Cryptocurrency, or crypto, is all the rage in recent news feeds – and it’s no wonder why, with Bitcoin up 65% in just two months. Established in 2008 as little more than an idea, this pioneer of the blockchain world has taken worldwide financial markets by storm.
Unfortunately, what crypto is is a little less well-known than the current state of the (waves hand in no particular direction) Bitcoin boom. And as investors, we feel that it’s essential for everyone to have a basic grasp on these alternative assets, from where they came from to where they’re going.
So, we’re going to help this process along.
Here it is, in all of its complex, complicated glory: Cryptocurrency, the down-and-dirty edition.
- Bitcoin’s 65% YTD rally has splashed into recent headlines due to increasing interest from players such as Elon Musk and Tesla, Microsoft, retail investors, and institutions like JPMorgan. While cryptocurrencies are not new, this new furor has led to speculation as to their future in modern society.
- In short, cryptocurrency, or crypto, is a virtual or digital currency that runs on a decentralized network via blockchains. This system of mathematical and computation encoding and decoding is spread across many units, such as computers, that manage and record transactions.
- Cryptocurrencies got their start in theory in 1983, but it wasn’t until early 2009 that Bitcoin was first released as an open-source cryptocurrency software. Since then, thousands of altcoins (alternative coins) have emerged, with big names such as Litecoin, Ethereum, and Tether offering unique products.
- However, while cryptos run on some of the most secure virtual platforms in the world, these “currencies of the future” are unregulated, untraceable, and operate wholly outside any central banking system. As a result, they’re perfect for peer-to-peer lending and financial speculation – but they’re also highly volatile and subject to use in illicit activities.
First Up…What is It?
Cryptocurrency is a virtual or digital currency typically doled out as “coins” or “tokens.” While their makers vary widely, the general idea is the same: to create a decentralized network of currency that bypasses central banking systems and government regulations. However, the latter half of this foundation has come under scrutiny as their use has grown, especially from governments concerned about illicit activities – and in some cases, their ability to track and tax transactions.
It’s essential to note that cryptos are somewhat new on the financial scene – Bitcoin was only established in 2009. Still, the last few years has seen a sudden uptick in their production. These altcoins, or alternative coins, often purport to best Bitcoin in features or usability, though none of them have reached Bitcoin’s level of success – or their security features.
This hasn’t stopped them from trying, however: there are literally thousands of altcoins available now, with more developed each month. And now that a fortunate few have entered mainstream conversation, several major companies have begun accepting them as payment for goods and services.
How do Cryptocurrencies Work?
Cryptos function on the principles of cryptography, or the mathematical and computational encoding and decoding of data. While we won’t go too far into the specifics, it’s cryptographical processing that allows makers to create and transact these digital currencies. This means that currencies can flow from person to person, entirely bypassing institutions that may process, track, and even take a chunk of such payments.
Cryptos work via blockchain technology, in which a decentralized system is spread across many units. These units – typically computers with special processors – then manage and record transactions. Blockchain systems are unique in the virtual space because their infrastructure means they’re incredibly secure (though not infallible, as we’ll discover shortly).
A Brief History of Cryptocurrency
Cryptos got their theoretical start way back in 1983 when American cryptographer David Chaum wrote about eCash, an anonymous, untraceable electronic currency. In 1995, he implemented his design via an early form of crypto payment software called Digicash. But his idea more or less stopped there – for a decade or so, anyway.
In August of 2008, the first mention of Bitcoin entered public consciousness when an anonymous figure registered the domain name bitcoin.org. Two months later, a mysterious (likely pseudonymous) figure named Satoshi Nakamoto published the paper Bitcoin: A Peer-to-Peer Electronic Cash System.
And then, in early 2009, Bitcoin was finally released as an open-sourced, decentralized cryptocurrency software. The first official transaction occurred on 12 January, when Nakamoto himself sent 10 Bitcoin to computer programmer Hal Finney.
Though this marked the first appearance of a real cryptocurrency, it wasn’t until 2010 when monetary value was assigned for the first time. This came in the form of a pizza purchase – two pies, to be exact, purchased for 10,000 coins. (Today, this transaction would be worth just under $490 million.)
And this was just the start.
- 2011: Namecoin, Litecoin, and Swiftcoin all emerged as altcoin challengers to Bitcoin. During this time, Bitcoin also faced its first real criticism after reports surfaced that it was being used on the dark web.
- 2013: Bitcoin “forked” for the first time in history. (A fork occurs when developers and miners can’t agree on code changes, which must typically be made on general consensus. If two or more parties can’t agree, the digital currency is “split.” The original chain keeps the original code, and a new chain with a new version of the code generates a new type of coin.)
- 2014: Microsoft began to accept Bitcoin for game purchases.
- 2015: both Ethereum and Coinbase emerged as new altcoins.
- 2016: Major companies such as Steam, Uber Argentina, and the Swiss national railway begin to accept Bitcoin payments. This same year, Ethereum forks into Ethereum and Ethereum Classic.
- 2017: Bitcoin splits again, this time into BTC and Bitcoin cash. This in part drives the massive cryptocurrency crash of 2017.
Crypto’s Main Players
Although there are thousands of altcoins jostling for a spot on the big stage, only a handful have made the big time since 2009. You’re most likely familiar with Bitcoin – after all, it was the first, and the first to be legitimized.
But Bitcoin isn’t the end of the story. These are the altcoins who have risen through the ranks not only to recognition and legitimacy, but truly massive market caps, as well.
Bitcoin Cash (BCH)
BCH is one of the earliest and most successful “hard forks” off Bitcoin. This newer model increased the currency’s storage capacity from 1MB to 8MB per blockchain, thereby allowing for more – and speedier – transactions.
- Per-token value: $535.15
- Market cap: $10 billion
Litecoin was launched in 2011 by former Google engineer Charlie Lee. It can be decoded with consumer-grade CPUs and has both a faster block generation rate and transaction confirmation than Bitcoin. As a result, it’s risen in popularity with some merchants.
- Per-token value: $178.38
- Market cap: $11.97 billion
This well-known Bitcoin alternative is a decentralized software platform designed to circumvent downtime, fraud, and third-party regulation. This currency hopes to become a “suite” of decentralized financial products, such as banking, loans, and insurance.
- Per-token value: $1,821.89
- Market cap: $209.46 billion
Cardano is a standout cryptocurrency from an ex-Ethereum founder. This research-based currency involved engineers, mathematicians, and no less than 90 expert papers on blockchain to launch. Its decentralized platform claims to provide interoperability for blockchains, legal contact tracing, and even voter fraud.
- Per-token value: $1.28
- Market cap: $40.93 billion
Polkadot is a unique cryptocurrency created by another core founder of Ethereum, Gavin Wood. This system provides a framework for different systems to intercommunicate, allowing developers to build non-native blockchains in their native system. They were the first cryptocurrency to introduce the idea of “shared security.”
- Per-token value: $38.38
- Market cap: $35.31 billion
Binance Coin (BNB)
Binance Coin is known as a utility cryptocurrency, as it operates as a method of payment for Binance Exchange trading fees. Binance Coin is currently one of the most widely used exchanges in the world in terms of trading volume.
- Per-token value: $267.57
- Market cap: $41.33 billion
Tether is a first-in-class cryptocurrency known as a “stablecoin,” a type of cryptocurrency that pegs its value to an external reference point. (In this case, Tether is tied to the value of the United States dollar.) The result is a more stable currency that lets users transact in traditional currencies with minimal volatility and complexity.
- Per-token value: $1.00
- Market cap: $39.23 billion
The Current State of Cryptos
Since their inception, the fight around cryptocurrencies has produced several arguments for and against their perpetuation. Some argue that cryptocurrencies are unstable, illegitimate, and lead to illicit activities. On the other hand, many proponents believe cryptos are simply “the way of the future” and their existence will have to be addressed eventually.
But even as this debate rages on in the foreground, cryptos have continued to gain real traction in our minds and wallets. With cryptocurrency prices booming and major companies such as Microsoft drifting toward digital currencies, the issue has evolved from if they should exist to how to regulate them now that they do.
We won’t get into the hairy details of how one could regulate an anonymous, decentralized currency here. Instead, let’s talk about something simpler (sort of): the pros and cons of cryptocurrency.
Cryptocurrency: What’s Good About It?
Cryptocurrency is often referred to as the “currency of the future.” As our working and leisure have moved into virtual spaces, it follows that, to an extent, our financial lives would, too. In a way, this has already happened with the advent of automatic deposits and PayPal.
Cryptocurrency takes this process a step further by removing the real-world backing of currencies and processing all transactions digitally. In turn, proponents argue, virtual coins even the playing field while removing unnecessary intermediaries.
Furthermore, the decentralized processing and recording systems on which cryptocurrencies are built are some of the most secure in the world. Their blockchain setup provides a transactional space that is anonymous, untraceable, and nigh-unhackable.
Additionally, such setups remove the need for central banks to manage the money supply. Proponents argue that banks reduce the value of money via inflation. By removing currency from a centralized system controlled by intermediaries, it also removes Big Money’s control over everyday individuals.
Besides these practical uses, there are many speculators and investors who enjoy cryptocurrencies as simply another investment vehicle. As cryptos fluctuate in value, they can lead to massive gains for both retail and institutional investors. And, although you can spend virtual currency – unlike a stock or bond, for instance – that hasn’t stopped some institutions from offering the ability to bet on digital coins rather than buying them outright.
And now we come to some of the more contentious points in the cryptocurrency debate: the arguments against.
One of the biggest worries put forth is that cryptocurrencies are not backed, insured, or regulated like traditional currencies. This leads to issues such as increased volatility (just look at Bitcoin’s five-year performance), fraud, theft, and scams. And because there are no legal protections in place – and no way to track transactions once they’ve occurred – it’s almost impossible for victims of market downturn or illicit transactions to receive reparations.
Furthermore, despite blockchain’s implicit security, there are still ways for hackers to steal a person’s identity – and even their coins.
This is because most cryptocurrencies are stored in online exchanges – trading markets – and digital wallets. These places store data such as wallet ID numbers, identifying information, and of course, the coins themselves. As such, they’re prime targets for experienced thieves, who can make away with millions in minutes…without a trace.
The Bitcoin Boom
And now, we’ve come to the reason you’re here: the Bitcoin boom.
While many cryptocurrencies have headlined in recent months as speculation about their future becomes commonplace, none have featured so frequently – or with as much furor – as Bitcoin. In the first two months of 2021 alone, Bitcoin reached an unprecedented height of $58,000 per coin. This record-breaking rally reached a market cap of $1 trillion before correcting down a full 18% just three days later.
Why is Bitcoin Rallying?
Bitcoin’s rally can be partially explained by increasing interest from retail and institutional investors, particularly as the financial consequence of the 2020 pandemic droned on.
As global central banks eased their monetary policy by printing money, lowering interest rates, and instituting quantitative easing programs, individuals and investors scurried to all corners of the earth seeking protections for their purchasing power.
Increasing interest by major companies seeking to cash in on the cryptocurrency trend has also played a part in Bitcoin’s success.
Tesla, for instance, has played an outsized hand in Bitcoin’s sudden surge, with CEO Elon Musk tweeting frequently on the subject following announcements that the company would soon accept Bitcoin as payment. Tesla also recently disclosed in an SEC filing that it purchased $1.5 billion in Bitcoin, increasing a stake valued at 3% of the company’s cash-on-hand at the end of 2020.
And they’re not the only ones. Since October 2020, several international organizations have set plans in motion to accept cryptocurrency as legitimate payment. These companies include giants such as PayPal, Square, and MicroStrategy. Even financial institutions like JPMorgan and Morgan Stanley have recently expressed interest in trading cryptocurrency as prices have continued to surge.
Our Shifting Attitudes, Explained
Such a sudden jump in price is a reflection of our current economy, as well as the shifting attitudes of investors and major companies following the 2017 cryptocurrency crash.
A recent poll of 30,000 Americans supports the idea that cryptos are gaining legitimacy in society, with 57% stating that major companies should accept digital currency as payment. A full 50% polled stated that they viewed cryptos as “safe” investments, while 41% reported that investing in the stock market and cryptocurrencies carried equivalent risks in their mind.
The CEO of digital payments platform Wirex, Pavel Matveev, explained that this change in attitudes – and the resulting bull run – as having “seized the attention of millions of people who previously had never considered digital currencies like Bitcoin to be an alternative asset…[cryptocurrencies] have several uses, not least ease of exchange, purchase, and liquidity.”
However, others have urged caution in the face of the cryptocurrency surge. One such critic is U.S. Treasury Secretary Janet Yellen, who recently told CNBC that Bitcoin is an “extremely inefficient way of conducting transactions, and the amount of energy that’s consumed in processing those transactions is staggering.”
The Future of Cryptocurrency
Despite such cautions, it appears that cryptocurrencies are here to stay – at least for a while.
The continuous entry of institutional players, from billionaires like Elon Musk to companies like Microsoft and PayPal, has increased both public interest and crypto’s financial legitimacy. And as major firms continue to give endorsement to digital currencies, smaller players will be empowered to adopt similar practices.
Furthermore, the more people that make use of these currencies, the more stable they are likely to become as liquidity and utility increase and volatility – hopefully – decreases. Only time (and government regulation) will determine if such changes are here to stay.