April 14, 2024

Cryptocurrencies: currencies? commodities? derivatives?

There has been a lot of talk about bitcoin derivatives in the media although I am in fact surprised to see how very little is really known about the basics!

What are derivatives?

Let’s recap very quickly – a derivative is a financial instrument that derives its value from the price of an underlying asset…It is not rocket science right.

There are many different types of derivative contracts such as futures, forwards and options although the purpose of this article isn’t so much about the details. The objective of this article is to help you understand that crypto currencies actually resemble derivative contracts.

Bitcoin as a gold derivative?

The moment we start calling bitcoin ‘digital gold’ and claim it is undervalued until it reaches the same market capitalisation of the physical commodity (gold), is the moment we connect its price to the physical commodity (gold) – and by making this connection we are indirectly referring to bitcoin as derivative of gold!

As a holder of bitcoin, I would be incredibly delighted to see its value reach the market capitalisation of gold – as at current prices, that would value bitcoin at least $400,000 per coin, as my earlier post alluded. However, I’d rather see bitcoin stand on its own merits.

What is bitcoin? Have we lost track of its original purpose?

Is bitcoin a digital currency that is meant liberate the world through the facilitation of commerce or exchange? or is it a commodity in which supply and demand determine its value?

Bitcoin was meant to be a decentralised currency to facilitate exchange and yet it is behaving nothing like a currency! it is being treated more as a speculative commodity that is akin to physical gold. So is bitcoin a commodity? a derivative? or perhaps more appropriately a commodity derivative?

Bitcoin has failed. Is Libra a resurrection of bitcoin’s intended purpose?

Whilst we question what bitcoin really is, it is important we acknowledge what bitcoin has become.

It is evident to me that bitcoin has failed in its overall purpose of making the world a better place since holders of the digital currency treat it as a speculative ‘get rich’ or ‘get richer’ scheme.

This bring me to the question – is Facebook’s Libra coin an acknowledgement of bitcoin’s failure in its intended purpose? Is Libra an attempt to resurrect and carry on bitcoin’s intended purpose to liberate the unbanked?

Security tokens as equity or debt derivatives

With regards to securitised tokens, one can easily understand their value is derived from the underlying equity valuation of the company or even its debt, depending on how the token is structured.

In other words, you could hypothetically derive the value of a security token as you would for a share or corporate bond – and from that aspect a securitised token resembles very much a derivative contract, deriving its value from the underlying asset or assets that act as a benchmark for its valuation.

Utility tokens are options!

Non-securitised utility tokens should be valued on the basis of the utility they derive (very much resembling an financial option) although many utility tokens aren’t valued this way – valuations are mostly speculative and on occasion these tokens trade as if they will someday become securitised tokens!

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