A few years ago, if you had mentioned the term “cryptocurrency” to me, I would have imagined some kind of currency involving an underworld banking system, with hooded traders sitting behind shady computers.
We now read about it not only in the business sections of daily websites or financial publications, but on their front page. Entire sections of news publications are becoming devoted to things like Bitcoin.
Jurisdictions around the world are scurrying to put into place legislation and regulations to allow or make it easier for companies to carry out initial coin offerings (ICO’s) or token issuances. Is “cryptocurrency” even the right terminology? Or should it be “digital currency”? “Virtual currency”?
So, the question which we must now ask ourselves: whatever we call it, do cryptocurrencies, really deserve this much attention. Should we care this much? What will the impact of crypto be in the long term?
What is cryptocurrency again?
In essence, cryptocurrency is – as blockchain based platforms are meant to be – completely decentralised. As a financial based blockchain, that means it is not governed by any central bank or monetary authority. It is rather maintained by a peer-to-peer community computer network made up of users’ machines or “nodes”. If you know what BitTorrent is, the same principle applies.
Using blockchain, it is effectively a digital database – a “distributed public ledger” – which is run via cryptography. Cryptocurrency such as Bitcoin is secure as it has been digitally confirmed by a process called “mining”. Mining is a process where all the information entering the Bitcoin blockchain has been mathematically checked using a highly complex digital code set up on the network. That blockchain network will confirm and verify all new entries into the ledger, as well as any changes to it.
Note that while it is fundamentally anonymous, the mathematics behind it makes it a global public transaction ledger, so every transaction can ultimately be traced through cryptography.
Why is cryptocurrency so important?
First, note there are various types of cryptocurrencies, and for the purposes of this piece, I’ll focus on easily the most mentioned and used: Bitcoin (BTC) and Ether (ETH).
Bitcoin was the very first blockchain – a financial one – created by an individual (or group, who knows) called Satoshi Nakamoto in 2008. Its value has exponentially increased to a ridiculous level: you may have seen pieces swirling around the Internet such as “if I had brought $100 of bitcoin back in 2010, I’d have over US$100 million now” or about Bitcoin’s first billionaires. An increasing number of retailers and internet sellers are beginning to accept Bitcoin as a method of payment.
Without going into too much detail, while Ethereum is very similar to Bitcoin, its uses extend beyond the mere financial side of things such as mining, into the provision of services on its own particular blockchain. Ethereum provides built-in software programming languages which can be used to write, for example, smart contracts that can be used for many purposes, including the transfer and mining of its own tradeable digital token, Ether (which is even more complex than Bitcoin).
Prior to Christmas 2017, the cryptocurrency space went through a process called “mooning”1. That is to say, their prices went utterly and completely ridiculously sky high. It became the absolutely wrong time to buy crypto. Because just before Christmas, the entire market utterly crashed, losing approximately 20% of its entire global market cap.
It then bounced up. And then in mid-January, crypto exchanges again crashed, with prices in Ethereum for instance falling approximately 25%.
Investing in initial coin offerings (ICO’s) and in cryptocurrencies is highly speculative and basically you can lose all your money.
But cryptocurrency is important and it is not going away, or be limited to 100 years as others may speculate: transactions are fast, digital, secure and worldwide, which in essence allow the maintenance of records without risk of data being pirated. Fraud is, actually, minimized.
What is the future of cryptocurrency?
Depending on who you ask about the future of cryptocurrency, you’ll get a different answer. Some analysts seem concerned about the risks that lie ahead, while others are confident that cryptocurrency has a stable role in our future.
Optimists may have a good reason to maintain their positive outlook. Despite the COVID pandemic and all of the economic chaos experienced in 2020, Bitcoin’s mid-November 2020 run surpassed all expectations, and the cryptocurrency has reached its all-time high. Since December of last 2020, Bitcoin has more than doubled its value, almost tripled, and some believe this is just the beginning of a long bullish run.
A number of experts believe that the Bitcoin surge of November 2020 and subsequently bears little resemblance to its December 2017 infamous spike, when the currency broke all previous records.
Also Read: Outrage as CBN Bans Cryptocurrency
Those who rushed into the legendary Bitcoin rally of the winter of 2017 were disappointed when the currency crashed shortly after. However, many believe that the previous surge was mostly facilitated by individual investors, rather than institutional support in the currency. When the individuals cashed out, Bitcoin’s price plummeted.
These days, Bitcoin is being promoted and supported by institutional investors. Big institutions like Fidelity Investments, JP Morgan and PayPal have taken steps into the crypto space. Fidelity has its own digital asset division, JPM has released its internal digital token and PayPal will allows users to pay via their crypto wallets. Moreover, big Wall Street hedge fund guys like Paul Tudor Jones have taken a liking to Bitcoin. Jones has even suggested that Bitcoin will be the anchor to hold us down against impending currency devaluation, similar to the role of the gold standard in the 1970s.
Not only are they supporting it by letting others buy it, they are buying it themselves. Big firms like Square and Galaxy Digital Holdings are actually stockpiling millions of dollars worth of Bitcoin.
Tesla, owned by the richest man in the world, Elon Musk (a big fan, and influencer, of cryptocurrency), recently bought Bitcoin worth $1.5 billion and announced plans to begin to accept Bitcoin as payment very soon.
This is potentially good news, as it means that Bitcoin holders this rally might be less tempted to sell, since institutional investments are usually not bought with the intention of making a quick profit.
Though many are proceeding with caution, there’s a lot of optimism surrounding the future of cryptocurrency in this new year and beyond. That being said, there are some risks to consider.
What are the risks?
One of the major risks of Bitcoin is that it remains incredibly volatile. It can shoot up over a short period and shoot down in a matter of weeks, days or even hours. Moreover, there are security threats that can arise like a 51% attack, where miners gain majority control and disrupt transactions.
However, the recent influx of institutional interest, as well as companies like PayPal making buying Bitcoin more accessible to people all over the world, mean that cryptocurrency is becoming a more certain fixture in our financial future.