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A cryptocurrency is a type of digital currency that is created and controlled using sophisticated encryption methods or cryptography. With the invention of Bitcoin in 2009, cryptocurrency made the transition from an intellectual concept to (virtual) reality. While crypto investments related to Bitcoin grew over the years, it really came to the attention of investors and the media in April 2013, when it reached a record high of $266 per bitcoin after increasing by a factor of ten in just the previous two months. At its height, Bitcoin’s market value exceeded $2 billion, but a 50% decline soon after triggered a heated discussion over the future of cryptocurrencies in general and Bitcoin in particular. Will these alternative currencies eventually replace traditional ones and attain the same level of ubiquity as dollars and euros? Or are cryptocurrencies a short-lived trend that will soon fizzle out? Bitcoin is bringing the solution.
Cryptocurrency’s Future
As institutional money joins the market, several economic analysts forecast a significant change in the crypto market. Additionally, there is a chance that cryptocurrencies will list on the Nasdaq, which would lend blockchain and its potential applications as a substitute for traditional currencies even more credibility. Some claim that a confirmed exchange-traded fund (ETF) is all that cryptocurrency needs. An ETF would undoubtedly make it simpler for investors to purchase Bitcoin, but there still needs to be a demand for cryptocurrencies, which may not be produced automatically by a fund.
Knowing Bitcoin
Peer-to-peer technology, used by Bitcoin, allows all operations—including currency issuance, transaction processing, and verification—to be carried out collectively by the network. The downside of this decentralization is that there is no central authority to guarantee that things function smoothly or to support the value of a Bitcoin, even while it makes Bitcoin immune to government manipulation or meddling. Through a process called “mining,” which calls for strong computers to solve challenging algorithms and crunch numbers, bitcoins are created digitally. They will be capped at 21 million coins, which is scheduled to be reached in 2140, and are currently produced at a pace of 25 coins every ten minutes.
Due to these features, Bitcoin differs fundamentally from fiat currency, which is supported by the full confidence and credit of its issuing government. Issuing fiat money is a highly centralized process that is controlled by a country’s central bank. There is no theoretical upper limit to the amount of such currency issuance, however, the bank regulates it in accordance with its monetary policy objectives. Additionally, local currency deposits are typically covered by a government agency against bank failures. In contrast, Bitcoin lacks these support features. The price at which investors are willing to purchase a Bitcoin at any one moment determines its entire value. Clients with Bitcoin balances also have no recourse if a Bitcoin exchange shuts down to recover their funds.
The Future Outlook for Bitcoin
The prospects for bitcoin in the future are hotly contested. The “overwhelming sentiment” among crypto supporters, according to Harvard University Professor of Economics and Public Policy, Kenneth Rogoff, is that the total “market capitalization of cryptocurrencies could explode over the next five years, rising to $5-10 [trillion].” This is despite the prevalence of so-called crypto-evangelists in the financial media.
He claims that the asset class’ historical volatility is “no cause for alarm.” He called Bitcoin “nutty” and said its long-term value is “more likely to be $100 than $100,000,” tempering his optimism and the “crypto evangelist” notion of it as digital gold.
According to Rogoff, the fact that Bitcoin is just used for transactions as opposed to actual gold makes it more susceptible to a bubble-like collapse. Additionally, compared to systems that rely on “a trusted central authority like a central bank,” the energy-intensive verification procedure used by cryptocurrencies is “vastly less efficient.”
Growing Criticism
Decentralization and transaction anonymity, two of bitcoin’s key advantages, have also made it a preferred currency for a variety of criminal operations like money laundering, drug trafficking, smuggling, and the purchase of weapons. The Financial Crimes Enforcement Network (FinCEN), the Securities and Exchange Commission (SEC), and even the FBI and Department of Homeland Security have taken notice of this (DHS).
Virtual currency exchanges and administrators were classified as money service businesses by FinCEN in March 2013, putting them under the purview of governmental regulation. The largest Bitcoin exchange, Mt. Gox, had a Wells Fargo account that was frozen by the DHS in May of that year on the grounds that it had violated anti-money laundering regulations. Additionally, in August, the New York Department of Financial Services served subpoenas on 22 startup payment companies, many of which dealt with Bitcoin, requesting information about their anti-money laundering and consumer protection policies.
The Upcoming Stage
Some of the current drawbacks of cryptocurrencies, including the potential for a computer crash to wipe out one’s digital wealth or for a hacker to ransack a virtual vault, may be resolved in the future thanks to technological advancements. The fundamental paradox that plagues cryptocurrencies—the more regulated and scrutinized they are expected to become as they gain in popularity, undermining the fundamental tenet of their existence—will be tougher to overcome.
While the proportion of businesses accepting cryptocurrency has constantly grown, it is still a very small number. Cryptocurrencies must first be generally accepted by customers in order to be used more frequently. With the exception of those who are digitally savvy, their considerable complexity in comparison to traditional currencies will, however, probably discourage most people.
A cryptocurrency that wants to join the mainstream financial system might need to meet a variety of different requirements. It would need to be decentralized but with sufficient consumer safeguards and protection, mathematically challenging but simple for users to understand (to prevent fraud and hacker attacks), and maintain user anonymity without acting as a conduit for tax evasion, and money laundering, or other illegal activities.
Is it possible that the most well-known cryptocurrency in a few years will have characteristics that sit somewhere between those of today’s cryptocurrencies and those of strictly controlled fiat currencies, given how difficult it will be to meet these requirements? Even while such likelihood seems remote, there is little doubt that, being the most popular cryptocurrency at the moment, Bitcoin’s ability to overcome its obstacles may have an impact on the future success of other cryptocurrencies.
Should You Make a Cryptocurrency Investment?
Consider treating your “investment” in cryptocurrencies the same way you would any other highly speculative endeavor if you are thinking about doing so. In other words, be aware that there is a chance you could lose most or perhaps all of your investment.
As previously stated, a cryptocurrency has no intrinsic value other than the price a customer is willing to pay for it at the moment. This raises the likelihood of a loss for an investor by making it particularly vulnerable to significant price changes. For instance, on April 11, 2013, Bitcoin fell from $260 to around $130 during the course of six hours.
If that level of volatility is too much for you to handle, consider elsewhere for assets that are more suitable. The merits of Bitcoin as an investment continue to be hotly contested; proponents point to its limited quantity and rising usage as value drivers, while critics dismiss it as just another speculative bubble. A conservative investor would be wise to steer out of this argument.
Conclusion
A discussion over Bitcoin’s and other cryptocurrencies’ futures has been generated by the development of Bitcoin. Despite its current problems, Bitcoin’s popularity since its 2009 introduction has prompted the development of rival cryptocurrencies like Etherium, Litecoin, and Ripple. A cryptocurrency that aims at joining the mainstream banking system would need to meet a variety of requirements. Even while that scenario seems unlikely, there is no doubt that how well or poorly Bitcoin handles its current problems could have an impact on the future success of other cryptocurrencies.
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