Some years ago, if someone had mentioned "cryptocurrency" in my mind, I would have imagined a currency that involved an underground banking system with hooded traders behind shady computer screens.
It is now a topic we read on the front page of financial publications and daily websites that covers business. Many sections are now devoted to Bitcoin.
All over the globe, jurisdictions are scrambling to create legislation and regulations that will allow companies to conduct initial coin offerings (ICO) or token issuances. Is it even the right term for "cryptocurrency?" Should it be called "digital currency?" "Virtual currency"?
The question we now have to ask is: cryptocurrencies, whatever they are called, deserve so much attention? Do we really need to care so much? What is the long-term impact of crypto?
In essence, cryptocurrency is blockchain-based platforms are supposed to be - totally decentralised. It is a financial-based blockchain and therefore not subject to any central bank or monetary authorities. Instead, it is maintained by a peer to peer community computer network that is made up of users machines or "nodes". The same principle applies if you are familiar with BitTorrent.
It is a digital database, or "distributed publicly ledger", that is created using blockchain. This is done via cryptography. A process known as "mining" has made cryptocurrency like Bitcoin secure. The process of mining is where all information entered into the Bitcoin blockchain has been mathematically verified using a complex digital code. This blockchain network will verify and verify any new entries to the ledger as well as any modifications.
It is anonymous in its core, but the math behind it makes it a public global transaction ledger. Every transaction can be traced using cryptography.
First, you should know that there are many types of cryptocurrency. For this article, I will focus on the most popular and widely used: Bitcoin (BTC), and Ether (ETH).
In 2008, Satoshi Nakamoto created Bitcoin. It was the first financial blockchain. Its value has risen to an incredible level. You may have seen bits of it floating around the Internet, such as "If I had brought 00 worth bitcoin back in 2010 I'd have more than US00million now", or Bitcoin's first billionaires. A growing number of internet sellers and retailers are accepting Bitcoin as a payment method.
While Ethereum is similar to Bitcoin in many ways, it has other uses beyond just mining and financial transactions. It can also be used for providing services on its blockchain. Ethereum has built-in programming languages that can be used to create smart contracts. This includes the transfer and mining Ether, a tradeable digital token. It is more complicated than Bitcoin.
The cryptocurrency market went through an "mooning” 1 process prior to Christmas 2017. Their prices went to ridiculously high levels. This was the wrong time to invest in crypto. The entire market crashed just before Christmas and lost approximately 20% of its global market capital.
The price of Ethereum then rebounded. Then, in mid-January, the crypto exchanges crashed again, with Ethereum prices falling by approximately 25%.
The headlines. The headlines are the result. Regulators are issuing "buyer-beware" notices. This is necessary, but it also shows that many central regulators have difficulty understanding how to regulate a decentralized technology. Investing in cryptocurrencies and initial coin offerings (ICO) is highly speculative. You could lose your entire investment.
You can. You can certainly say that Lehman Brothers' public shareholders did as well, but cryptocurrency exchanges are unquestionably more volatile than stock markets.
However, cryptocurrency is still important. It will not disappear or be limited to 100 year as some may speculate. Transactions are fast, digital and secure, and allow for the maintenance of records without fear of data being stolen. In fact, fraud is minimized.
As an aside, inflation should not be caused by digital currency like Bitcoin. There is a limit to the number of bitcoins that can be mined. This means that there is no way for any central bank to increase the cash supply. Although bitcoin is scarce by nature, it can be argued that cryptocurrencies can be created by anyone.
Large banks are spending money to either collaborate with existing crypto clients (James Dimon and JPMorgan with Zcash) or develop their own cryptocurrency (such Bank of America).
When I am asked if I would consider buying cryptocurrency like Bitcoin or Ethereum, I usually answer the question along these lines. (Note: I'm not an investment advisor nor can I give investment advice. So this shouldn't be taken as any kind of investment advice. Do you have any spare cash? Are you willing to gamble in volatile investments (and I use "fairly" as a polite term)? Are you a Las Vegas native? Welcome to the Crypto Casino.
The cryptocurrency markets are all over the place, as mentioned. This is true, but it's important to remember that there are many high-quality digital token and coin issuers other than Bitcoin and Ethereum. They have excellent backers and management with AML procedures in place and a great business model.
However, many ICO's are completely unacceptable.
The need to be able to receive regulator "buyer-beware" notices. It is important to research the market before you invest.
Another important point to remember is that cryptocurrencies are becoming more popular is actually the decentralised ledger technology , which is what crypto is built upon.
Blockchain is a platform that allows cryptocurrencies and digital tokens to work within it. Any transaction that can be recorded can be accessed through blockchain. This includes medical records, immigration information and insurance policies. All of this data can be stored on a blockchain and can be guaranteed to be accurate.
Smart contracts that are based on Ethereum blockchain, which allow for self-execution of contracts when certain conditions are met, will soon be headline news.
Crypto is a currency that has existed for only 10 years. It's not gold nor fiat. This technology is new and has already demonstrated its potential to disrupt the global financial system. It isn't perfect.
The paradigm shift in how we view money has been made possible by crypto, also known as digital currencies or virtual currencies. How we view the possibility of buying it. How we view it as a possibility of spending it.