Disclaimer: I'm not an investment expert and am not offering any views on investing in cryptos.
Cryptocurrencies attract very distinct views, among laypeople, professionals, investors and the like.
There are those who are very much against it, and there are those who have cult-like belief in it. And then there are those of us who are kind of in between.
My knowledge of this space is at a high-level, and I have limited experience too. But here is what I have gathered so far, looking at it with an actuarial lens.
What is a cryptocurrency?
It's funny that even a basic question like this is difficult to answer properly - such is the complexity of this space.
First of all, the word currency needs to be used cautiously with crypto, because almost all countries in the world (except for El Salvador and maybe some others) do not recognize cryptocurrencies as legal tender.
And second, crypto refers to cryptography - a branch of mathematics that focuses on encoding and decoding information so that only the sender and receiver of the information are able to see it.
Cryptography is the bedrock of cryptocurrency.
Now basically cryptocurrency is a form of digital asset which doesn't need a bank to hold & process it. Transactions are verified and stored in a decentralised ledger, called a blockchain.
There are vast varieties of cryptocurrencies and each one has very different traits to another. Broadly categorised, there are payment cryptocurrencies, stablecoins, tokens and Central Bank Digital Currencies (and likely many other types which I don't know of).
Payment cryptocurrencies (which include Bitcoin) are meant to be a medium of exchange and a way to facilitate peer-to-peer transactions (not requiring a central authority).
Stablecoins are pegged to a fiat currency (mostly to the USD, but there are others too), using cash & asset reserves or other methods. However there is a risk that the peg may fall apart if the stablecoin reserves are inadequate (which has happened before with Terra and Luna). Examples of popular stablecoins are USD Tether (USDT) and USD Coin (USDC).
Tokens are a vast area in itself - these cryptocurrencies are designed for specific use cases. For example Ethereum is an open source development network that enables smart contracts and decentralised apps, removing the need for legal entities and intermediaries. Ether's use case is to pay the transaction fee to develop something on the Ethereum network.
There are Exchange tokens, Service tokens, Governance tokens and others, all intended for specific purposes.
Non-Fungible Tokens (NFT) are somewhat different, as they are collectibles rather than cryptocurrencies.
Central Bank Digital Currencies (CBDC) are basically fiat money programmed as cryptocurrencies. The value of CBDC are the same as its corresponding fiat, but it doesn't require a bank to hold and process the digital money.
Why do cryptocurrencies exist?
Even the staunchest critics of cryptocurrencies must admit that the conventional financial system is far from perfect. Governments around the world have chosen to abandon words of caution from traditional monetary theory, that printing money causes inflation, to prop up their economies in times of financial distress.
Time will tell, whether the tenets of monetary theory prevail.
Some cryptocurrencies eg Bitcoin, have been designed such that they are deflationary. That is, the supply of the currency is limited by design, so that in theory, the value of the currency increases over time rather than reducing over time (assuming that the currency is in demand). Also, governments have no control over decentralised cryptocurrencies (they do control CBDC, which is fiat).
We have seen fiat currencies collapsing with hyperinflation in so many countries, eg Turkey, Argentina, Lebanon, Zimbabwe and many others, destroying the hard earned savings of their people.
We have seen countries having their banking system targeted and destroyed in times of war - eg Ukraine, which left their people desperately scrambling for an alternative to secure their assets and continue their economy.
In both situations, people have resorted to cryptocurrencies to stay afloat.
Cryptocurrencies have also emerged as solutions for issues with asset ownership, cross-border payments and other problems.
Why Actuaries should understand the cryptoverse?
(again, not investment advice)
Yes, the cryptocurrency space is rife with bad actors and scams, and the value of cryptos with relation to fiat is extremely volatile- but in my view the blame is not with the cryptocurrency itself.
The sun shines alike for the virtuous and the sinner. The fire does not choose whose food it cooks.
Likewise, cryptocurrencies are simply a technology that enables an alternative financial system.
The high complexity of the space, combined with lack of knowledge are quite concerning. Due to the stigma attached to cryptocurrencies by governments and mainstream financial providers, we need to resort to different sources of knowledge on this field, many of which are dubious.
As actuaries, we are equipped with skills to analyse this space with our sharp intellect, and then convert it to simpler language for the understanding of the public.
Also, as this alternative financial system is being developed, there is a need to shepherd it in the right direction - with proper risk management, controls, governance and valuations. The skills we actuaries employ in the traditional financial system can be transferred over to this space to steer it the right way in the development of financial providers, securities, products and the like.
In conclusion
(no investment advice here too)
The cryptocurrency space is fast emerging with its own shapes and forms, and its own rules. It is a very interesting area to understand and analyse. Time will tell how successful it may be, but we don't have the luxury of standing idly on the sidelines.
We actuaries have been blessed with the abilities and skills as risk & financial professionals - and it is time to be brave and open up our horizons (not necessarily our investments).
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