Bitcoin Commodity or Stock?
There still is no consensus concerning how regulators should treat bitcoin. While some describe bitcoin as a “decentralized currency,” others express that it is an “entry in a public, digital ledger.”
Although both definitions have truth to them, they are also not a complete reflection of bitcoin’s utility. In addition to these definitions, bitcoin can be adequately described as the sum of its parts. Those who use the digital currency, they easily consider it to be an asset.
The big question that arises though is what type of asset is it? The determination may be a reason for bitcoin’s instability.
The Stock Model
Many investors who follow the stock model treat digital assets as a form of stock. For instance, tokens are bought and sold in the same marketplace and they are then stored in digital wallets. Similarly, cryptocurrency and startups share trading spaces, and they treat blockchain assets identically, regardless of whether the blockchain assets are released with an ICO or found during bitcoin mining.
Additionally, both cryptocurrencies and tokens are marketed with the same language. Campaigns often focus on investment and the ideas behind the assets. When it comes to bitcoin, marketing often focuses on factors such as advances in blockchain technology and its role as a next-generation technology. As for Ethereum, its marketing may address stability against the market, self-executing contracts, and future documents.
When the market analyzes both crypto and tokens, it internalizes all of the above factors. As a result, investor classes are taught to treat blockchain investments as identical to an asset class that is like token stocks. However, there are those who challenge this impression as incorrect.
Bitcoin Commodity or Stock?
Villanova professor Meg Lou wrote in a U.S. news article that “investing in bitcoin is not like investing in stocks and bonds.” She further added:
Investors buy stocks and bonds because they bring in future cash flows, interest and principal income in the case of bonds and dividend for stocks, and capital gains from a possible increase in price in the future. But bitcoin’s only source of return is price increase.
Well, you may argue, there are firms who never pay dividends, many of the tech companies, and bitcoin is kind of like them, where capital gains is the sole driver of returns. But here’s the essential difference: the future price of non-dividend paying stocks are backed by the company’s potential to grow its profit. It has cash flow, whereas bitcoin has none. The only thing it can offer is the belief that someone will be willing to pay more for it in the future.
To Lou, generally stocks or bonds can generate profits, even if the investor does not sell either of them. As for the future sale price, it is determined by market forces such as supply and demand and also by the performance of the underlying product. This concept, however, does not apply to bitcoin and other pure cryptocurrencies. Neither of them have underlying performance to support their value and they are based on pure market principles.
Also, bitcoin’s pricing histories corroborates this stance. Stock market prices tend to be low in volatility and trend toward stability. When it comes to the S and P 500, it was only during the Great Recession that the average daily rate changed to four percent. As for most years, mainstream stocks have a daily rate of change of 0.5 to 1.5 percent.
Regarding absolute pricing, the Dow Jones Average’s trend toward stability. Once the market reaches a new baseline, the average trends around it. Even though it can change, such change is an exception to the general rule.
When compared to cryptocurrency prices, which can change by 20 percent in a single day, the latter is much more volatile. As a result, crypto does not act like a stock investment. It’s baseline is also in the short term, not like the long term.
The Commodity Approach
Because bitcoin is unlike a stock, then maybe it is more similar to a commodity.
A commodity is a single unit of a tangible asset – for example, pork, gold, and oil. Dissimilar to stocks of bond, who produces the latter does not matter. Across all marketplaces, such commodities remain fungible. Further, commodities have a limited and fixed supply because unlike a stock certificate, one cannot just create another ton of lumber. The pricing of commodities is completely determined by supply and demand.
These qualities easily describe bitcoin. Bitcoin was designed to emulate gold and its algorithm has a fixed quantity at a pre-determined rate that does not alter the inherent value. Also, like other commodities, bitcoin needs to be sold to be profitable. Which means that the value is determined by supply and demand.
One World Bank analysis determined that a commodity volatility can fluctuate anywhere from 4 to 25 percent during an economic shock – gold is one such example. Those who like bitcoin to commodities stand to profit the most because they’ll be able to make smarter and better decisions with their money.