If you have not already heard the term “cryptocurrency,” you have been living under a rock for the last decade, whilst the rest of the world has witnessed the explosive growth, pitfalls and volatility that this all-digital, fully encrypted, free-from-government control currency encompasses. It is literally everywhere you look. In fact, as of January 2021, there were more than 4,000 cryptocurrencies in existence; while many of these cryptos have little to no following or trading volume, others are ramping up amongst dedicated communities of backers and investors.
Most recently, following a steep dive in the cryptocurrency market that saw Bitcoin drop by as much as 50%, entrepreneur and business powerhouse Elon Musk announced his own Bitcoin alternative, or ‘altcoin,’ he calls Dogecoin – an unofficial pet token, if you will, that originally started as a joke. “How much is that Doge in the window?,” Musk tweeted. The crypto market rebounded almost immediately, up more than 11% to about 40 cents, just hours after the first tweet. It tanked again after Musk hosted SNL and joked about Doge. So is cryptocurrency the cure to the financial woes of the world?
Why Is Crypto Currency So Volatile?
Right now, it comes down to pure economics – innovation and competition. What began with Bitcoin is now a world filled with ever upgrading newcomers to the market – altcoins modeled like Litecoin and Etherium, for example, have new crypto features Bitcoin does not offer such as higher speed transactions with more complex algorithms. And these are just a few of the cryptocurrencies that exist – each with their own features, pros and cons.
Government Currencies vs. Crypto Currencies
A key element of cryptocurrency that attracts many of its investors is its decentralized status, meaning that it is not controlled or regulated by a central financial or government authority. Payments are processed through a private network of computers, linked through a shared ledger, and recorded in a “blockchain” on each computer. The blockchain serves as a distributed ledger and eliminates the need for a central authority to maintain such records, whereas ‘government’ currencies such as the U.S. dollar or Japanese Yen rely on the backing of central banks for value, circulation, and legitimacy.
The flip side is that the lack of regulation of digital currency serves as a gateway for those without access to traditional financial products – those who would use it for harm. This includes some of Bitcoin’s early adopters that made headline news, striking fear in the hearts of investors. The bankruptcy of Mt. Gox in early 2014 and, more recently, that of the South Korean exchange Yapian Youbit, validate just how accessible and dangerous crypto can be. Other such stories and the public panic that ensued, including the high-profile use of Bitcoin in drug transactions via Silk Road, drastically decreased the value of Bitcoin, sending it into yet another downward spiral.
Bitcoin-friendly investors, on the other hand, viewed those events as evidence that the market was maturing, driving the value of Bitcoin versus the dollar back up. This is precisely why Bitcoin’s fluctuations really are the perceived store of value. Simply put, as economies with government currencies fluctuate, investors may allocate more or less of their dollar assets into crypto. This really could change the financial state of the world when looked out on a global scale.
Leaders of the Crypto Pack
Still on the fence about investing? Yes, it can be volatile, and it has its ups and downs a la the traditional stock market exchange, but the field of cryptocurrencies is expanding rapidly. While Bitcoin is widely seen as a pioneer in the industry, here are a few strong contenders to also check out:
Ethereum, launched in 2015, has a market cap roughly 19% of Bitcoin’s size but is currently the second-largest digital currency after Bitcoin, and it is the ONLY cryptocurrency used for minting and purchasing NFTs, another burgeoning market. According to Ethereum, it can be used to “codify, decentralize, secure and trade just about anything.” In 2021, however, there are big plans to change Ethereum’s algorithm from proof-of-work to proof-of-stake. Proof-of-stake enables participants to “stake” their Ether to the network, helping to secure the network and process the transactions that occur. Those who do this are rewarded, much like earning interest on a regular bank account.
On the contrary, Litecoin, created by MIT graduate and former Google engineer Charlie Lee, launched in 2011 and is often referred to as the “silver” to Bitcoin’s “gold.” For this reason, developers were sure to integrate all of the notable features from Bitcoin but decided to incorporate other aspects that they felt could be improved, such as a faster block generation rate and a faster transaction confirmation time. As of January 2021, Litecoin had a market cap of $10.1 billion and a per token value of $153.88, making it the sixth-largest cryptocurrency in the world.
Bitcoin Cash (BCH) also holds an important place in the history of altcoins. One of the earliest and most successful forks of the original Bitcoin – taking place as the result of multiple debates amongst developers – BCH challenged the developer’s ability to make changes to the underlying code. From this fork, they devised two major solutions: increasing transaction speed and processing more information at a time. By making the amount of data to be verified in each block smaller and making the blocks of data bigger, BCH makes digital transacting faster and cheaper than ever before.
So Is Cryptocurrency the End-All, Be-All Cure to the World Financial Crisis?
Not yet, but it very well could be. Just the creation of blockchain technology has changed the world as this technology can go far beyond having a transparent ledger. Debt markets are using crypto already, with Venezuela as an example – turning to a new oil-backed Crypto created by the Venezuelan government called Petro that is being used increasingly to avoid the hyperinflation issues of their national currency. Even here in the States, Chicago is pushing to become a crypto friendly city and citizens of Ohio can now pay their taxes using cryptocurrency.
Slowly this new form of currency is changing the world and the way money is regulated. Follow along with me as we explore more in our Facebook group!