“The future of money is digital currency” -Bill Gates.
In recent times, cryptocurrency has caused an uproar in the world. Cryptocurrencies remain to be a controversial topic. Economists Paul Krugman and Warren Buffet have called Bitcoin evil and a mirage whereas venture capitalist Marc Andreessen has referred to Bitcoin as the next internet.
To get a clear understanding of the cryptocurrency market, it is vital to first get into the basics and origin of cryptocurrency. Cryptocurrencies are digital assets that use cryptography for security. Cryptography refers to an encryption technique. Cryptocurrencies are commonly used to buy and sell goods and services. They do not have any intrinsic value such that they are not redeemable for another commodity, such as gold.
Cryptocurrencies are decentralized. Contrary to traditional currency, cryptocurrency is not issued by a central authority and is not considered legal tender. Cryptocurrency is not deemed as a necessity because government-backed or issued currencies still function adequately. Buying goods and services with cryptocurrencies takes place online and does not necessitate disclosure of identities. However, this does not guarantee complete anonymity when carrying out transactions. Instead, pseudonymity is offered. Pseudonymity is a near-anonymous state where consumers are allowed to complete purchases without providing personal information to merchants albeit a transaction can be traced back to a person or entity if or when required by the law. This feature has brought about concerns of identity theft and privacy from the users.
Cryptocurrencies are run using blockchain technology. A person or group of people known by the pseudonym Satoshi Nakomoto invented and released the technology in 2009 as a way to digitally and anonymously send payments between two parties without needing a third party to verify the transaction. Initially, it was designed to facilitate, authorize, and log the transfer of bitcoins and other cryptocurrencies. Blockchain has a conceptual framework and underlying code that is useful for a variety of financial processes because of the potential it has to give companies a secure, digital alternative to banking processes that are commonly bureaucratic, time-consuming, paper-heavy, and expensive.
There are over 2000 cryptocurrencies available to buy and sell, although most have little value. The most common ones include Bitcoin, Litecoin and Ethereum. Globally, there are around 10 million Bitcoin holders, with approximately half holding Bitcoin purely for investment aspirations. In 2021 alone, bitcoin has risen 66%. Cryptocurrency is becoming the mainstream investment opportunity for investors all around the world especially with increased digitization.
The cryptocurrency market is mainly hinged on the speculative nature of investors. Apart from making purchases using cryptocurrency, investors monitor the cryptocurrency price movements in order to inform their decision on whether to buy or sell cryptocurrency with the aim of making a profit. In most instances, the cryptocurrency market moves according to supply and demand. The cryptocurrency market is rarely affected by various economic and political concerns that normally affect traditional currencies since it is decentralized. However, some of the factors that have a momentous impact on cryptocurrency include supply, market capitalization, press and media, integration into existing infrastructure, and major events.
Cryptocurrency exchanges are websites where buying, selling or exchange of cryptocurrencies for other digital currency or traditional currency is facilitated. The cryptocurrencies can be converted into major government-backed currencies and one type of cryptocurrency can be converted into another cryptocurrency. Some of the largest exchanges include Poloniex, Bitfinex, Kraken, and GDAX. Almost every exchange is accountable to government anti-money laundering regulations. Traders are also required to provide identification proof when opening an account.
On Friday 23rd April 2021, Bitcoin and other digital currencies plunged in the market. This was in response to a proposed capital gains tax hike from U.S. President Joe Biden. This proposal led to a wave of selling by investors. According to Coin Metrics data, Bitcoin was at $49,730 which is a decrease of 7.3%. This is the first time Bitcoin has traded below $50,000 since early March 2021. Similarly, Ether fell to $2,320 which was a decrease of 8%. XRP, the fifth-biggest cryptocurrency, plunged by 16%. However, the Bitcoin rebounded later on the same day to above $51,000. In line with data from CoinMarketCap, a listing of cryptocurrency prices and charts listed by market capitalization, these actions wiped out more than $200 billion of value from the entire cryptocurrency market.
This recent incident clearly proves the volatile nature of the cryptocurrency market. That being said, a lot of due diligence and research should be employed when venturing into trading in the cryptocurrency market.
Content writer at Cue Africa. Email: email@example.com LinkedIn: Selina Liyengwa.