In April, a US-based digital marketing startup valued at US$ 2 billion was in the news. What got highlighted was the fact its CEO got fired from his position, but what missed the headlines was the fact the firm found extraordinary success in just six-seven years. Indeed, there are many other digital marketing startups that have become unicorns in no time. The point here is digital marketing, which has the power to infiltrate deep into our lives, has taken entrepreneurship to new levels.
Even the cryptocurrency market hasn’t been left untouched. Do you think digital currencies, including bitcoin and ether, could have found so many takers without digital marketing tools? Recently, a single tweet from a multi-billionaire tech entrepreneur fueled a bull market in the crypto space.
Now, no one knows whether that was part of digital marketing or not, but the fact is retail investors do get motivated by digital marketing. Even in the cryptocurrency space, retail investors are not entirely motivated by any underlying revolutionary tech, but by a meticulously designed marketing campaign that targets them through popular social media platforms like Instagram, Twitter and Reddit. Stories of billionaires and top firms investing in these assets act as a shot in the arm.
However, this does not necessarily mean that the cryptocurrency space is, as many call it, “a bubble”. At the same time, it also doesn’t mean that it definitely isn’t one.
We all know the basic economic theory that price is shaped by demand and supply forces. The demand here is a result of consumption. When people started hoarding goods like toilet paper amid the COVID-19 panic, they knew those goods are consumable items. People buy what they consume. But the same doesn’t hold true for digital currencies.
First things first. Can these be called currency? If yes, why don’t they have a fixed face value? Currencies, we know, are a store of value. A $100 bill holds a certain value that can be used to purchase goods or services. But what is the value stored in one Bitcoin or Ethereum coin? Indeed, this values changes every now and then. Can a currency have such varying value? No, because that would simply defeat the purpose.
Next, are they a tradable commodity? We all know gold is a precious metal that never loses its sheen in the eyes of investors. Gold prices fluctuate based on the events in the global economy, and this volatility in prices can be compared to price fluctuations in the digital currency space. If digital currencies, like gold, are hard to mine, are rare and exhaustible at the same time, indeed, they may justify their high prices. But no, cryptos can’t really be compared to gold either. Gold is tangible, and it has a regulatory oversight framework, cryptos have none.
Some proponents of digital currencies cite the revolutionary tech underlying this space as the primary factor behind their popularity. The tech is blockchain, which, in a nutshell, means a decentralized way of storing and handling data. Of course, blockchain has the potential to change how things in the digital space are controlled. It doesn’t, however, essentially mean a currency based on this tech is a game- changer too.
Another argument can be digital currencies can be seen as an investment instrument. But here, too, they cannot be blindly equated to shares or debentures. Shares and debt instruments have a tangible entity associated with them, and this tangible entity is a corporation that produces or trades some goods and/or services. These entities undertake a certain economic activity, earn revenues, and all these factors shape the demand of their scrips. Indeed, the stock of a vaccine-maker will rise in current times, but this, again, will not hold true for digital currencies.
Digital marketing, as we argued earlier, is seemingly the biggest driving force for digital currencies. Ask yourself, do many of us even know whether Ether and Ethereum are inter-changeable terms or not? Do we know that Bitcoin, although frequently compared with Ethereum for their values, doesn’t have identical origins and purpose? The lack of understanding is so prevalent that any discussion about digital currencies is centered only on their rising or falling market value.
Retail investors should know that institutional or professional investors will love to have any and every investment instrument in their portfolio, as long as it has the capability to return profits, but they have the wherewithal to hedge the risks through other instruments. That is why the risk appetite of retail investors isn’t comparable to that of institutional investors. The former will have to look beyond the digital marketing campaign before making any investment decision.
Whether or not digital currencies are a bubble is a difficult question to answer, but facts and knowledge aren’t difficult to acquire. So, take an informed decision.
Kunal Sawhney is the founder and CEO of Kalkine. An accomplished financial professional, he has extensive expertise in equity markets and adopts quantitative and qualitative stock selection practices.
