What to avoid in 2022: Cryptocurrency, NFTs and Blockchain | Value Research New investment avenues like Bitcoin are wooing investors with stellar returns, but their investment worthiness is dubious
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What to avoid in 2022: Cryptocurrency, NFTs and Blockchain

New investment avenues like Bitcoin are wooing investors with stellar returns, but their investment worthiness is dubious

Cryptocurrency
The growing craze for cryptocurrencies has been luring investors. Cryptocurrencies refer to a category of supposedly 'digital' currencies that try to provide an alternative to the existing government- controlled money. Unprecedented transactional convenience (including international payments), freedom from government supervision, absolute anonymity and most importantly, its track record of high returns are driving the demand for cryptocurrencies. According to PitchBook Data Inc, VC funds invested about $30 billion in the crypto theme in 2021, which is more than the total investments made in all previous years.

But as long-term readers of Value Research probably know by now, investors are better off avoiding this fad altogether. An asset is something that is inherently valuable, for example, stocks (they entitle investors to a share in the underlying profit). But when it comes to cryptocurrencies, there is no such feature. Besides, the absence of any underlying value, unrecognised legal status and factors like extreme volatility, the possibility of it being lost/ stolen forever or hacked easily and the risk of it being outlawed by the governments at any point in time make this investment a risky option.

What is not surprising is that the premise of cryptocurrency investments is the hope that somebody else may, for the same reason, buy these currencies for a higher price in the future. That alone, by definition, is not an investment.

NFTs
The non-fungible token or NFT is another trend that has caught investors' fancy. In simple words, NFTs are unique digital copies of a particular item. These could be copies of images, audio clips or videos. When a purchaser buys an NFT, she is purchasing a unique license to use the digital artwork based on the terms and conditions of the contract. But the key difference between a regular license agreement and an NFT is that since the latter is based on blockchain technology, the ownership credentials can be quickly verified. This means that the NFT could be resold and there would be an easy way to establish ownership rights.

But having said that, when viewed from an investment perspective, it is still unclear what benefits the ownership of NFTs will bring to investors apart from bragging rights. This market is still in its infancy and it is highly doubtful if it will be recognised by law. Readers can simply ignore this for now.

Blockchain
Blockchain paves the way for cryptocurrencies to work in a decentralised manner. This underlying technology ensures that data is stored in multiple locations (instead of a central database) so that it is very difficult for anyone to tamper with it. For example, when it comes to the purchase of a used car, the seller can tamper with the car's odometer. But if several entities regularly maintain and update the information, then the seller would not be able to tamper with the data, as the blockchain technology would prevent any single entity from unilaterally changing it.

Bitcoin, the most famous cryptocurrency, uses this method to ensure that transactions and ownership records are kept safe. SEBI chairman Ajay Tyagi said in a recent press conference that the market regulator doesn't want mutual funds to come up with new fund offers (NFOs) based on crypto assets until the government has announced regulations for cryptocurrencies. Thus it is better for investors to avoid such niche investment avenues, owing to the lack of any precedent and a high dependence on the government's policies. Blindly chasing the fad of the day is not how wealth is created in the long term.

Also in our 'Top trends to profit from in 2022' series:

Top trends to profit from in 2022: Return to normalcy

Top trends to profit from in 2022: Clean energy & pollution control

Top trends to profit from in 2022: PSU divestment

Top trends to profit from in 2022: China plus one

Top trends to profit from in 2022: Digital disruption

Top trends to profit from in 2022: Electric vehicles

Top trends to profit from in 2022: Artificial intelligence and machine learning

Top trends to profit from in 2022: 5G & Telecom revival

Top trends to profit from in 2022: Ethanol


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