In an interview with CNBC in February 2020, Warren Buffet said, “Cryptocurrencies have no value, and they don’t produce anything”. His remark on cryptocurrencies tended towards it being a fad that is unlikely to last long. This statement evoked sharp responses from the crypto-community, who were dismissive of Buffet’s opinion.
To decide whether cryptocurrencies are a fad or not, one needs to analyze both sides of the argument carefully. As a first step towards this analysis, let’s understand what constitutes a fad and then discuss the use cases of cryptocurrencies to determine if it fits the description.
Three features common to most fads throughout the history are:
- Intensity and frequency of a belief or a behavior: All fads are characterized by a rapid increase in popularity, both in intensity and frequency. The time to attain peak popularity varies from a few days to weeks.
- Irrational obsession: Both early and late adopters of a fad innately know that there is a degree of irrationality in their behavior but they go about it anyway. Most fads give an emotional high to its participants with little to no material incentive.
- An abrupt drop in popularity: Fads are short-lived; they disappear as quickly as they gain popularity.
Does cryptocurrency meet the requirements of a fad? Let’s examine.
Cryptocurrency as an Investment
It’s been more than a decade since Bitcoin kickstarted the age of cryptocurrency. Since then, it has experienced sporadic peaks and troughs in its valuation. Despite this, Bitcoin has grown in popularity over the years.
The interest in cryptocurrency has varied wildly, as reflected in the multiple surges and drops of its value on exchanges. For the sake of this discussion, let’s focus on the fluctuations of the Bitcoin. Most striking are the rallies of 2013, 2017, 2018, 2019, and, more recently, from Feb to May 2020. Each of these rallies, however, ended in a crash. With such frequent swings, Bitcoin has earned the reputation of a very high-risk investment, meant only for people with an appetite for such risks.
The wildly fluctuating value of Bitcoin may support the notion of it being a fad. However, given the fact that Bitcoin continues to exist and increase in value after so many fluctuations, it is safe to conclude otherwise. Quite simply, had it been a fad, it probably wouldn’t be trading at around $9,200 ten years after its inception. This, in turn, lends validity to other cryptocurrencies that have carved a niche for themselves, justifying their value and existence.
Use of Cryptocurrency in Everyday Transactions
While cryptocurrency has laid the groundwork for discussion about the need for decentralized currencies, they have stopped short of becoming a mode of payment in everyday transactions.
Two factors are responsible for this:
- Without a regulatory body for cryptocurrencies, there is currently a lack of protection for users. For example, an incorrect transaction cannot be reversed, which is possible in a regulated environment, say, when using a credit card.
Also, given its fully-digital nature, there are some concerns about safe storage. The unregulated ecosystem, coupled with a lack of secure storage options, make it a hotbed for criminal activities. This can leave users vulnerable to theft and other damages.
- The other reason for cryptocurrencies not gaining mass adoption is institutional resistance. If these digital currencies gain popularity, it could lead to a massive disruption in the current financial system. This would undermine the significance of institutions and businesses built around the current fiat system.
Even as these problems continue to exist, there have been quite a few positive developments indicative of a growing acceptance of cryptocurrency.
Changes on the Horizon
With traditional institutions finally realizing the advantages of cryptocurrencies, the future looks bright. For example, Ripple (XRP), is currently used as a payment settlement, asset exchange, and remittance system, by some banks and financial intermediaries. Several other application-specific cryptocurrencies are emerging, leading to a gradual shift in public perception. Eventually, we may live in a world where cryptocurrencies co-exist with fiat currencies, each serving a different set of requirements.
Fluctuations in valuation are likely to stabilize over time, with the dust settling around legalities around the world. Subsequently, as cryptocurrencies become more ‘transaction-ready’, it may also be used to purchase groceries and pay bills.
Are Cryptocurrencies a Fad?
Now, let’s put cryptocurrencies to the test based on the three characteristics we mentioned before.
- Intensity and frequency of a belief or a behavior: Although cryptocurrencies have existed for more than a decade, they are yet to gain widespread popularity and mass adoption. On this count, cryptocurrencies are not a fad.
- Unreasonable and irrational obsession: Currently, Bitcoin is mainly a trading instrument. The emotional attachment to the cryptocurrency, if any, is limited to traders’ greed and fears. As such, there is no evidence of any irrational obsession.
- An abrupt drop in popularity: Cryptocurrencies haven’t waned in popularity, even after a decade. In fact, they are continually breaking walls of resistance and gaining acceptance with several banks and other institutions.
The scope of cryptocurrencies continues to expand. With more application-specific altcoins, like Ripple, appearing on the horizon, cryptocurrencies will likely become more mainstream than they are today.
As they continue to solve more real-world problems and gain acknowledgment, cryptocurrencies will eventually find applications in more and more areas. A decade is too long a time for a fad to last. Undoubtedly, the cryptocurrencies are here to stay!
