Cryptocurrency: What's The Big Deal?
Bitcoin. I'm sure you'll have heard about it. Recently in the news for reaching all time highs, it is once again a topic of discussion in the finance world. This article will hopefully provide a quick insight into the world of digital currency, and potentially the future!
What is it?
Cryptocurrency refers to a digital or online currency protected by cryptography. The art of cryptography has very strong security features, which means it is basically impossible to duplicate the currency or cheat the system. The primary role of cryptocurrency is to revolutionise the financial systems that exist today by introducing decentralisation. This means there is no central bank or intermediaries behind Bitcoin, but instead there are several "nodes" which act as the peer-to-peer network. These networks store all transaction histories on something called blockchains, which are ledgers freely available for all to see. But don't worry, this doesn't mean you can see who has sent what! More about this down below.
Bitcoin was the first such currency, formulated in 2008 and created by an unknown entity/person called Satoshi Nakamoto (no really, no one knows who he/she/they are). It has now taken on the role today as virtual Gold, and has a pretty high store of value. At the time of speaking, 1 BTC (Bitcoin) is worth £17,535.64 or $23,562.60. There are now over 5760 cryptocurrencies in the world today, each with their own individual purpose. The second well known cryptocurrency is Ethereum (ETH), worth significantly less than Bitcoin, but with a much more practical purpose. Unlike Bitcoin, Ethereum is based around the idea of smart contracts and digital applications (dApps). These are lines of code which get executed within the blockchain once the predetermined terms and conditions have been met. More on Ethereum here.
How does it work?
A blockchain is an ever growing list of blocks, or records, containing a cryptographic hash, timestamp and transaction data of the previous block. A strength of a blockchain is that it's records cannot be altered once a block has been recorded, else you have to change all subsequent records after that block. There are a lot of uses for blockchains these days, with smart contracts, financial services, video games, healthcare and even energy trading utilising it.
The idea is to make payments quicker, more secure, for less fees and widely available for everyone. One of the biggest markets for Bitcoin is actually Nigeria! When sending cryptocurrencies, it takes a matter of seconds if not minutes, and you can also see the transaction on a blockchain explorer such as Etherscan.
Why is it useful?
Firstly, imagine a regular currency like USD (US Dollar), or GBP (Pound Sterling), or EUR (Euro). The current financial system is built on the central bank framework, where the Federal Reserve, Bank of England, or European Central Bank control the monetary supply of the currency. Policies such as quantitative easing (printing money) increase the supply of the currency in the world during times of economic difficulty. However, this decreases the value of the currency itself. A greater supply without demand results in a decrease in value. So what I hear you say? Well inevitably, this isn't sustainable. Printing money causes inflation due to prices of goods increasing.
The graphic below explains this visually.
Decentralisation prevents this. Since crypto is built on cryptography, it's very difficult to create counterfeit currency or duplicate it. And since there is no central bank, no one can control it even if they wanted to. This is why many believe cryptocurrency is the future of payments and digital currency. It cannot be printed, and there is a finite supply.
How can I get some?
Until recently, the most accessible way to obtain cryptocurrencies would be to buy them outright using fiat (cash) on cryptocurrency exchanges, similar to market exchanges. The most popular in the UK is Coinbase, however the fees are quite steep, therefore you may wish to look at:
Coinbase Pro - (free if you have a standard Coinbase account)
Kraken - (I use this myself)
Binance - (lowest fees) - referral code means we both get 10% off trades!
Coinbase actually has a great program where you can watch videos and earn free crypto!
If you want, use the referral links below to get your free crypto! You don't have to use the referral link, but it means we both get a bit more free crypto, so why not!
Stellar Lumens - https://coinbase.com/earn/xlm/invite/7532syvz
Band Protocol - https://coinbase.com/earn/band/invite/jkxnp17g
How do I pick what cryptocurrency to invest in?
DYOR - Do Your Own Research. The core, basic principle of cryptocurrency analysis.
I look at whether I see a future for the project and therefore the coin/token. Then comes the team behind the scenes, is it headed by people with a track record or just nobodies? How much of the total supply is controlled by the developers/team? If over a certain amount it's a red flag for me already because it means the token's price can be controlled by "pumping and dumping", thus taking away from the whole point of decentralisation. Finally, how active are the developers? Is the project actually being worked on? You could also check whether the project has any interesting partnerships with big tech.
Coingecko, Coinmarketcap for the "tokenomics" - crypto lingo for coin/token economics. Check out the official project websites, maybe a Google search to see whether people are talking about it, Reddit search maybe. See how active the project's sub-reddit page is. If it's ETH based, go over to Etherscan and see how much is being traded each day, etc.
If you couldn't explain to a stranger why you're investing/invested in a coin, it's probably a bad idea to buy the coin. Only buy/spend your money on something you fully understand.
Are there any risks?
Of course! As with all investments, cryptocurrency also carries a risk of capital. I would advise only investing money that you can afford to lose, as the value of cryptocurrency is very volatile. In March 2020, the value of 1 BTC was hovering around £4,000. As mentioned above, it is now almost 5x in value in 9 months, which is mental.
Can it be outlawed? It would be very hard for governments to try to control cryptocurrency and regulate it, something which was designed to not be controlled. Given the enormous scale of investment into Bitcoin by the likes of Paypal, Square, Microstrategy and Grayscale, it's not hard to come to the conclusion that cryptocurrency is here to stay.
Personally I believe cryptocurrency will become more and more adopted in the future, by corporations (this is already happening), pension funds and even the big banks in the end!
Where can I read more about this?
The app and website Decrypt is pretty cool, they have some great content over there!
You could also spend some spare time browsing the top 20 coins to get an idea of circulating supply, market capital and volume. You’ll see why coins are in the price range they are.