Cryptocurrencies: A Quick View
In the past few years, it seems like you cannot go a week without hearing some news on the state of cryptocurrency and speculation on how it will one day affect the global market. Along with this, you will also hear terms like blockchain thrown about and how new forms of cryptocurrencies are being developed. Of note, Bitcoin, Dogecoin have both seen a rise in popularity and have seen a surge in their values.
In the wake of this news, China is reportedly testing out its own digital currency, its value backed by the state, after seeing the potential represented by other such currencies. Elon Musk of SpaceX and Tesla fame vows to allow one to buy Tesla cars with Bitcoin soon and has even invested more than 1 billion dollars in it, giving credence to his claims. Bank of America has also indicated it might allow transactions in Bitcoin, Ethereum, and other altcoins, treating these crypto transactions as a cash advance.
In light of this, the question we have to ask is: what is cryptocurrency? It is a currency made up entirely of code that is highly encrypted in such a way it cannot be copied or faked. Each transaction is recorded in a public unalterable ledger that can be viewed by anyone on the internet but it does not record what the transaction is about and it does not record who made the transaction. This makes it a secure way to buy and sell on the internet while maintaining anonymity.
The technology used in creating such currencies is a type of database known as a blockchain. A database is a collection of information, but a blockchain differs from regular databases in how it stores information. It gathers and stores sets of information in groups or blocks which when full chain to previously filled blocks. This process is repeated with each new block that’s filled forming a blockchain. This creates an irreversible timeline of data when implemented in a decentralized nature.
Now let us look at a few of the cryptocurrencies available for purchase and trading right now.
1. Bitcoin is the most popular digital currency. It was first launched in 2008 and has a total of 21,000,000 coins which are mined by setting up computers to solve complex math problems. These computational problems are incredibly taxing and require a high-powered computer to solve. Solving these equations helps maintain the bitcoin network by verifying its transaction information, making it more trustworthy.
Bitcoin is also the most popular cryptocurrency available and the focus of major banks and billionaire investors looking to use it in legal transactions, bringing it into the mainstream. Due to this the value of Bitcoin has risen to more than 50,000USD, at the time of writing (February 2021).
2. Ethereum was designed as a decentralized software platform that enables smart contracts and Decentralized apps (DApps) to be built and run. It was created so anyone in the world could have access to its decentralized suite of financial products.
These Decentralized apps run on Ethereum’s platform-specific cryptocurrency. Ether is the second-largest digital currency, though it lags behind Bitcoin with a market cap about 19% of Bitcoin’s size.
While Bitcoin is meant to be a fiat currency, Ether is used to pay for the use of the Ethereum platform.
3. Litecoin is another fiat alternative meant to rival Bitcoin. Litecoin transactions can be confirmed significantly quicker than Bitcoin, which should make it more attractive for merchants. Bitcoin is more established, however, making it the cryptocurrency of choice.
4. Ripple XRP is another utility coin set up to facilitate cross-border transfers of fiat currency and make them more efficient. It is closely connected to, and supported by, some banks and has been regarded as the ‘establishment’ cryptocurrency. It has the highest likelihood of becoming part of the traditional financial system.
So, should you invest in cryptocurrency? That is a hard thing to say but here are a few reasons others have considered it a worthy venture.
- Cryptocurrency is fraud-proof as all confirmed transactions are stored in a public ledger. Coin owners are encrypted to ensure the records are legitimate.
- Due to the existence of ledgers, all transactions are checked to ensure the current spender owns the coins being used.
- It is accessible as all you need is an internet connection and you do not need any kind of credit rating to use altcoins. This also makes it so you can transact instantly.
- You own your account.
The disadvantages are:
- Cryptocurrencies are volatile. The value goes through extreme ups and downs. With Bitcoin as an example, its value in 2017 swung from $700 to $20,000 before dropping again to about $8,000. In 2021 it sharply rose to more than $50,000 and is still rising but it may, at any time, drop.
- They are used in illegal activity. Due to how user identity is encrypted, people who use these digital currencies are anonymous and can easily avoid regulation from banks and governments. Many transactions are made on shady deals and the black market. To be clear, not all transactions are bad, it’s just easier for criminal activity to use them and avoid being tracked.
- Since most cryptocurrencies have no government backing, the change in their value is very hard to predict making it a lot like gambling.
Let’s conclude by saying we do not recommend buying any cryptocurrency in the hope you will make a profit but you can buy it if you want to own some, Dogecoin or some other altcoin that’s low valued is recommended for this purpose.
Maybe in the future cryptocurrency will become legitimate and widely used. It has the potential to change how we transact and how the banking industry works, but for now, it is an interesting field of finance to keep track of.
