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Much ado about cryptocurrency

02 February, 2021 | 4 MINS READ

If you’ve been following the news on the surge in the price of bitcoin in 2021, you’ve probably come across various discussions on cryptocurrency.  The value of the bitcoin has rallied over time, with the value of a single bitcoin ranging as high as $41,973 in January 2021.

Starting with the basics

Cryptocurrency is a virtual currency or digital currency created as a a medium of exchange on blockchain technology. The most popular cryptocurrencies include Bitcoin and Ethereum.  While the origin is speculative, it has become one of the most speculative investments in the world today. To understand what it is, you need to go back to understanding what currency is.

Currency is a means of exchange in general use in a particular country. Currency typically come in forms such as paper, coins, or digital, in modern days, but one corresponding feature amongst all current forms of regular currency is they are regulated by Central Banks. Currencies declared by Government to be legal tender are known as fiat money.

How is Cryptocurrency different from your country’s currency?

 Fiat Money Cryptocurrencies
RegulationCentral BanksDeregulated/ Decentralized
SupplyDetermined by the Central BanksFixed number of units in supply
Value driversForces of supply and demandInflation Central Bank policiesForces of supply and demand
Transaction CostsYes, such as bank chargesA limit to transaction costs or no transaction costs at all.
Image 1.1 Fiat money vs Cryptocurrencies

The two major cryptocurrencies: Bitcoin and Ethereum. They have a fixed number of units in supply and it is generally predicted that the number of Bitcoins mined should not exceed 21 million by 2140, while that of Ethereum is said to not exceed 100 million units. Basically, scarcity and the fact that 60-70% of both currencies are owned by a few individuals drive the value of these currencies up.

Bitcoin was launched in 2009 by an anonymous group known as Sakashi Nakomoto. It is fully decentralized and uses blockchain to perform transactions on a peer to peer network, a peer-peer network is a connection between two personal computers that can interact or transact with each other without connecting to a separate server or computer, by using this,   Bitcoin has been able to solve the problem of data reproduction making it more secure to send money to someone.

Ethereum works on blockchain technology to create an open-source platform that can build and deploy decentralized applications. Ether is a currency that’s accepted in the Ethereum network.

The world’s biggest and most valuable currencies mentioned above use blockchain technology.  

What is Blockchain technology?

Blockchain’s origin story begins with Bitcoin. A Blockchain is a chain of blocks that are only added and never deleted.  It is a new type of database, that avoids repetitive data challenges faced by banks so instead of a decentralized database, it is installed in individual databases.

It is often referred to as a distributive ledger or a block protocol.  It lives on the internet and when a transaction takes place, it is recorded in a ledger, which is the Blockchain.

Investing in Bitcoins

Bitcoin stays speculative when it comes to investing, with volatile prices. Some analysts refer to Bitcoins as a form of illiquid financial asset. Early bitcoin investors who held long-term positions have become wealthy from the investment.  Bitcoin also provides the advantage of not being affected by indicators such as inflation, which could make it an option for portfolio diversification.

Bitcoin’s Realized Capitalization, a measure of a holder’s cost basis, has hit an all-time high. A growing cost basis suggests that early investors are taking profits in 2021, while newer investors are establishing positions and creating higher price support levels.

Future of cryptocurrencies – The outlook of cryptocurrencies remains a speculative subject, there are supporters and opposing sides of investing in cryptocurrencies. Governments may decide to regulate how cryptos work to reduce the anonymity of transactions, banks in certain countries are prohibited from transacting with bitcoins.  Bitcoins could also help improve the swiftness of shipping transactions.

As of November 2020, roughly 60% of bitcoin’s supply had not moved in more than a year, a testament to the market’s longer-term focus and a holder base with stronger conviction. If all S&P 500 companies were to allocate 1% of their cash to bitcoin, ARK Invest estimates that its price would increase by approximately $40,000

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