Introduction
For the last 10 years, all we could hear in the finance market is the talk of cryptocurrency. Sometimes it is about how great it is to invest in, how some ordinary people became millionaires by mining and selling them; while on the other hand, sometimes how some lost millions because of it. In the past 2 years, however, all we could see is the declining market trend for the virtual currency. So what is going on here, and what should we do about it?
So what is cryptocurrency ?
Cryptocurrency is an alternative of the usual transaction system that we call “money”. The first cryptocurrency, bitcoin, was created in 2009 by pseudonymous developer Satoshi Nakamoto. What is interesting about this new form of transaction is that it is completely digitized and anonymous, encrypted, and more importantly, it is decentralized, that is, it is not controlled or regulated by any central authority like the Government. Instead, it is based on a network spread across a large number of computers.
Most cryptocurrencies use Blockchain technology, a distributed record system imposed by a diverse network of computers all over the world, as an organizational method to ensure the integrity of the transaction. This method of transaction uses cryptographic functions to encrypt your data and to conduct the financial transactions in terms of virtual “tokens”. P2P network system is used to generate digital identities for a user (private and public keys) so transactions can be made directly between a set of two parties, anonymously, over the internet.
What made cryptocurrency so popular ?
Over the years experts have developed mixed opinion about cryptocurrencies. Nevertheless, when it comes to users, especially millennials, it has seen a huge amount of popularity. Some even considered it to be the currency of the future.
Money in this system, not being controlled by the Government or any company, is directly handled by only the two parties involved. This completely eliminates the cut percentage that goes to the middleman. Also, the processing fee for fund transfer is negligibly small.
The transaction, each time, is broadcasted to the entire network and recorded permanently, so it is really difficult to fool the system. Hence, the transaction is quite secure and you are immune to losing money in the transaction in cases of bank frauds.
Fund transfers, especially international ones, are much faster.
Financially however, the biggest reason for interest in cryptocurrency is the staggering investment returns. Bitcoin has shown an approximate 1,500% increase in 2017, while Ethereum has skyrocketed over 10,000%. There are also less known crypto tokens emerging now which offer even higher potential returns.
Most importantly, cryptocurrencies allow investors to put their stakes in a company before it is even born. Therefore, in case the company makes it big, the investors earn huge profits from it, way more than if they had invested after. The early crypto investors of Amazon and Netflix have seen it big and that is a fact.
What is crashing the crypto market then ?
No matter how amazing this invention sounds, there are quite a few drawbacks linked to this new form of currency. While it sure is much easier and more convenient to use this currency, investing in it runs a number of risks, including legal ones. As a result, the cryptocurrency market has lost $340 billion of value since the start of 2018. There are a few theories by experts about why the crypto market is on the downside.
Lack of regulations
Cryptocurrencies are not regulated by any form of authorities. While this is considered an advantage in a lot of cases, in case of fraud, this causes a complete vulnerability.
In order to raise crypto capital for a start-up all someone needs to do is draw up a detailed white paper document and convince people to invest in the form of ICO (Initial Coin Offering); a structured company is not required. A lack of proper research has led a lot of people to be blindsided by some so called start-ups and lose money. As there is no authoritative regulations on this currency, money once lost is gone forever. Too many cases of fraud like this have made people afraid of investing in cryptocurrencies.
Hacking also has posed a similar issue. $1.1 billion in cryptocurrency was stolen by hackers in 2018. That money cannot be recovered either.
Market manipulation
Market manipulation, what is absolutely illegal in the real stock market, poses no problem in the virtual currency world. Investors use the “pump and dump” scheme in order to gain profit in the cryptocurrency market - inflating the value of the currency only to sell it off at its peak. Especially for crypto with smaller market cap, this scam is easy to pull off.
Cryptocurrency Paradox
Crypto is not a commodity, whose price is determined by its consumption which creates a demand. Crypto is simply a currency which has no demand and can only be exchanged and reused as no unit of it is destroyed once created. Being decentralized, the price of a cryptocurrency is only determined by supply and demand. Supply differs widely between exchanges. If someone buys a lot of one form of currency on a smaller exchange, investors on other exchanges will notice and buy the same currency, triggering a market-wide inflation.
Now this creates the “Cryptocurrency paradox”. People investing in crypto buy and hold them because they want their value to go up, but unless they use their crypto the value will remain the same. On the other hand, unless the crypto is used, its value will keep falling, and investors will start selling to avoid further losses. This goes on and on, leading to the inevitable “death cycle”.
Risky investment
Not every start-up end up becoming Amazon or Netflix. Not all start-ups, even though legitimate, bring in a lot of return for the investors.
With cryptocurrency, there is no governing body to expand or limit the money supply to meet changing events, and also no mechanism to prevent widespread price manipulation. This makes crypto highly volatile, i.e, the value of them rises and falls in a very disorganized manner. Bitcoin shot up in value from $1,000 per Bitcoin on January 1, 2017 to $19,783.06 in mid-December of that year, and then again the value went down by 80% in between January and September in 2018.
Crypto is not a revenue-producing asset as it is simply a currency and not a product. Unlike a stock whose value can be determined by earnings, owners earn absolutely nothing from cryptocurrency.
It is not a store-of-value either. If you invest in $1000 of value in crypto today, because of its high volatility, there is absolutely no guarantee that you will get back $1000 worth of crypto in future.
Rising restrictions in several countries
The anonymity in the transaction of cryptocurrencies is giving rise to tax-evasion, money-laundering, and most importantly, illegal activities mostly over the dark-web. This is leading to strict restriction on the usage of cryptocurrencies by many countries, especially in the Asian ones. Without the huge market that the Asian countries provide, it is gradually becoming a worthless investment.
What kind of future can we expect for cryptocurrency ?
Unlike physical assets, cryptocurrencies are limited to exchange only, which caused the volatility and the bubble. The lack of regulation was bound to make this collapse happen someday. Some experts predict all crypto needs is a verified exchange trusted fund which will make it easier for people to invest in them. Some others expect them to gain wide-spread acceptance among consumers in a few years to have them widely used which will bring their value up. However, according to a lot of economists, like every other asset, cryptocurrencies will likely stabilize in the next 15 years. New technologies like Blockchain CD (Certificates of Deposit) are emerging in order to control the risks in the investment and gaining a stable return. If all goes well, it seems that crypto will resurrect soon and is here to stay.
Author Bio: Neha Tiwari, is digital & marketing enthusiast, currently working at One-Stop Media. Nothing interests me more than the changing trends of the digital market landscape. I enjoy researching the marketing dynamics and love transforming my knowledge into words. Besides this, I like exploring social media advertisement sphere. Get in touch with her on Medium, Twitter and LinkedIn to get the insight into latest digital trends.