Recently the term cryptocurrency has come up more often than once at business dinner time conversations, online forums like Reddit, as well as other media sources. With the recent hype of Elon Musk investing in bitcoins raising the stock prices, as well as the memes that followed the event, cryptocurrency is slowly becoming a familiar term to us. But truth be told, almost all of us do not know what exactly does this word signifies. I too was unfamiliar with the technicalities and implications of the buzz words associated. So today we are going to talk in brief about the same and try to comprehend these elusive terms and what they mean for us as well as the industries today.
A group of people thought that games have their own intrinsic currency online which can be bought with real money, then why can’t we have the same kind of digital currency to shop things online like real currency? This leads to many other questions- how will this currency be duplicate proof? How will this be able to replace real currency?
According to finance expert Jeffery Mazer, Cryptocurrencies are digital assets that use cryptography, an encryption technique, for security and to prevent duplication. Cryptocurrencies are primarily used to buy and sell goods or services, though some newer cryptocurrencies also function to provide a set of rules or obligations for their holders. They are not redeemable for another commodity, such as gold. Unlike traditional currency, they are not issued by a central authority and are not considered legal tender. One can transfer cryptocurrency to someone online without a “middle man”, like a bank. This means one can avoid transaction fees when transferring money using cryptocurrency. Another distinct feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government intervention or manipulation. Bitcoin and Ether are well-known cryptocurrencies, but new cryptocurrencies continue to arise.
Most cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a diverse network of computers. Blockchain depends on the people, continuously updating the ledger with any transactions taking place. Hence, transactions can be processed without anyone else getting involved. Both the buyer and the seller have access to the ledger at one time, and hence it does not need third-party verification. The ledger is not controlled by either of the parties, but it operates on consensus, so both of them need to approve and verify the transaction for it to be added to the chain. As mentioned before, the chain is secured with cryptography, ensuring that no one can change the chain after that. This kind of transparency has been quite attractive to both buyers and sellers.
Trends in cryptocurrency
According to forecasts, the global cryptocurrency market is expected to grow with a CAGR of 32% from 2019 to 2024. The future of the cryptocurrency market looks promising with opportunities in the peer-to-peer payment, remittance, e-commerce and retail, and media & entertainment industries. The major growth drivers for this market are transparency and immutability of the distributed ledger technology, growing remittance in developing countries, fluctuating monetary regulations, and a significant increase in venture capital investments.
- Cryptocurrency is expected to see tax regulation soon. The main topic for the near future is the tax regulation of cryptocurrencies. Crypto taxes are not yet widespread, and while they are unwelcome to some, they have begun appearing in some countries as those markets mature and governments see their revenue-raising potential outweighing previous crypto uncertainties. We also see monitoring tools being actively developed, along with governments exchanging information on the owners of cryptocurrencies, and the transactions they are making. Therefore, in 2021, the world is likely to face the first bitcoin tax evasion lawsuits. The release of the official digital currency bill 2021, is another notable factor.
- To resist the jurisdiction and law-making, some “offshore crypto havens” will develop more actively. This role will most likely be played by countries where IT and the financial market are both well developed, such as Singapore, Korea, Japan, and, of course, Switzerland.
- The cryptocurrency crisis is arising soon. Due to no regulation of cryptocurrency, there can be an oversupply of these in the market. Just like in traditional money, if the government starts printing presses, an excess of fiat money supply in the market leads would lead to an inflation of the countries’ currency and thus its devaluation, which leads to a rise in the cost of goods, which, in the crypto world, is BTC. Therefore, current trends may lead to further depreciation of altcoins and an increase in the price of bitcoin, the emission of which is well known to be limited.
- With the increase in popularity, risk management models will also soon be put into place. This is because it is very difficult for users to understand the implications and outcome of their investment. Since they do not have any guarantee, this makes it a very risky investment. According to CoinMarketCap, there are over 8,000 different cryptocurrencies in the world today. More than 90% of them are fraudulent schemes, or ‘scams’, as they are called in the industry. However, out of the remaining 10%, many show growth rates no worse, and sometimes even better, than Bitcoin.
- There are also trends that are very unpredictable and can go in multiple directions. The cost of transactions or cryptocurrency will either go down due to dvancements in technology or continue to rise up like bitcoins are at the moment. It cannot really be said which is more likely.
Impact on investment
The most important thing to understand from al this would be the impact of cryptocurrency on investment and why do people continue to invest in these new forms of digital currencies. People invest in cryptocurrencies for a couple primary reasons. First, there’s a speculative element to cryptocurrency prices which entice investors looking to profit from market value changes. For example, the price of Ether appreciated from $8 per unit in January 2017 to almost $400 six months later as the Ether market became more bullish—only to decline to $200 per unit in July due to technical issues. Apart from pure speculation, many invest in cryptocurrencies as a geopolitical hedge. During times of political uncertainty, the price of Bitcoin tends to increase. As political and economic uncertainty in Brazil increased in 2015 and 2016, Bitcoin exchange trade increased by 322% while wallet adoption grew by 461%. Bitcoin prices also increased in response to Brexit and Trump victories, and continue to increase alongside Trump’s political controversies. With so many venture capitalists investing in various cryptocurrencies, it is quite possible the future. However there are also many challenges ahead of the cryptocurrency companies. Many controversial opinions on whether investment in cryptocurrencies is advantageous or too risky. About 90% of the currencies existing in the market are fraudulent and scams, so that leaves 10%. There is always new technology coming up for the prevention of such mishaphs, but the bottom line is, cryptocurrency is something to look out for. However, it is highly advisable to not make any hasty decisions.