President of the European Central Bank Christine Lagarde recently went on record to state that cryptocurrencies, including stable coins and speculative assets, are not currencies at all. Although they present themselves as such, Lagarde defined cryptocurrencies as assets that are monitored by management authorities. She highlighted how fiat-denominated digital currencies are often disguised for independent transactions, but their value is completely tied to the US dollar.
This discussion adds another layer to the ongoing debate on whether virtual currencies backed by the blockchain are assets or payment systems. With Square and PayPal entering the equation, it appears that crypto’s role in finance is only just beginning in terms of reaching the mainstream. While the technology is still in an experimental phase, it’s clear that crypto has become a new way of raising capital and sending money around the world.
Classifying Crypto: Assets vs. Currencies
A currency is any medium of exchange that is fungible, divisible, transferable, portable, and scarce; currencies can be used to make purchases from merchants that accept it. Assets, on the other hand, are any resource that can produce economic value; the ownership of assets is convertible to cash. On paper, crypto does sound like a currency because it was designed to act as a currency. However, it’s not something people use for transactional purposes regularly because it cannot hold its value predictably. This is why crypto is more suited to the asset class, where investors spend on crypto with the expectation that it will provide a future benefit.
Cash is a currency because its value isn’t as volatile as stocks or crypto, and its ability to be regulated enables governments to deem it as legal tender. Crypto is inherently decentralized and unregulated, which is why it has many adopters. Crypto-assets display high returns, have a low correlation with other asset classes, and offer an inflation hedge against the loose, global monetary policy.
The debate of currency vs. asset ultimately matters because the answer gives authorities a framework for regulating crypto. The World Economic Forum cites it as a challenge for regulators because open-source crypto networks are computer protocols directly available to the public, and there is little need for intermediaries to issue tokens and self-hosted wallets. In turn, this system limits regulators’ abilities to guide market activity and address risk.
Managing Your Crypto-Assets
As hackers exploited a vulnerability, the Cream Finance platform lost $34 million in Ethereum and AMP tokens. The culprit has offered to return the lost money but intends to keep part of it as a ransom. This scenario underscores an essential truth about crypto-assets: once you lose it, it’s gone and is very rarely recovered.
If you’re planning to manage crypto as an asset, it’s best to spread them across multiple wallets on platforms with the appropriate firewalls to reduce any potential losses. Another good practice is to limit the size of your wallet. Experts suggest that aiming to have 10% of your net worth in crypto is good, but you should set aside only 1%, 3%, or 5% for trading. Keeping crypto assets in small amounts can mitigate risks.
Respected financial advice website AskMoney has plenty of valuable articles on crypto and stock trading. One of their articles states that one rule of thumb you should follow is to follow your age: subtract your current age from 100, then use the difference to determine what percentage of your portfolio should consist of stocks. The rule works on the logic that the older you are, the less time you recover from poor-performing stocks.
Applying a similar concept to crypto-based assets is also helpful, especially if the technology behind crypto keeps gaining mainstream recognition, as we expect it will. Until these debates are sorted out, it’s still better to err on the side of caution. For more updates on crypto trends, check out the latest articles on Coincu News.
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