By Iacovos Iacovides, The Sports Financial Literacy Academy.
As we saw in last week’s article, blockchain technology and cryptocurrencies are becoming a big part of our lives, and the sports industry is not an exception. This week we ask: are they the future? Are they here to stay? Or, are they just a bubble?
On one hand, you have the narrative of a revolution led by young people, computer science geeks and perhaps some charlatans as well, who seek to redefine the matrix of our financial system and who see blockchain technology and cryptocurrencies as the future. On the other hand, we have the traditional investors and hedge fund people who dismiss cryptocurrencies as attempts to subvert political systems along with national currencies, and label them as the next great bubble. In a sense, both are right. Cryptos are the offspring of the two previous financial crises. The dot-com bubble with overspeculation in tech and the Great Recession which eroded trust in financial institutions and “the system”. In short, yes; cryptos are here to stay, but the explanation is much more complicated.
The collapse of the housing market brought about an unprecedented distrust for big banks and hence the decentralized nature of cryptocurrencies is appealing to those who seek alternative types of investment. It could be argued that 2021 was the year that cryptocurrencies became mainstream, with exchange platform valuations reaching the same levels as traditional powerhouses such as FedEx and Ford Motor, banks entering the game, and engagement reaching 200 million users. According to a Big 4 survey, hedge fund managers were expecting Bitcoin to exceed $100,000 by the end of 2021. They were wrong. In fact, it ended the year with a value below $40,000. Nonetheless, it was up 70% compared to a year before. As you can probably tell, cryptocurrencies are still very unstable and volatile, which is one of their greatest problems.
Nonetheless, a central argument in favor of cryptos is their transparency within the blockchain ecosystem. As they are based on blockchain technology, they essentially allow for a public ledger that everyone can deal with and trust. Not everyone is sold. Black Swan author Nassim Taleb, called Bitcoin an ‘open Ponzi scheme’, while Michael Burry – portrayed by Christian Bale in The Big Short – argued that it will soon collapse. For the record, Burry was among the first to see the collapse of the housing market coming.
Unlike cryptos, traditional currencies share certain criteria-functions, of which the most important are:
- Unit of account– When something is a unit of account, it means that we can use it as a metric. For example, a coffee might cost 5 chocolate bars. Instead of saying that, however, we say that it costs $6.
- Medium of exchange– Instead of exchanging a coffee for 5 chocolate bars, we pay $6 for that coffee.
- Store of value– Instead of storing 5 chocolate bars which will eventually go bad, we store dollars. Moreover, the price of the dollar (or another important currency) is relatively stable.
How do cryptos perform in these 3 tests?
Most probably, cryptocurrencies are not a good unit of account as their prices change in the blink of an eye. Indicatively, during May 2020, bitcoin value made a huge dive to $30,000 on a Wednesday and then by Thursday it reached $41,000. Moreover, half a Bitcoin is worth tens of thousands of dollars. Imagine trying to compare two cars where one is worth 0.5 Bitcoin and the other 0.53. Not very useful, right?
Consequently, it’s not very useful as a medium of exchange either. Although, many places – from carmakers to bars – now accept cryptos for payments, not that many people utilize this method of payment. Finally, can a cryptocurrency fulfill the store of value role? No. It’s way too volatile. Those who argue that it can replace gold, it can’t – in its current state at least—as it is 4-5 times more volatile than gold. Let’s face it, cryptocurrencies will not replace traditional currencies anytime soon. For the time being, cryptocurrencies are seen as a speculative commodity; an investment, that people seek to make money from.
Cryptos will stay with us for the foreseeable future. However, they or we, still need to find their ultimate purpose as they can’t remain an object of speculative frenzy forever and they will also have to become more stable to inspire some confidence. Finally, they need to find a way to incorporate anti-money laundering procedures since right now cryptos have a bad name due to the fact that they are preferred by criminals for their illicit transactions. In conclusion, we recommend that athletes engage to a degree with this new trend, but by no means throw everything in cryptos.
The Money Smart Athlete® Blog is established and run by the Sports Financial Literacy Academy® (SFLA). Through its education programs the SFLA has the vision to financially educate and empower athletes of all ages to become better people, not just better athletes. For more information on our courses, our SFLA Approved Trainer Program®, and how they can benefit you and your clients, please get in touch with us at [email protected].