Cryptocurrency as an Investment: A Speculative Gamble

Evaluating how cryptocurrency works from a technological standpoint is beyond the scope of this finance blog. Instead, this post will focus on assessing cryptocurrency as an investment and its potential implications within the context of finance and economics.

Not a Traditional Investment

Traditional investments such as stocks, bonds, and commercial property derive their value from the cash flows that they generate. Stocks produce dividends, bonds pay interest, and commercial property earns rental income. These cash flows enable investors to perform valuation methods, such as discounted cash flow (DCF) analysis, to determine an asset's intrinsic value. In contrast, cryptocurrencies do not produce any form of cash flow. As a result, they lack the fundamental basis for valuation and are inherently speculative assets. Their value is purely based on market sentiment and what someone else might be willing to pay for them in the future.

A Digital Gold?

Cryptocurrencies are often referred to as ‘digital gold’ because, like gold, they do not generate cash flows and are valued primarily based on supply and demand dynamics. Whilst gold has historical and industrial utility that underpins its value, cryptocurrencies lack such tangible backing. Their perceived worth is driven largely by speculation and the hope that someone else will purchase them at a higher price later (Baur and Lucey 2010).

The Greater Fool Theory

Buying cryptocurrency essentially involves subscribing to the ‘Greater Fool’ theory of investing. This theory posits that the value of an asset is not based on its intrinsic worth but on the belief that someone else will purchase it at a higher price later. When purchasing cryptocurrency, you are essentially hoping that you will find a ‘greater fool’ willing to pay more for it. This makes it inherently risky as an investment, as its price is driven solely by the expectation of rising demand rather than sustainable financial performance (Keynes 1936).

Volatility and Risk

Cryptocurrency returns resemble lottery-like outcomes. The data available from the relatively short period of traceable returns indicates a wide dispersion of results—some investors have made significant gains, whilst others have lost substantial amounts. This volatility is problematic for investors seeking consistent, risk-adjusted returns. As with a lottery, the average expected outcome tends to be a loss.

Bitcoin Macro Charts

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Bitcoin Macro Charts ₿ Click Me

Figure 1. This displays the periods in time where the index was down compared to a previously achieved peak.

The longest drawdown period lasted for 3 years and 1 month and was between November 2013 and December 2016. It reached a trough of -76.7%.

The deepest drawdown period lasted for 3 years and 1 month and was between November 2013 and December 2016. It reached a trough of -76.7%.

Data taken from Curvo 2025.

Macro-Economic Implications

One of the most critical concerns with cryptocurrency is its incompatibility with established macroeconomic policies. Governments manage economies through centralised monetary policies, such as quantitative easing (QE) during economic downturns. For instance, QE was pivotal in mitigating the economic impacts of the 2008 Global Financial Crisis (GFC) and the 2020 COVID-19 pandemic (Bernanke 2020). Central banks use such measures to stabilise economies, maintain liquidity, and restore confidence. Without a centralised currency system, how would counter-cyclical economic policies work?

Furthermore, cryptocurrency lacks the regulatory oversight that centralised systems provide. Regulation is crucial for maintaining financial integrity, preventing fraud, and ensuring economic stability. Governments are unlikely to cede control of their currency systems, especially major economies like the United States.

The Geopolitical Reality of the US Dollar

The geopolitical significance of government-backed currencies cannot be overlooked. The US dollar (USD), for instance, holds the status of the world’s primary reserve currency (Eichengreen 2011). A significant proportion of international transactions, including commodity trading and financial settlements, are conducted in USD, often passing through the US financial system regardless of the origin or destination of the transaction.

This gives the United States unparalleled economic leverage on the global stage. The ability to impose sanctions, control financial flows, and influence global markets through the dollar network is a powerful geopolitical tool (Cohen 2021). It is highly unlikely that the US government would ever cede control to cryptocurrencies, as doing so would significantly diminish its influence in global economics and politics.

Conclusion

In my opinion, non-government-controlled, decentralised cryptocurrencies are inherently speculative and offer little long-term investment value. They lack the fundamental characteristics that make traditional assets investable, such as cash flows or regulatory protection. Whilst the allure of quick gains can be tempting, the lack of intrinsic value, combined with the risk of regulatory crackdowns and high volatility, makes cryptocurrency a poor choice for serious investors.

References

Baur, D. G., and Lucey, B. M. 2010. ‘Is Gold a Hedge or a Safe Haven? An Analysis of Stocks, Bonds and Gold’. Financial Review, 45(2), pp.217-229.

Bernanke, B. 2020. ‘The New Tools of Monetary Policy’. American Economic Review, 110(4), pp.943-983.

Cohen, B. J. 2021. ‘The Future of the Dollar as a World Currency’. Journal of International Money and Finance, 115, p.102405.

Curvo. 2025. ‘Bitcoin Historical Returns’. Curvo. Accessed May 17, 2025. https://curvo.eu/backtest/en/market-index/bitcoin?currency=eur

Eichengreen, B. 2011. ‘Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System’. Oxford University Press.

Keynes, J. M. 1936. ‘The General Theory of Employment, Interest, and Money’. Macmillan.