Appl Ex 4e

Application Exercise 4e: The rise of cryptocurrencies as a form of investment.

  1. A cryptocurrency is an example of a digital currency that also acts as a type of investment.


  1. Whenever a market booms, whether it is property, shares, gold or cryptos, herd mentality sets in and people fear that if they do not enter the market as buyers now, then they will miss out on the returns offered up during the boom. This further increases the demand for the asset and therefore further inflates the market to a point where prices are well above ‘fundamental values’.


  1. The very low interest rate environment experienced around the world prior to the latter part of 2022 helped to increase the demand for a range of non interest bearing assets (e.g. those financial assets other than bonds and bank deposits). Given that the rate of return on interest bearing assets, such as bonds, fell towards zero, it meant that investors sought to invest in other asset classes Offering a relatively higher rate of return. The resulting higher demand for other assets, including shares and cryptos, caused these markets to experience significant price rises.


  1. The fall in the price of cryptos causes investors to reassess and seek out other investment classes that were potentially less risky and/or offering relatively higher returns. Accordingly, the demand for shares will have increased, exerting upward pressure on the price of shares and growth in the sharemarket.


  1. Crypto scams undermine the perceived safety and profitability of investing in cryptocurrencies. As a consequence, investors are more likely to consider other investment options, including shares. This means that scams involving cryptos will help to boost sharemarket values as the demand for and price of shares increase.