using blockchain technology for the purposes of clearing and settlement, which supports his view around the future legitimacy of the space, especially in terms of growing institutional interest. More importantly, he believes industry infrastructure has been maturing in the right way.

Another application is in trade finance, where Quinlan says the key benefit is proving provenance traceability, and creating what he would call “a centralized golden source of truth” for something like KYC – Know Your Customer. “You can end up having everyone’s profile on a centralized blockchain database that is immutable. This creates an ecosystem where you can enhance many processes within the financial services and other ecosystems to generate a lot more efficiency because you’re not duplicating the processes across different financial institutions,” said the adjunct professor on FinTech, Big Data Analytics, and Storytelling Through Data.

So, should we invest in crypto currency?
At the end of the day, anyone can invest in anything they believe in. It is clear, however, that there is danger in not doing your homework. Like China, Thailand has recently banned the trading of some cryptocurrencies and NFTs, citing their characteristics of “having no clear objectives or substance, and whose prices are dictated by social media trends, or meme-based tokens.”

Fear-Of-Missing-Out (FOMO) has driven many people to pour their savings into crypto – an investment that is not based on valuation fundamentals, according to Quinlan.

“There are many opportunities right now to make a lot of money, but it’s not really based on fundamentals. Ultimately, if you want to invest in crypto, it’s your choice. But understand what it is you’re investing in, do your homework, and have a clear view on what you’re aiming to get out of it,” said Quinlan as he cautioned investors.

In other words, when it comes to investment, do not just do it based on your feelings alone (or what your friends are saying on social media).

Why is FinTech important?

FinTech or Financial Technology is all around us. From ordering a meal or hailing a ride, booking a flight or a hotel, or even registering to receive and spend financial aid from the government — all is made possible by FinTech. Essentially, it is the technology that automates financial services.

“FinTech has become a large part of everyone’s daily life. It’s important to understand what it is about, how it works, and where it can add value and make your life easier,” concluded Quinlan.

Mr. Benjamin Quinlan is an AIT School of Management Adjunct Faculty member who teaches their Business Analytics & Digital Transformation program, covering courses in FinTech, Big Data Analytics, and Storytelling Through Data. He is also the CEO and Managing Partner of Quinlan & Associates, and Chairman of FinTech Association of Hong Kong.