Digital currencies have hit the headlines of everyday news for more than several months. Since the leading and the very first cryptocurrency – Bitcoin – appeared, people don’t stop questioning whether it’s a bulb or a nice source for investments and earning extra money.
What is the relation to digital assets now compared to what it was when Bitcoin has just sprung up? Let’s discover together some notions related to crypto, the mechanism of virtual money, how people relate to digital money, and whether it will be lucrative in the future.
Cryptocurrency is essentially a measure of value. In the same way that investors purchase stocks when they believe the company will grow and its share price will increase in the future, cryptocurrency investors buy cryptocurrencies in the hope that their value will increase.
Essentially, stock valuations entail discounting estimated future cash flows. Since any company does not back cryptocurrencies, there is no comparable valuation metric; a cryptocurrency’s value is solely based on investors’ appetite.
A cryptocurrency’s valuation can be attributed to either the prospect of other investors buying it or its blockchain’s utility.
A blockchain represents the technology used to support cryptocurrencies. As a term of such common usage, its significance is sometimes lost in the fog. Blockchains are nothing more than digital ledgers.
Several computer systems are connected to form one ledger (or database). Such a ledger is not controlled by one system. Rather, a decentralized ecosystem of computers runs a blockchain and authenticates its transactions.
Technology developers say blockchain can help increase the transparency of data, increase trust, and bolster security. Blockchain’s detractors complain that it is inefficient and expensive to use, and consumes too much energy.
In addition to believing in the strength and utility of the blockchain that powers digital money, rational crypto investors buy the digital asset. The blockchain underlies all cryptocurrencies, which means crypto holders are betting (whether they know it or not) on the robustness and attractiveness of that blockchain.
Transactions involving cryptocurrencies on the underlying blockchain are permanently recorded. Each new block validates the authenticity of the digital money transfers and keeps the network up and running.
The public shared ledger records all batches of operations. Significant blockchains such as Bitcoin (BTC) and Ethereum (ETH) record all transactions publicly and are open for anyone to see.
The answer is simple: users receive payments using digital currency. In an incentive-driven system called proof-of-work (PoW), the user is rewarded for their efforts. Known as miners, there are computers that ‘check’ blockchain operations. Crypto assets are minted in exchange for miners’ energy.
Cryptocurrency investors do not hold their assets in a traditional bank account. Instead, they use digital addresses. Addresses are used to send and receive cryptocurrency funds and are associated with public and private keys.
Unlocking and sending cryptocurrency are made possible by private keys. In addition to being publicly available, public keys facilitate receiving cryptocurrency from anyone.
Clearly, Bitcoin has changed the paradigm. There has never been anything like it before, and it has introduced an entirely new technology, a new platform for investing, and a new approach to the concept of money.
Virtual currency began as an anti-establishment movement, but today corporations and financial institutions are embracing cryptocurrencies as disruptive technologies and as a means to diversify their investment portfolios.
Cryptocurrency will continue to evolve as innovations reshape it, including exciting new projects like decentralized finance (“DeFi”).
An example of a digital currency is Bitcoin, which emerged after the crisis in 2008. With the help of this asset, people are able to bypass traditional payment methods such as banks. It is now one of the most popular cryptocurrencies among thousands of altcoins.
This is due to the “blockchain” technology, which encrypts and validates entries in a shared database. Bitcoins are offered as a reward for verifying money operations on the network by individuals called “miners.”
As of November 2017, there were more than 18 million Bitcoin in circulation. Since the mining process is decentralized and therefore does not utilize a central bank, the maximum number of Bitcoins that can be generated is 21 million.
In both 2013, and 2017, Bitcoin prices declined sharply following rallies, but these declines weren’t triggered by any major event affecting various asset classes. Nevertheless, it was merely the other side of the blade that took the digital coin down; fears about hacking risks, for instance, hurt cryptos last year.
As a consequence, no matter how brief, the bear market of 2020 marked a first dip for Bitcoin, other digital currencies, and other investments.
In the wake of the bear market, cryptocurrencies were hardly untouched. Initial sell-off of equities began in February with investors moving to cash, followed by a dip in gold as well. However, Bitcoin also crashed hard in March.
It was a brief period of lows, however. In April, Bitcoin, the digital currency that bounced off the bottom, turned positive.
Through 2020, it took flight.
As the market tanked in March, liquidity was pushed to the surface. This usually happens at the peak of an economic downturn. As with previous crashes, it also occurred around the same time in Bitcoin, suggesting there was more institutional interest at play than in the earlier hits.
As of mid-November, Coinbase, a digital currency exchange that’s expected to go public in 2019, had an institutional asset base of $20 billion, up from $6 billion mid-2020.
Canaccord Genuity highlighted recent institutional and other notable cryptocurrency events. Accordingly, JPMorgan Chase (JPM) sent its “JPM Coin” digital currency live on Oct. 27, and it formed an Onyx division aimed at blockchain technologies. In addition, MassMutual acquired 100 million Bitcoins on Dec.12.
As well, Coinbase introduced the first cryptocurrency debit card in October under the Visa (V) branding.
Lastly, we have inflation.
Bitcoin, for example, is being compared with gold because it is a relatively fixed asset, while fiat money is being printed at an exponential rate.
Bitcoin is attracting more analysts, resulting in more and more Bitcoin price targets.
The bombastic nature of some of these statements is beyond comprehension. The figure of $200,000 is “conservative,” according to former Adaptive Capital partner Willy Woo.
Citigroup said in mid-November that Bitcoin prices could rise as high as $318,000 by the end of the year for its institutional clients.