Currently, more than 10,000 crypto-currencies are being traded
We saw wired communication give way to wireless. We saw combustion engines evolve into hybrid systems that are now making room for fully electric vehicles. These are all signs of how innovation is currently directed towards a fast, convenient and more connected way of life. All these transitions underwent a series of changes. They were all rejected and accepted, debated and argued about. Trial and error has been the way for advancement; it will likely continue to be so. As humans, we have found that history may not repeat itself but it does rhyme. Such is the story of crypto-currency.
A crypto-currency is a digital or virtual currency that is secured by cryptography that makes it nearly impossible to counterfeit or double-spend. It allows for a secure framework to carry out transactions in exchange for goods and services via a decentralised network based on a block-chain technology. In order to understand the dynamics and value of a crypto-currency one should first have an idea of how the block-chain technology works. Here is a brief: block-chain, also referred to as distributed ledger technology (DLT), makes the history of any digital asset unalterable and transparent through decentralisation and cryptographic hashing. For further clarity, decentralisation in this context means that the currency isn’t backed by a central bank or financial institution. To give a simple analogy, suppose that we create a Google document and share it with a group of people. The document is distributed rather than copied. As a result we have a decentralised distribution chain that allows everyone to witness modifications to the document in real time. In the process no one is locked out and awaiting changes from another party.
More than 10,000 crypto-currencies are being traded currently traded according to CoinMarketCap, a market research website. Currently, the global crypto market capitalisation is soaring around $1.35 trillion, $0.65 trillion shy of its all-time high earlier this year. That being said, one should understand the appeal towards crypto-currency before being taken away by mere statistics. Supporters view crypto-currency such as bit-coin (the most popular crypto-currency) as the currency of the future and are racing to collect it before it becomes more valuable. Others like the fact that crypto-currency removes central banks from the equation since with time, banks tend to reduce the value of money via inflation. Furthermore, the block-chain technology behind crypto allows for a more secure mode of transaction as compared to other traditional payment systems. Some supporters like crypto-currencies just because they’re going up in value and have no interest in their long-term acceptance as a way to manage money. With the ongoing pandemic, another major appeal towards a digitised currency is the reduction in handling hard cash since it is a potential way of minimising unnecessary contact between individuals involved in a transaction. These, along with a combination of other factors, fuel the interest amongst individuals towards crypto-currency and the concept that it promotes.
The first block-chain based crypto-currency was bit-coin. It still remains the most popular, currently fluctuating around $31,700. Today there are thousands of crypto-currencies with various functions and specifications. Each of those was either forked from bit-coin or built from scratch. Some of the competing crypto-currencies, known as alt-coins (crypto-currencies other than bit-coin) include Ethereum, Cardano and LiteCoin to name a few.
Even though crypto-currency attracts a lot of positives, there has been criticism directed towards the technology over the years. The nature of crypto-currency transactions makes them well-suited for a set of illegal activities such as tax evasion and money laundering. That being said, crypto-currency advocates highly value their anonymity and cite benefits of privacy like protection. Some currencies are more private than others. For example, bit-coin would be a poor choice for conducting some illegal business online since forensic analysis of the bit-coin block-chain has helped authorities trace and arrest criminals in the past. Experts see the block-chain technology as having serious potential for uses like online voting. Financial institutions like JPMorgan Chase see the potential to lower transaction costs by streamlining payment processing. Even though crypto-currency block-chains are highly secure, exchanges and wallets which are part of the crypto-currency ecosystem, like every online platform, are not immune to hacking. Furthermore, there are concerns with regards to the level of energy required to mine crypto-currencies like bit-coin. However recent updates in currencies have shown that some of the alternative currencies are environment-friendlier.
As with any investment, it is important to go over the pros and cons. Once more familiar with the nature of a certain opportunity, we move ahead with how and why the value of a crypto-currency fluctuates, something a crypto investor should be mindful of. Investing in virtual currencies is highly speculative. Values fluctuate a lot over a short period of time. The value of a crypto-currency depends on its popularity at a certain point in time. This can be related to the number of people using it, how easy it is to use it, its perceived value and finally the underlying block-chain technology. The supply and demand of a currency and the utility it provides, coupled with mass adoption is the key to its value.
Predictions are increasingly being acknowledged that mass adoption could be right around the corner. One of the primary barriers that stand in the way is the reluctance of governments to establish regulations for crypto due to widespread fear surrounding crypto-currencies. However, a rise in public interest in digital currencies is putting pressure on governments across the globe to offer effective regulations. Based on several reports, it’s predicted that by 2022 60 percent of the global GDP will be digitised. As B2B and B2C payments start making use of digitised transactions, the market will open up to more innovative opportunities for a larger pool of consumers.
The pandemic has only accelerated the growth of the trend to make payments online hence people are beginning to realise the benefits of a token-based, digitised economy. In June, El Salvador became the first country to recognise bit-coin as legal tender. As a result, all Salvadoran businesses will be required to accept payment in bit-coin as well as the US dollar. Singapore, on the other hand, is attempting to create a legal framework to give consumers and businesses the confidence to operate safely in the crypto space. Electric car manufacturing giant TESLA was reported to be willing to accept bit-coin transactions once the energy usage by miners was sufficiently clean.
There are signs therefore of a move towards mass adoption. However, this still doesn’t even scratch the surface. Mass adoption is currently in its early stages and nowhere near its end goal. This is why as an investment opportunity crypto-currencies are considered a long term game. Projects like StarLink (one of Elon Musk’s ventures) that aim to sell internet connections to almost anyone on the planet by way of a growing network of private satellites orbiting overhead, can possibly provide the final touch needed for a crypto market boom. Theoretically speaking, the success of such a project would mean that crypto transactions could be carried out from potentially anywhere in the world.
Like traditional currencies, crypto-currencies generate no cash flow. So in order for you to profit, someone has to pay more for the currency than you did - the bigger fool theory of investment. Since the value of crypto-currencies has been anything but stable, there is a conundrum. For example, if the price of bit-coin is going to be much more in the future than it is right now, why sell it?
How does one acquire crypto-currencies? One needs a wallet on an exchange. Here you can transfer real money to buy crypto-currencies such as bit-coin. In Pakistan, you can’t buy crypto-currencies through any bank’s debit or credit card due to a ban by the State Bank. Instead, payments can be made and received through local Pakistani bank accounts, JazzCash, EasyPaisa through the P2P (peer to peer) system that is offered on exchanges such as Binance.
As a beginner, one should try to understand why and how the crypto market can be manipulated. One should not fall for the conventional pump and dump strategy and one should be ahead of the herd when investing. Even though everyone plans and implements their own entry and exit strategy, one of which is found very effective and has proven to be useful in minimising risk of market manipulation is to dollar cost average your investment. One can modify this strategy by constantly collecting currencies during the dips and partially taking profits during the breakouts. Such a method allows one to get in as close to the dip possible and also average out once one exits the market. There are endless such strategies that one can find online and use to educate oneself to be a more calculated and safe investor in the crypto space because if the market is manipulated then drawing lines and diagrams on charts for short-term trades leaves one at the mercy of the manipulators. If one holds high-quality crypto and has a long-term horizon, the market manipulators have no power over them.
Crypto-currency appears to be a promising technology, one which most people do not fully understand. That being said, uncertainty is an opportunity. We should try to educate ourselves as much as possible before investing into something that we cannot fully grasp. Good research coupled with a strong investment strategy is the key for a profitable crypto portfolio. No one knows for sure where the world is truly headed but one can make use of data to connect the dots and learn from history to predict and calculate what is and what can be.
The writer is a LUMS graduate currently working as a software engineer at PakWheels.com. He can be reached at [email protected]