Cash may be considered king, but digital forms of currency are growing.
Risk, convenience and cell phones have changed money on a global scale. And as technology rapidly expands and develops, we can expect more changes.
As investors, it’s important to know the basics of digital currency—from bitcoins to money transfer apps to cell phone minutes. Here, a few experts weigh in on some of the key new developments of the ever-changing market.
Bitcoins
As a payment system that allows users to interact directly without a middle party (e.g., the U.S. Federal Reserve), bitcoins have spiked in popularity, especially with the millennial generation. “While popular, bitcoins are extremely risky,” says Mark A. Johnson, Ph.D., Assistant Professor of Finance at Loyola University. They were valued above $1,000 in late 2013, and now they are worth less than $500, he says, adding that “bitcoins can be a bumpy ride.”
Money transfer apps
Also surging in popularity, apps that allow users to transfer funds peer-to-peer have become significant to the flow of currency. “They are here to stay and show no signs of slowing down,” says Johnson, adding that the volume of transactions will build, but ultimately remain small compared with cash and point-of-sale systems that use credit and debit cards or RFID chips.
Cell phone minutes
Beginning with Africa’s M-Pesa system, which allows transferring of minutes between phones, people without access to modern banking began using cell phone minutes as currency, a trend that’s expanded in emerging markets. “Cell phone minutes as currency has the potential to increase in emerging markets,” says Johnson. “You could make a compelling case for investment in the companies and infrastructure.”
New technologies bring disruption and risk
Bitcoin-type exchange models become more attractive when compared with currencies subject to inflation. To counteract growth, some countries are putting new restrictions in place, says Fariborz Ghadar, D.B.A., Professor of Global Management, Policy and Planning at Penn State. “They may not be successful,” he says. “As long as governments print an excessive amount of money, investors will desire to hold bitcoins, which are, to a large extent, limited in amounts and thus preserve their value.”
And investing in new technologies poses greater risks than investing through established institutions. These are newer companies often run by those with less experience. “Investors are better off buying gold,” says Johnson, who adds that more established companies may soon offer better consumer alternatives. “They’re trying to,” he says. “Because it’s obvious that the next generations want alternatives.”
