Cryptocurrencies including Bitcoin and Ethereum are very speculative, unregulated, experience significant price volatility, and are not suitable for all investors. Fluctuations in the underlying cryptocurrency's value between the time you place a trade and the time you attempt to liquidate it will affect the value and the potential profit and losses related to it. Be very cautious and monitor any investment that you make. Speculating in these markets should be considered a high-risk transaction. Investors must have the financial ability, sophistication, experience, and willingness to bear the risks of an investment, and a potential total loss of their investment.
Who would want to own cryptocurrency?
Well, there's about a billion people on the planet that have a smartphone but don't have a bank account. There's also about a billion people who live in countries that have enacted capital controls at some point in the last ten years. So you can imagine the situation. If you're seeing your life savings fade away due to your currency's trajectory, and meanwhile, your government is actively preventing you from divesting and diversifying into a more stable asset, then you might find Bitcoin very useful.
Why are crypto prices so volatile?
Bitcoin is very volatile, crypto is very volatile and it comes from a divergence in valuation metrics. But it also comes from fundamentally why people are buying it as well as who's buying it. Bitcoin is a – best thought of as a speculative technology investment. The price people pay for it is based on what it will do – sentiment, market sentiment, rather than fundamentals.
How are cryptocurrencies valued?
A lot of things like Bitcoin don't clearly fit in a paradigm. Is it a currency? Is it a security? And depending on which mental framework you bring to it and impose upon it, you get a very different answer. I should say, crypto has some unique properties, one of which is radical transparency. We can see every transaction that happens. We can see it while it's happening. We can see how much money every single wallet has, and there's a lot of information in that. We can look at rates where people – currency levels where smart contracts will be liquidated, so we can see forced liquidations and their predictable effect on the market.
How is crypto changing the financial industry?
I believe cryptocurrency is a multitrillion dollar sector in the future, which means somewhere in there are the next Facebook, Amazon, Netflix and Google. Ask yourself, does this crypto project currently provide or does it have the potential to provide a valuable product to a lot of people? There have been a lot of ordinary Russians who have used cryptocurrencies to seek to seek some refuge from the ruble volatility. Meanwhile, we have seen the world chipping in to Ukraine directly by cryptocurrencies. Millions of dollars flooding in, millions of dollars in donations. And we've seen suppliers allowing Ukraine to pay directly in cryptocurrencies.
What is decentralized finance (DeFi)?
Decentralized finance is the word we give to a collection of projects by many different people to replicate and extend the conventional, traditional, centralized financial system onto the blockchain. What Ethereum does, and other similar technologies, is it allows the money to actually be programable. Instead of just sending the value to you, I can say, "if gold reaches $3,000, send you $1,000." And you can program that in, into what's called a smart contract. And what you've done in this case is remove the execution risk and in some cases the counterparty risk from a contract. So this is the building block of decentralized finance. And using the same method, you can create and really replicate all sorts of financial instruments. We see loans. You can borrow money, you can lend money, you can invest in numerous ways. You can create synthetic assets. Anyone who wants can go ahead and create something that looks a whole lot like a hedge fund or a whole lot like a mutual fund. But it can be done pretty easily in a web browser.
How is crypto gaining traction as a form of currency?
Cryptocurrency is – you can buy almost anything with it, but usually when you're going to a website and actually buying something, you're using a payment processor. So in a lot of cases, it's not really the company that holds the crypto, it's an intermediary. So it's not that different than a credit card. But there's a lot of great reasons that merchants might want to use cryptocurrency. For example, when you buy a coffee, you swipe your credit card and you forget about it, you're done. But the merchant can forget about it, right? They get paid down the line. They have to pay a fee. And who knows if that transaction gets disputed, maybe a month later. Bitcoin or a similar cryptocurrency can offer that merchant absolute certainty. It's an irrevocable transaction and it settles almost immediately. So if merchants are willing to take cryptocurrency, if they're willing to deal with the volatility or they're willing to trust the stablecoin, you will see merchants being able to allow sales of their goods and services directly with cryptocurrency and both the retailer, and in many cases the customer can see a benefit from that.
Mr. Landahl is discussing topics related to his research. The views expressed are as of June 14, 2022, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. The commentary should not be considered as investment advice or a recommendation of any particular security, strategy, or product.