Billionaire CEO Michael J. Saylor has called bitcoin an essential invention and recently said he has nearly 18,000 bitcoins worth around $740 million.
But the founder of MicroStrategy, the Virginia-based business intelligence application software provider, can’t use cryptocurrency to pay for a $5 cappuccino at Starbucks.
Will Cong, Rudd Family Management Professor and Associate Professor of Finance at Cornell University’s Johnson Graduate School of Management, told PYMNTS that there are some basic questions that need to be answered before cryptocurrency becomes so big. popular than the dollar.
By the end of 2021, there were around 30,000 Bitcoin ATMs in the United States, nearly double the amount since the start of the year.
A Pew Research Center survey last fall found that most Americans had heard of cryptocurrencies like Bitcoin or Ether, and 16% said they had invested in, traded, or used one.
Yet most consumers buy it as a speculative investment, and not for the purpose originally intended, to pay for goods and services.
“What exactly are these cryptocurrencies,” Cong said in an interview with PYMNTS. “Are they hyped? Are they really assets, or even commodities or money? Are they the tulip of our time?
Tulip refers to a 17th century market bubble in which the price of the flower bulb ballooned due to speculation by Dutch investors and led to a stock market crash.
When it comes to cryptocurrencies, Cong said there are thousands of them and they shouldn’t be lumped together.
“They’re not all created equal,” he said.
Thinking of cryptocurrency, they have multiple uses, Cong said, including using them as currency or units of payment.
“For bitcoin, we know that as a unit of account it doesn’t quite work [due to] the high volatility,” he said.
The second category is platform tokens, a class that Cong described as very promising. He compared it to Amazon Web Services (AWS), the reliable, low-cost cloud infrastructure platform that powers more than 1 million businesses, governments, startups and organizations in 190 country.
Another category, he said, is the emergence of non-fungible tokens (NFTs), the non-interchangeable unit of data stored on a blockchain or some form of digital ledger.
“It’s basically a category of token ownership tied to a particular product, like a particular piece of art or a particular service,” Cong said. “My miles points from a United Airlines would be an example of this type of token. Sometimes it’s not even blockchain-based.
A fourth category is cash security tokens, essentially the tokenization of traditional security contracts, he added.
“Once we think about those categories, we can think more about sources of value, sources of volatility,” he said. “If you look at the whole cross-section, we can build systematic risk factors like we’ve done for other asset classes.”
As to whether cryptocurrencies will eventually challenge the dominance of the dollar, Cong said he and his team have looked into this question. He said that cryptocurrency is challenging fiat currency while digital currencies will compete with each other.
” In one way, [cryptocurrency] remove some transactions that were previously traded through the US dollar,” he said. “They also challenge currencies that are not super dominant, for example the Canadian and Australian dollar. In addition to this direct challenge, the fact that they reduce the dominance of the US dollar is going to lead to a reduction in the competition of the US dollar over these other currencies.
The indirect effect of reduced competition from the US dollar could potentially benefit these other currencies.
Despite all the confusion over cryptocurrency, Cong pointed out that El Salvador has adopted Bitcoin as its national currency.
Last fall, at the request of Salvadoran President Nayib Bukele, the smallest country in Central America adopted bitcoin as legal tender.
Samson Mow, Chief Strategy Officer of Blockstream, the crypto asset firm overseeing El Salvador’s upcoming $1 billion bitcoin bond issuance, tweeted that the country is apparently gearing up for a new bitcoin law.
ElSalvador.com reported that Blockstream will be working with cryptocurrency exchange Bitfinex, sister company to stablecoin issuer Tether.
The outlet noted that iFinex, the owner of the two companies, paid an $18.5 million fine last year to settle charges brought by the New York attorney general. These came after it was discovered that Tether had secretly loaned Bitfinex hundreds of millions of dollars to keep it afloat after the exchange lost $850 million, allegedly due to the theft.