Making cryptocurrencies less cryptic
By this point, you’ve probably heard of cryptocurrencies. They’ve been atop the public consciousness since at least the end of 2017, when one unit of the digital currency Bitcoin was valued above $17,000.
What are cryptocurrencies? How did they get so valuable? Are they a recognised unit of exchange? If you’re looking for answers to these questions, our informative blog post will demystify virtual currencies, and give you the foundational bearings needed to explore cryptos on your own.
What are cryptocurrencies?
Cryptocurrencies, at their most basic, are digital assets designed to be used as a medium of exchange similar to cash. Except there is a key difference: cryptocurrencies only exist on peer-to-peer networks.
‘Crypto’ refers to an extensive encryption system that protects and secures financial transactions using complex software. This encryption is intended to safeguard against attacks to the network, including hacking and theft.
Cryptos are used as an alternative to physical currencies that are controlled and centralised by governments and banks. Instead, cryptocurrencies attempt to shift the centralising power of the cash-economy into a diverse, decentralised theatre; one controlled by the people, who may not have access to any sort of purchasing power or credit, or may wish to exchange and send money internationally without an intermediary.
When did they start?
Virtual currencies went through a few preliminary stages before Bitcoin appeared on the map. There were a few e-cash operators trying their hand at usability, including Wei Dai’s b-money and Nick Szabo’s bit gold.
It was Satoshi Nakamoto’s Bitcoin that made a fundamental impact, however, in 2009 when it was released as open-source software and became generally recognised as the first decentralised cryptocurrency.
Early supporters of Bitcoin were thought to be philosophically motivated, or politically anarchist. They sang from the hilltops about an end of government control and centralised banking. Meanwhile, the identity of Nakamoto was never revealed.
Now, nearly ten years later, more than 4000 alternative cryptocurrencies – known as altcoins – have sprung up to compete. Some of Bitcoin’s biggest competitors include Ethereum, Litecoin, Ripple and Bitcoin’s offshoot, Bitcoin Cash.
An historical overview of Bitcoin
The rise of Bitcoin, and cryptocurrencies in general, is nothing short of meteoric.
At the release of Bitcoin (BTC) in January 2009, the price of one BTC unit essentially equated to zero USD. This continued for over a year. By March 2010, the price of one BTC became $0.003 when the now-defunct BitcoinMarket.com began operation.
By April 2011, one year later, BTC had hit parity with the US dollar. It fluctuated between $2 and $20 until April 2013, when one BTC unit hit a price of $266. Following this peak, and for the next four years, Bitcoin would oscillate between $300 and $1242.
By 2017, one BTC could be purchased for around $5000 in September, and by December Bitcoin’s price had skyrocketed to a staggering $17,900, making international headlines.
Since then, Bitcoin’s value has fallen, with notable economic events contributing to its downtick including China’s cryptocurrency crackdown. One BTC now hovers between $6000 and $7000 as of writing.
How did cryptos get so valuable?
Though you can enter the cryptocurrency market at a variety of price points – altcoin Nano, for example, costs just $2.33 per unit at time of writing – Bitcoin has become scarce and expensive. For $100 today, you’re only able to purchase a minimal fraction of an entire unit.
One reason for Bitcoin’s hefty price tag is the fact that more retailers, governments, and people in general have started to accept the cryptocurrency (and others like it) as a form of exchange.
Countries such as Japan, Mexico and Germany have allowed the use of Bitcoin with specific legal provisos. Some nations recognise cryptocurrencies as a form of money wholly separate from the definition of ‘legal tender’, while different governments may or may not apply taxes to digital earnings.
Conversely, many nations and governments have outright banned the use of digital currencies or have opted out of their regulation. Most countries note that Bitcoin could be used in criminal transactions and seek to mitigate that risk.
Overall, the growing acceptance and awareness of all cryptos has pushed more investment into the market, making digital currencies soar in demand.
Where can I invest in cryptocurrencies?
There are a variety of ways to enter the crypto economy.
The standard avenue is purchasing cryptocurrencies directly from other people using online marketplaces. You can also use a digital currency broker who can offer you a digital wallet to store and exchange your cryptocurrencies. This wallet houses your personalised secret key (a 256-bit ID), which gives you access to your virtual currencies. The wallet lets you use your cryptos wherever they are accepted.
Alternatively, you may wish to speculate on the price of cryptos by opening a spread betting or CFD position on a digital currency. Since cryptocurrencies can move five to ten percent per day, this volatility can offer some unique trading opportunities – while also presenting major risks.
What are the sceptics saying?
Some of the loudest scepticism comes from economists and investors who believe the volatile cryptocurrency market exists in a ‘bubble’.
Next, the use of cryptos for illegal transactions on the dark web has cast a considerable shadow on both the use of digital currencies and those associated with their exchange. The networks where Bitcoin and other digital currencies exist have also been vulnerable to fraud and theft, with several cryptocurrency brokers experiencing hacking, bankruptcy and litigation, or Ponzi scheme allegations.
Environmentally, the process of ‘mining’, which is the rewards-based computer process that generates Bitcoin, has also been criticised for its large-scale energy consumption.
Stay in the know
We hope this blog post has been informative for those looking to learn more about the new wave of digital currency exchange.
If you’re interested in investing in any cryptocurrency, it’s imperative that you do your own research first. Consult professionals, and make sure you’re investing through trusted companies acknowledged in the financial sector.
You should under no circumstances consider the information and comments provided as an offer or solicitation to invest. This is not investment advice. The information provided is believed to be accurate at the date the information is produced.