Since Bitcoin’s price hit all-time highs this year, I thought it was about time we discussed cryptocurrencies. [1] Spectacular gains are just one of the many fascinating components surrounding these virtual coins.
Together we’ll review what cryptocurrencies are, how they work, why they’re appealing, and what their future could hold.
We’ll start at the beginning…
What Are Cryptocurrencies?
Cryptocurrency is digitized money that isn’t regulated by any centralized system or government. Instead, its records, transactions, and issuance is secured and maintained through cryptography technology.
You also need to understand that there are thousands of cryptocurrencies available for purchase. Each has a different dollar value assigned to it, and many may or may not be accepted as a form of payment for a given good and service.
If you think about it, they’re similar to chips in a casino. At the end of the night, you’ll still need to trade them in for “real” dollars. But as long as the casino is in business, you’ll be able to do so. Thus your casino currency can become “accepted-anywhere” currency as long as it’s funneled through the proper channel(s).
More on this later too…
How Do Cryptocurrencies Function?
If you were confused by terms like “decentralized” or “cryptography,” don’t worry. You’re not alone. There’s plenty of jargon in finance, and the world of digital currencies has brought a slew of its own. But don’t sweat it, we’ll help you understand.
When you go to buy something at a store, you’ll notice you end up paying more than the price tag. That’s because you pay taxes on the item(s) you buy. The government acts as an intermediary in all your transactions. But their involvement also extends into your financial records and currency issuance.
We’ll look at the Internal Revenue Service (IRS) and Federal Reserve (Fed) as examples. The IRS has power to audit the financial records of both individuals and corporations. And the Fed, which acts as the nation’s central bank, can influence interest rates and print money, which can contribute to higher inflation. This can be thought of as centralized, and regulated finance.
Cryptocurrencies have their transactions facilitated and recorded across a network of computers. This network isn’t owned or regulated by any individual, company, or government, which makes it decentralized and unregulated finance.
Cryptography, which has been defined as the “…science of using mathematics to secure information” is an essential component of cryptocurrency. [2] It’s often utilized through blockchain technology, which is a system that functions as a digital ledger recording and verifying all of the encrypted cryptocurrency transactions. [3] The cryptography and blockchains eliminate the need for any government oversight.
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What’s the Appeal?
Well, the lack of government intervention has certainly been an appeal for some. But that’s also generated one of cryptocurrency’s biggest criticisms. That is, their potential use for criminal activity. However, the lack of governmental involvement has many other, non-criminal benefits for users like:
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- Finite amounts of supply. For example, the supply of Bitcoin is capped at 21 million. By limiting the supply, a given cryptocurrency is shielded from the negative impacts of inflation. [4]
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- No time restrictions. Traditional stock markets in the U.S. operate between 9:30 am to 4:00 pm (Eastern Time). and they’re closed on weekends and on an assortment of holidays. Cryptocurrencies, however, can be traded all day, everyday.
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- Fewer geographical barriers. Cryptocurrency is universally recognized, and wouldn’t require a currency exchange to pay/collect from someone in a foreign country. This of course also breaks down business barriers. Cryptos have made it easier to expand business dealings into more diverse markets. [5]
NOTE: Some countries, like China, have banned the use of cryptocurrencies and deemed any associated activities like: mining, trading, or issuing tokens as illegal. [6]
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What Does the Future Hold In Store?
It’s impossible to say for sure what the future holds. And that’s especially true for emerging and volatile assets like cryptocurrencies. However, using history as our guide, we can examine the past and make more educated predictions. And there’s two patterns of history particularly worth paying attention to.
Adoption and advancement.
Remember when we compared them to poker chips' We mentioned the chips wouldn’t be accepted as payment outside the table. Well, that’s actually starting to change for cryptos on a pretty massive scale:
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- Major companies like Tesla have started accepting Bitcoin directly as payment for their vehicles. And investment firms like Morgan Stanley and Goldman Sachs have even looked into exposing portfolios of some of their wealthiest clientele to Bitcoin. [7]
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- Additionally firms like Grayscale and Proshares have helped usher in crypto-based ETFs. Though they’re still subject to SEC intervention, this progress only strengthens the overall crypto momentum. [11]
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- While China may have put a ban on cryptocurrencies, other countries have not followed suit. In fact, the country of El Salvador made national headlines when it became the first country to accept a cryptocurrency (Bitcoin) as official legal tender. [8]
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- Since its introduction in 2009, the price for a single Bitcoin has reached over $60,000. [1] It presently has a market capitalization of ~1.1 trillion, and is followed by Ethereum, Binance Coin, Tether, and Cardano bringing billions of their own. [9] In fact, the total market value of all cryptocurrencies is currently estimated to be over two trillion! [10]
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How Should You Handle This?
Once upon a time, cryptocurrencies may have been written off as fad. But there’s no denying their significance now. With staggering market capitalizations, revolutionary advantages, and large-scale adoptions, cryptocurrencies have taken the world by storm.
With the current economic environment being one of high inflation, investors may be tempted to look at commodities like gold. But with a now proven track record, cryptocurrencies deserve just as much (if not more) attention for their ability to hedge against it.
We at Crafted Finance would be happy to continue to discuss the ever-changing landscape of cryptocurrencies. If you have any further questions feel free to reach out to us at (650) 336-0598 or fill out a contact card here, and we’ll reach out to you.
References
1.https://www.bbc.com/news/business-56390409
2.https://csrc.nist.gov/glossary/term/cryptography
3.https://www.pwc.com/us/en/industries/financial-services/fintech/bitcoin-blockchain-cryptocurre
4.https://www.coindesk.com/tech/2021/03/10/valid-points-why-ether-doesnt-need-a-supply-cap-t
5.https://www.nasdaq.com/articles/the-benefits-of-using-cryptocurrency-2017-02-27
6.https://www.nytimes.com/2021/09/24/business/china-cryptocurrency-bitcoin.html
7.https://www.cnbc.com/2021/04/13/bitcoin-hits-new-all-time-high-above-62000-ahead-of-coinba
8.https://www.npr.org/2021/09/07/1034838909/bitcoin-el-salvador-legal-tender-official-currency-
10.https://www.bloomberg.com/news/articles/2021-08-15/crypto-market-retakes-2-trillion-market
11.https://www.cnbc.com/2021/10/15/bitcoin-etfs-may-finally-make-their-debut-sort-of.html
