A New Study Says Bitcoin is Too Volatile to be a Long-term Investment Option

News / 31.05.2020

It seems the revolution of cryptos and digital assets in the mainstream finance space is a disruptive force. Various flaws associated with traditional financial institutions and traditional forms of money were revealed during the economic troubles that ensued in 2008 and it appears that cryptocurrencies such as Bitcoin responded to them.

Issues related to cryptos in the time of digital money were expatiated in a research paper published recently by Stanford Graduate School of Business. The paper also discussed whether or not regulatory bodies are necessary for the stability of cryptocurrency. It noted the way a new taxonomy or classification process can help in comprehending money in the digital era.

For money to exist as cryptocurrency or fiat, the four major criteria considered in classifying money include:

“Issuer (central bank or other entity); form (electronic or physical); accessibility (universal or limited); and transfer mechanism (centralized or decentralized, i.e. peer-to-peer).”

Some of the usual demerits associated with cryptocurrencies such as Bitcoin were noted in the paper. It mentioned their outrageous volatility which makes it seem like they cannot be a dependent long-term investment option. Likewise, the paper mentioned their speculative characteristics which makes them more complex.

However, within the previous three months, traditional assets such as gold also exhibited some volatility. According to data from Skew, a decline in the volatility of assets such as Bitcoin was the same with gold and the S&P 500.

The paper said cryptocurrency regulations and adoption in 2019 increased in a dramatic manner, but there were demerits coming along as they grow and become more popular. Full decentralization and high democratization of cryptos such as Bitcoin is in progress regarding the validation of transactions but it is inevitable that centralization exhibits more efficiency, the study added.

As central banks started rushing to come up with CBDCs in recent times and Facebook came up with its Libra project, there could be a subversion of basic cryptocurrency ideals, said the study.

Featured image courtesy of Getty Images.

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Sudarshan M is a long time crypto-enthusiast. Pulled in by bitcoin early on, it did not take long for Sudarshan to divert all of his academic attention from business studies to blockchain by doing his Masters and eventually pursuing his PhD in the subject.