A cryptocurrency is a type of digital currency created and handled using advanced encryption techniques referred to as cryptography. With the creation of Bitcoin in 2009, cryptocurrency transitioned from an intellectual concept to (virtual) reality. 1 While Bitcoin grew in popularity over the following years, it garnered significant investor and media interest in April 2013 when it peaked at a record $266 per bitcoin following a tenfold increase in the prior two months. At its peak, Bitcoin had a market cap of over $2 billion. Still, a subsequent 50% decline triggered a furious discussion about the future of cryptocurrencies in general and Bitcoin in particular. 2 Therefore, will these alternative currencies eventually overtake traditional currencies and become as pervasive as dollars and euros? Or are cryptocurrencies merely a transitory trend that will soon fade away? Bitcoin is the answer.
According to some economists, a sea change in the cryptocurrency industry is imminent as institutional money enters the market. Additionally, there is a possibility that crypto will be listed on the Nasdaq, which would provide additional credibility to blockchain technology and its potential usage as a substitute for conventional currencies. According to some, all cryptocurrencies need is a recognized exchange-traded fund (ETF). While an ETF would undoubtedly make it easier for people to invest in Bitcoin, there must still be a demand for crypto, which may not automatically generate a fund.
What Is Cryptocurrency?
Let’s Recognize Bitcoin:
Bitcoin is a decentralized currency that utilizes peer-to-peer technology to collectively enable the network to perform all activities such as money issuance, transaction processing, and verification. While this decentralization protects Bitcoin against government manipulation or meddling, it also means that there is no central authority to assure seamless operation or guarantee a Bitcoin’s value. Bitcoins are digitally created through a process called “mine,” which needs powerful computers to solve complex algorithms and crunch data. They are currently being minted at 25 Bitcoins every ten minutes and will be capped at 21 million in 2140. 7 These qualities distinguish Bitcoin fundamentally from fiat currency, backed by the government’s full faith and credit. The issuance of fiat currency is a highly centralized process that a nation’s central bank supervises. While the bank restricts the amount of money created to meet its monetary policy objectives, there is theoretically no upper limit on such currency supply.
Additionally, deposits in local currency are often protected against bank failures by a government agency. Bitcoin, on the other hand, lacks such means of support. A Bitcoin’s worth is entirely determined by the price at which investors are prepared to pay for it at any given point in time. Additionally, if a Bitcoin exchange fails, clients with Bitcoin balances have no way to recover them.
Bitcoin’s Future Prospects
The future of bitcoin is a point of contention. While so-called crypto-evangelists infiltrate the financial media, Harvard University Professor of Economics and Public Policy Kenneth Rogoff suggests that the “overwhelming sentiment” among crypto advocates is that the total “market capitalization of cryptocurrencies could explode over the next five years, rising to $5-10 [trillion].”
The asset class’s historical volatility is “no reason to fear,” he says. Nonetheless, he moderated his excitement, as well as that of the “crypto evangelists,” who consider Bitcoin as digital gold as “nutty,” adding that its long-term value is “more likely to be $100 than $100,000.” Unlike real gold, Rogoff says that Bitcoin’s utility is limited to transactions, making it more susceptible to a bubble-like collapse. Additionally, the cryptocurrency’s energy-intensive verification procedure is “very inefficient” compared to systems that rely on “a trusted central authority, such as a central bank.”
Increasing the Level of Scrutiny
Bitcoin’s primary benefits of decentralization and transaction secrecy have also made it a preferred currency for various criminal operations such as money laundering, drug trafficking, smuggling, and arms acquisition. This has drawn the attention of several major regulatory and other government organizations, including the Financial Crimes Enforcement Network (FinCEN), the Securities and Exchange Commission (SEC), and even the FBI and Department of Homeland Security (DHS). FinCEN released rules in March 2013 that categorized virtual currency exchanges and administrators as money service organizations, bringing them under government jurisdiction. 9 In May of that year, the DHS blocked an account at Wells Fargo held by Mt. Gox — the world’s largest Bitcoin exchange – because it violated anti-money laundering rules. 10 11 And in August, the New York Department of Financial Services sent subpoenas to 22 developing payment companies, the majority of which dealt in Bitcoin, seeking information on their anti-money laundering and consumer protection policies. 12
Despite its recent difficulties, Bitcoin’s success and increasing prominence since its inception have resulted in the introduction of several other cryptocurrencies, including:
Litecoin: Litecoin is widely considered to be Bitcoin’s chief challenger at the moment, and it is optimized for processing tiny transactions quickly. It was launched in October 2011 as a “silver currency to Bitcoin’s gold,” as founder Charles Lee put it. 13 Unlike Bitcoin, which requires a high level of computer horsepower to mine, We may mine Litecoins with a standard desktop computer. Litecoin’s maximum limit is 84 million – four times the limit of Bitcoin, which is 21 million – and its transaction processing time is approximately 2.5 minutes, or roughly one-fourth that of Bitcoin. 15 14
Ripple: Ripple was founded by OpenCoin, a technology startup founded in 2012 by entrepreneur Chris Larsen. Ripple, like Bitcoin, is both a cryptocurrency and a payment system. The currency component is XRP, which is based on the same mathematical principles as Bitcoin. In comparison to Bitcoin transactions, which can take up to ten minutes to confirm, the payment mechanism facilitates transferring funds in any currency to another user on the Ripple network within seconds. 16
MintChip: Unlike most cryptocurrencies, MintChip was developed by a government entity, specifically the Royal Canadian Mint. MintChip is a smartcard that stores electronic value and enables secure data transfer between chips. MintChip, like Bitcoin, is not subject to personal identification requirements; however, unlike Bitcoin, it is backed by a tangible currency, the Canadian dollar.
The Proposed Future
Some of the limitations that cryptocurrencies presently face – such as a computer crash that can erase one’s digital fortune or that a hacker may ransack a virtual vault – may be overcome in time through technological advances. What will be harder to surmount is the fundamental paradox that bedevils cryptocurrencies – the more popular they become, the more regulation and government scrutiny they are likely to attract, which erodes the fundamental premise for their existence. While the number of retailers accepting cryptocurrency has overgrown, they remain a small percentage. To become more widely used, cryptocurrencies must first earn significant consumer approval. However, their relative complexity compared to conventional currencies will likely deter most people, except for the technologically adept.
A cryptocurrency that aspires to become part of the mainstream financial system may satisfy widely divergent criteria. It would need to be mathematically complex (to avoid fraud and hacker attacks) but easy for consumers to understand; decentralized but with adequate consumer safeguards and protection; and preserve user anonymity without being a conduit for tax evasion, money laundering, and other nefarious activities. Since these are formidable criteria to satisfy, is it possible that the most popular cryptocurrency in a few years could have attributes that fall in between heavily-regulated fiat currencies and today’s cryptocurrencies? While that possibility looks remote, there is little doubt that as the leading cryptocurrency at present, Bitcoin’s success (or lack thereof) in dealing with the challenges it faces may determine the fortunes of other cryptocurrencies in the years ahead.
Should You Make a Cryptocurrency Investment?
If you’re considering investing in cryptocurrencies, it’s probably better to approach your “investment” similarly to any other extremely speculative business. In other words, accept the possibility of losing the majority, if not all, of your investment. As previously stated, a cryptocurrency has no intrinsic worth other than what a buyer is willing to pay for it at the moment of purchase. This makes it highly susceptible to significant price movements, which enhances the investor’s risk of loss. On April 11, 2013, Bitcoin fell from $260 to around $130 in six hours. 18 If you cannot handle that kind of volatility, search for more suitable assets. While opinion on the merits of Bitcoin as an investment remains sharply divided – proponents point to its limited supply and expanding usage as value drivers, while skeptics see it as just another speculative bubble – this is one argument that a cautious investor would be wise to avoid.
The development of Bitcoin has spurred debate over its and other cryptocurrencies’ futures. Despite recent difficulties, Bitcoin’s success since 2009 has spurred rival cryptocurrencies such as Etherium, Litecoin, and Ripple. A cryptocurrency that wishes to be integrated into the mainstream financial system must meet a variety of criteria. While that likelihood is remote, there is little doubt that Bitcoin’s success or inability to overcome its current obstacles will significantly impact the fortunes of other cryptocurrencies in the coming years.