By Robby Thomas
Cryptocurrency is literally the hottest topic of conversation on every major financial platform and publication including Bloomberg and Forbes. It has risen to the pinnacle of the financial universe. So, what is Cryptocurrency? Is it money? is it an investment? is it technology? is it even real? The short answer is, it’s all of the above.
Here is a general definition of Cryptocurrency or Crypto. It is simply digital or virtual currency that is secured by cryptography. Cryptography is a secured way to protect data through the use of codes and mathematical concepts. It helps to create digital signatures that make verifying transactions on the internet possible. A defining feature of cryptocurrency is that it is independent of any control or manipulation by a centralized entity such as a central bank or government. This also means that neither of those entities play a role in issuing or managing cryptocurrency.
Cryptocurrencies are also known as digital assets. They serve a variety of functions in the digital economy. Some serve as a medium of exchange while others serve as a store of value similar to gold or the US dollar. For instance, you can use crypto to buy regular goods and services, but you can also invest in them like you would in stocks, bonds or precious metals. Each cryptocurrency is created for a specific use, in other words they weren’t just created to replace fiat currency. Bitcoin, the first and most dominant cryptocurrency, has established its use case as both a medium of exchange and a store of value.
All cryptocurrencies besides Bitcoin are referred to as “Altcoins,” as in an “alternative” to bitcoin. The way to view “Altcoins” or all other cryptocurrency platforms that are not bitcoin, is as a start-up project offering a solution to real world problems. Think Silicon Valley in its very early stages, or the dot com tech companies of the 1990s. Each tech era has been fueled by a combination of entrepreneurs, creators and speculators, all of whom are in it for different reasons. That said, Amazon.com, Inc., one of the few companies that survived the dot com era is currently one of the world’s largest and most successful companies. This illustrates that over time, nothing can stop an idea or technology whose time has come. Looking at the potential of blockchain platforms with a combined market cap of over half a trillion dollars ($690.9 billion), it is within the realm of possibility to think that the next Amazon could well be a new blockchain company.
Cryptocurrencies are built on a relatively new technology known as a decentralized application or DApp. A decentralized or distributed ledger is a computer application that is distributed across many computers around the globe. Computers that help operate the network are called nodes. They enable users to make secure payments and store money without the need for a bank or financial middleman. The decentralized or distributed ledger system is part of a public network known as a blockchain. The ledger stores data in a block format which chronologically connects each new block to the previous block, much like a chain, hence the term blockchain.
The blockchain is an encrypted public record that lives on the internet. It enables users to maintain transparent and permanent records of transactions. One of the notable characteristics of the blockchain is that data contained in the blocks cannot be changed once the blocks are completed. The blockchain therefore has an immutable quality, since data contained within it cannot be manipulated or hacked. In addition, data on the blockchain is simultaneously housed on thousands of computers or nodes in the network. Unlike centralized databases, a potential hacker would have to achieve the virtually impossible task of hacking into more than half of all the nodes in the entire network to breach the system. The immutability of this technology makes it an appealing and dynamic infrastructure to build on.
Data Privacy and Protection
Although nothing is perfect, the promise of blockchain technology as a safer alternative to centralized data management systems, has tremendous real-world value. In the US, data breaches have been all too common in recent years, with 1,473 of them occurring in 2019. In 2020, several parts of the US federal government experienced a major data breach by a group backed by a foreign government. Providing solutions to this negative trend will be invaluable, especially in an environment where data privacy and protection are absolutely essential.
In sum cryptocurrencies allow for the secure transfer of value over the internet because of the unique verification processes built into the system. From a broader point of view, crypto can be viewed as an evolution of money specifically built for usage on the internet. It was borne out of the 2008 financial crisis and created in 2009 by an unknown person using the pseudonym Satoshi Nakamoto. The Bitcoin white paper can be viewed at Bitcoin.org.
Why Should You Invest in Cryptocurrency?
Here are a couple of reasons why cryptocurrencies have gotten many so excited.
- Many people view cryptocurrency as ground-breaking technology. Given that for the first time it solves the problem of moving or storing large sums of money via the internet in a safe and secure way without using an intermediary, such as a bank or transfer agent. As a result, interest in Bitcoin has grown making it the leading cryptocurrency in the world. CNN, referred to Bitcoin as “the investment of the decade,” and there is reason to believe that the future is even brighter for bitcoin.
- As more people learn and begin to get acquainted with digital currencies more trust will be gained, and adoption will grow. As adoption grows, so will the value of digital currency platforms. This will benefit early adopters and investors who seized on investment opportunities much earlier.
- Cryptocurrencies are built around the values of decentralization, and the democratization of technology. This essentially means that it lowers the barriers of entry for many to participate in the global economy. It’s potential to economically empower billions of people with a smart phone is unparalleled.
Bitcoin A Store of Value/Digital Gold
Many agree that the use case for bitcoin in particular is that of being a store of value, meaning that it shares similar characteristics with gold, often being referred to as digital gold or gold 2.0. It may however, prove to be a better store of value than gold in a couple ways.
- Crypto, regardless of amount, is easily transportable and can be carried or sent via a mobile device in seconds. Large quantities of gold cannot be easily transported or used in e-commerce in seconds.
- As a digital asset Bitcoin embodies one of the key characteristics of gold as a store of value, and that is scarcity. There will only be 21 million bitcoins ever issued. No one knows for sure how much gold is in the ground or in existence. A sudden surge in the production or quantity of gold will negatively impact prices.
- Knowing that there is only a finite supply of bitcoins is likely to be a demand driver for the asset which will positively impact its price.
New Digital Ecosystem
Cryptocurrencies built on blockchain data networks have ushered in the emergence of a new asset class and ecosystem. There are well over 8000 cryptocurrencies listed on www.coinmarketcap.com, a website that lists cryptocurrency prices and market capitalization. Many in fact may not survive, however, these new platforms are leading a digital dialogue toward a more decentralized, transparent and inclusive economy.
With the success of cryptocurrencies such as Bitcoin, Ethereum and others, Wall Street has taken notice. Major banks such as JP Morgan Chase, and companies such as PayPal and Cash App are actively involved in the digital asset space. But, here’s the best news of all. Modern digital decentralized platforms allow anyone with a mobile device to participate in the economy especially the unbanked. This is likely to change the economic landscape for many developing countries plagued by government’s inefficiency and lack of transparency. The economic and global implications for crypto and blockchain are infinitely incredible and this is only the beginning.