Is Cryptocurrency Still Around?
Cryptocurrency was a household term at the beginning of the year. Popping up online, in the news and in our work conversations, Cryptocurrency was the talk of the town. So what happened? We hear nothing about it now. Was it just a passing fad? Or has it gone completely?
We can tell you now that cryptocurrency is still around as numerous forms of the currency are still trading in the virtual world. But the hype of the virtual currency has died down with a number of the larger Cryptocurrencies such as Bitcoin and Litecoin having decreased dramatically in value.
Cryptocurrency is very volatile and near impossible to predict. A high risk high reward investment. So what exactly is Cryptocurrency and how does its pricing work? We are going to do our best to explain Cryptocurrency in its simplest terms and hope that we uncover some of the secrets behind its decreasing value.
What is Cryptocurrency?
Cryptocurrency is digital money created by code. Free from an overarching authority, a Cryptocurrency network is monitored by a peer to peer protocol where all participants in the network must be in consensus for transactions to occur. Kind of like having a currency without a government or bank deciding its value, sounds crazy right? This virtual network with no centralised authority is what many virtual currencies since the 90’s had struggled to develop. It wasn’t until 2009 when someone only known as Satoshi Nakmoto introduced Bitcoin to the world with their decentralised, Blockchain network.
The Blockchain network worked as a ‘peer-to-peer electronic cash system.’ There are no servers or central controlling authority, and all transactions are recorded publicly on the Blockchain. Each Cryptocurrency unit is its own string of code or hash, as the medium of exchange operates only in the virtual world with no fiat version of itself. There is, however, a finite number of units of the encrypted string of code/hash, and practically anyone can get them. If you have a computer and the necessary hardware, you can mine for portions of Cryptocurrency. Mining is done by contributing your computing power to solve cryptographic puzzles which help confirm transactions on the Blockchain network. Essentially you are providing a bookkeeping service for the community, this is how the decentralised network works, a ‘peer-to-peer electronic cash system.’
So that is short basic rundown on what Cryptocurrency is and how it figuratively works. But now it’s time for the important part, how is its value determined?
Cryptocurrencies Volatile Valuation
Cryptocurrencies value is determined similar to other stocks/shares, but its volatile nature is unique due to its decentralised Blockchain network. With there being a finite number of units (approx. 21 million for Bitcoin), the forces of supply and demand come into effect when there is less and less coins to be mined, therefore driving up the price. The degree of difficulty in mining a coin also increases as there is less available, so more energy must be used in computer processing to solve cryptographic puzzles. This increased cost in energy use and degree of difficulty in mining also drives up the value. So the actual creation of Cryptocurrency and the network itself is a significant determinant of its value.
Another key determinant is its utility and public perception. Cryptocurrency is a digital currency, and cannot be held physically. At some point in time, it would have had no worth to anyone as it was a made up form of money and only value it had was that of whoever created it. Being non-redeemable at wholesalers, Cryptocurrency would hold no value. But with more and more early adopters having joined the trend, making the currency transactional, the value increased. With the world hearing the likes of McDonald’s planning on accepting Bitcoin in their store at the end of 2018, the value of Bitcoin increased. The pure hype and media attention alone caused people to value the currency more and caused its monetary worth to grow. It’s this perception and demand that the market has for Cryptocurrency that works as the main contributor to its value.
With no central authority, it was the public that gave Cryptocurrency its extreme value and worth. It was a craze, and everyone was talking about it, everyone tried to jump on the train at once when there was only a limited number of seats. Businesses adopted it, everyone was mining it, and the general perception of the public was that it was a means to an end from the corruption that the big overseas banks play in causing the global in unequal distribution of wealth. It wasn’t until we started seeing some of the big banks in America, making it that the public couldn’t use their credit cards to purchase the coins, that we saw the price of Cryptocurrency drop. Its utility decreased and demand decreased as less of the public could participate. The hype dropped off and so did its value, as people stopped talking about it. There was less demand for the currencies, so the initial overestimation of the currencies dropped.
That’s generally how Cryptocurrencies value is determined. It’s difficult to compute, and even analysts are in the dark on future valuations. So now it begs the question, should we look into it again?
The value of Cryptocurrency is highly volatile since it is a new and exciting medium or exchange. Some people have made millions whereas others have lost millions from their Cryptocurrency investments. Our recommendation to when it comes to Cryptocurrency is not to put your house on it. Of course, some small investments may be fun, but in terms of investing for long-term financial gains, Cryptocurrency is not your best bet. We believe it is better to stick to simple saving accounts, term deposits and safe stocks. You always need to assess the risk and think about what outcome you are trying to achieve when it comes to investing. A lot of the credit of Cryptocurrencies exponential growth can be put down to the perceived value that we had put into it. If a new innovative currency comes along and demand for Crypto drops, you could see any investment you made, plummet to a zero. Play it safe with your money, and invest smartly.