Land in Kenya has been yielding abnormal returns over the past few years. But there is a new kid in the block with even higher returns: Digital currencies.
Barely a month ago, the value of the Bitcoin was $2,000. As I wrote this article last week, it was approaching $4,000. By now, it is perhaps a couple of points higher. This digital currency is the fastest growing asset of any kind in the world today.
A digital currency is in the category of what is popularly known as Internet money or electronic money. In most cases, the tech community refers to these currencies as cryptocurrencies or virtual currencies.
They are different from hard currency such as bank notes and coins, but they can be used like normal currency to buy goods and services. They operate more like mobile money and can be used just like the physical currency to settle any form of payments.
Digital currencies enable real-time transactions across borders.
Digital currencies can be bought from online brokers just like in the stock market.
The currency is not to be confused with other traded currencies or the activities in the money market.
Like other currencies such as the dollar or the euro, it is also a traded currency. When demand for the dollar rises, its value goes up. Similarly, when demand for cryptocurrency rises, its value increases.
The difference between hard currency and cryptocurrency is that the latter does not need a bank intermediary to transfer value. The money market too isn’t a place for virtual money, but with time it will happen as the market matures.
The market assets are short-term IOUs largely issued by governments, large corporations and financial institutions.
These short-term securities are in almost all cases very liquid and particularly safe. As a result, the returns are significantly lower than any other instruments of a similar kind.
In recent times, as more people have become familiar with virtual currencies, the demand has been phenomenal necessitating its value to rise. It is increasingly becoming the fastest way of settling debts across borders.
For example, if you buy goods from Singapore, you can buy the virtual currency online and settle the payment without having to visit any bank. There are several kinds of these currencies, but the most widely used are the Bitcoin and Ethereum. There are several others emerging.
The main concerns about virtual currency centre on their legality. While some countries have allowed these currencies to operate as a medium of exchange, others have either banned them or have no position about them.
In Kenya, for example, the central bank says that since they are not regulated, you can use them at your own discretion.
Although the adoption of these currencies was fast in China, the country’s central bank banned the handling of these instruments by financial institutions. Other countries like the Great Britain and the US have allowed their use and trade.
Some countries have concerns that these currencies may be used to promote online black markets. This, however, is an issue that can be resolved if financial regulators began paying more attention to this emerging medium of exchange.
Advances in technology will always disapprove prophets of doom. At the start of Internet, fear mongers heaped all manner of reasons as to why Internet was not good for humankind but today people ask how our lives will be without the Internet.
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Like any financial instrument, virtual currencies also come with risks. While most are on the rise, lack of demand could equally make the currency’s value spiral downwards.
It is not a good investment for short-term investors like in money markets. You will need to hang in there and exit when terms are favourable.
In terms of security, they are largely safe and backed by a new tamperproof emerging technology referred to as Blockchain.
This new technology offers great hope not just in backing up virtual money but also in its application in land registries, music and many other assets.