Since crypto exchange FTX went bankrupt and its Ponzi-style shell game with investor funds was exposed, many commentators have doubled down on their criticism of cryptocurrencies as some kind of Ponzi scheme.
For those who need verification, Ponzi schemes start with an initial investment from an early round of investors, and the money is then used (and spent) for the purposes of the investment product’s general partners or issuers. When the time comes when the original investors want to withdraw their funds, their investments are repaid by funds invested by subsequent rounds of investors, giving the illusion of solvency and returns.
Similarly, FTX continued to provide funds to previous investors on its exchange, using deposits from subsequent investors — those previous investments had gone to Alameda Research, an affiliated hedge fund.
You’re reading Crypto for Advisors, a weekly look at digital assets and the future of finance for financial advisors. Sign up here to receive the mailing every Thursday.
The FTX revelations have prompted a chorus of voices — including actor Ben McKenzie and Nobel laureate in economics Paul Krugman — to claim that cryptocurrencies in general are a Ponzi scheme.
Why crypto is not a Ponzi scheme
Let’s be clear: although bad actors use cryptocurrencies as a medium to conduct Ponzi-like schemes, crypto itself is not a Ponzi scheme.
For one, tokens like bitcoin (BTC) and ether (ETH) hold their value even in falling markets and don’t rely on new money inflows to pay off investors. Rather, the holders of these tokens can always exchange them for other valuables or fiat currency if they find a counterparty willing to take their crypto.
There is no central body that gives these tokens the illusion of value, rather the willingness of the investing public to pay $17,000 or $21,000 or $68,000 for a bitcoin determines the token’s ultimate market value.
The story goes on
The most popular cryptocurrencies are capable of delivering value in and of themselves without the manipulations of a Ponzi scheme operator.
What crypto tokens can do
And as a reminder to financial advisors, cryptocurrencies have fundamentals and practical use cases.
Here are a handful of features that cryptocurrencies offer:
1. Medium of exchange
As 2022 draws to a close, cryptocurrencies can be used as a medium of exchange at hundreds of retailers, including AMC Theatres, Virgin Galactic and Cheap Air. Many of these retailers use BitPay, a service that accepts crypto for a small fee as part of a transaction converts the currency of a provider’s choice.
Bitcoin holders can also exchange their coins for fiat cash at Bitcoin ATMs or via a debit card prepaid with their tokens.
And while many people argue that the volatility of bitcoin and other popular cryptocurrencies makes them unsuitable as a medium of exchange, stablecoins, which do not fluctuate in value, are on the rise.
The reputation of stablecoins has been tested this year by the collapse of some “algorithmic” stablecoins like Terra/UST. However, they still have the potential to overtake paper money by enabling fast, secure, and accurate digital payments. Central banks are taking this challenge seriously by working to develop their own digital currencies.
2. Foreign Exchange
Using tokens for cross-border transfers remains one of the most popular applications for cryptocurrencies.
While many critics have criticized the volatility and uncertainty of cryptocurrencies compared to fiat currencies like the US dollar, many other international currencies suffer from high volatility and inflationary pressures well in excess of those of the dollar.
Tokens like bitcoin can still be moved across borders faster and cheaper than fiat currencies.
3. Decentralized applications (dapps)
Blockchain technology and digital tokens are being applied to problems far beyond the problems of investors, advisors, exchanges, and digital broker-dealers.
The technology is applied to problems in real estate, agriculture, healthcare, gaming, and supply chain management, among others.
Tokens distributed through Initial Coin Offerings are programmable assets that use smart contracts to automatically execute transactions when certain conditions are met, without the need for an intermediary. Many industries, not just finance, can benefit from smart contracts that eliminate the need for intermediaries.
4. Yield
In 2022, Ethereum, the blockchain represented by Ether, the second-largest cryptocurrency by market cap, transitioned from a Proof-of-Work blockchain to a Proof-of-Stake blockchain, offering Ether holders the opportunity to earn income generate staking transactions on the blockchain. As a result, it has become much easier for many crypto investors to earn some income from their holdings without selling a position.
But in decentralized finance (DeFi) there have been so-called “yield farming” opportunities for a number of years. While some of these opportunities are fraught with risk and potential fraud, others offer investors the opportunity to earn more returns more efficiently than low-risk stocks and bonds — even in the current higher interest rate regime.
5. Investment diversification
Many investors will bet that blockchain will continue to spread and that demand for cryptocurrencies will pick up again, pushing prices up from their 2022 impotence. While these may often be hopeless hopes for easy money, some credible analysts also expect the value of major tokens like bitcoin and ether to eventually start rising, perhaps surpassing the highs reached over a year ago.
While advisors generally encourage long-term investing over get-rich-quick speculation, a little speculation about the potential growth of digital assets among younger, high-income or very large net worth clients shouldn’t seriously detract from their ability to achieve long-term goals. long-term financial goals.
Learn Crypto Trading, Yield Farms, Income strategies and more at CrytoAnswers
https://nov.link/cryptoanswers
Comments are closed.