My take on cryptocurrency
- lloydmufema
- Aug 29, 2021
- 5 min read
I should start by giving a disclaimer that I'm still a novice when it comes to the cryptocurrency and blockchain space. I only gained interest during the turn of the year so anything that I'm going to say does not consistitute financial advice. Under normal circumstances, I would be the least qualified to talk about this subject but my only qualification is that I have a platform through which I can share my thoughts.
What is crypto currency? A cryptocurrency is a form of digital asset based on blockchain technology. Blockchain is a decentralized technology spread across many computers that manages and records transactions. Part of the appeal of this technology is its security. Bitcoin, created in 2009 is the most popular cryptocurrency but there is more than 11,456 different cryptocurrencies (aka altcoins) traded publicly, according to CoinMarketCap.com, a market research website. The current total market capitalisation (value) of all crypto currencies is $2 trillion with Bitcoin pegged at $914 billion and Ethereum at $379 billion being the top two. The all time high (ATH) market value for Bitcoin was US$1.2 trillion in April 2021.
A scam? Cryptocurrency is not a scam as you will understand from this piece. However, a lot of scammers have and continue to use cryptocurrency to due to the difficulty in tracing funds transferred as cryptocurrency. Some of the red flags are: 1) Someone offering to invest in crypto currency on your behalf - one does not need another party to buy cryptocurrency on their behalf. It is something that one can and should do themselves, 2) Someone promising a set return on your investment - due to volatility of cryptocurrency, it is very difficult to predict what the price will be in future, therefore is someone promises a particular return, its likely a scam, 3) If it is too good to be true, it is likely not true.
Crypto currency as a store of value The money that we use today is called fiat money. It is a government-issued currency that is not backed by a commodity such as gold or silver. Fiat money gives central banks greater control over the economy because they can control how much money is printed. As a result, it risks losing value due to inflation or even becoming worthless in the event of hyperinflation. On the other hand, because many of the crypto currencies have a finite supply, they are seen as deflationary. Therefore, one is likely to store the value of their money if it is in cryptoassets than in fiat money. However, since cryptoassets are a new phenomenon and no one can predict with certainty what the future holds, there is always a risk that prices may crash.
A headache for government regulation Due to decentralisation of most cryptocurrencies, governments around the world are struggling to regulate it. People can send money around the world without going through the restrictions and bureaucracy of the formal banking channels. A person can keep crypto currency in their digital wallets giving them freedom and access to their money anytime. Due to governments still playing catch up on putting in place oversight and regulation, there are risks of money laundering. It is reported that in 2019, criminal entities laundered approximately $2.8 billion through cryptoasset exchanges. There is also risk of hacking of crypto wallets and exchanges. This month, hackers exploited a vulnerability in Poly Network, a platform that looks to connect different blockchains so that they can work together and stole more than US600 million. Although the money was returned, it highlights the inherent risks associated with cryptoassets.
Pathway to financial freedom There is a new generation of retail investors who have embraced investing as a path to financial freedom and the cryptomarkets have been seen as a key step in democratising wealth. Tonnes of money has been made in the cryptomarkets and this will continue to be the case although there are risks involved. There are many exchanges on which people can trade cryptoassets. Unlike forex trading which require certain expertise, with cryptocurrency, one can just buy and hold overtime waiting for the price to increase. Key however is to research and understand the particular coins that one is investing in. Considering that there is currently zero reward on savings by financial institutions, in addition to investing in stocks (which a lot of retail investors are also flocking to), investing in cryptoassets is now seen as serious alternative in growing one's wealth. For certain cryptocurrencies, one can also earn passive income through staking rewards (which is not a lot, but something all the same).
There are also decentralized finance (DeFi) lending platforms that run mostly on Ethereum which serve as the newest financial service enabler, while implementing the security and trustless benefits that blockchain and cryptocurrency bring. This eliminates the need for centralised financial institutions and opens up access to capital for the unbanked. Defi loans enable users to lend their crypto to someone else and earn interest on the loan.
Volatility The cryptomarket is an emerging space and and it can be difficult to predict what the future holds and the impact of future government regulation but as stated above, decentralisation will always make regulation difficult. Apart from this, volatility is one aspect of cryptoassets that makes them risky. Taking for example Bitcoin, the cryptocurrency's first price increase occurred in 2010 when the value of a single Bitcoin jumped from around $0.0008 to $0.08. By December 2017, the price had increased to $19,873 and then dropped to $5,000 by March 2020, increased to $60,000 by April 2021 and is currently around $48,000. So without doubt, the crypto market is an adrenaline pumping kind of space but generally despite the volatility, overtime, prices tend to increase.
Blockchain use case As much as the future of cryptos is not certain, the fact that a lot of projects on the blockchain have use cases prove that they are here to stay. Having a use case simply means they bring a solution to a problem or gap in the market. Some examples include: Peer to Peer Digital Cash System Smart Contracts Internet-of-Things Network Supply Chain Management Remittances Data-sharing Marketplace Cloud Storage Education Records Decentralized Social Network Decentralized IDs e-Voting Systems Gaming Therefore cryptoassets relating to these solutions will most likely be there in the future as long as these solutions are there.
Future of cryptocurrency Another good way of understanding what the future holds is to look at how digital assets have been embraced in the corporate world. Currently, 27 public companies listed across the world are holding $9.9 billion worth of Bitcoin, Tesla (with a holding of $1.5 billion) being the most popular on the list. In addition, there are now crypto hedge funds, index funds, ETFs and derivatives catering for investors with different risk appetite. In April 2021, Coinbase became the first crypto exchange to go public when it listed on the Nasdaq.
On June 9, 2021, El Salvador became the first country to officially classify Bitcoin as a legal currency. In a way that is seen as an attempt circumvent US sanctions, there were reports this past week that Cuba will now recognize and regulate cryptocurrencies such as bitcoin, in a move being billed as historic for the country.
Conclusion Blockchain and cryptocurrency is an intriguing space that I will continue following closely. Though no one can say with certainty what the future will look like, it definitely looks exciting. There are opportunities for investors and for those seeking to build solutions on the blockchain. I deliberately shied away from sharing my experiences as a retail investor because my goal was to simply stimulate interest and hope I have succeeded in doing that. If I would have any regrets about my experience in this space thus far, it is that I should have developed an interest a little earlier! https://www.cnbc.com/2021/08/11/cryptocurrency-theft-hackers-steal-600-million-in-poly-network-hack.html
Comments