You’ve probably heard a lot about cryptocurrency lately. More and more people are investing in cryptocurrencies, and they have many questions about them. If you want to learn more before putting your money into cryptocurrency, you’re making a wise move.
After all, there are a number of investments that seem foolish but can make people rich. In terms of crypto, savvy investors have become incredibly rich from it, and many believe it’s the future of investing. Based on recent market trends, crypto is here to stay. It’s hard to argue with that, so we broke down several reasons why smart investors should grab a position in cryptocurrency before it’s too late.
33. Governments Don’t Back Cryptocurrency
Dollars are the national currency of the United States and the U.S. Treasury backs their value. The treasury keeps a certain amount of dollars in reserve to ensure that we use those every day to retain their value. Without the backing of the federal government, the dollar wouldn’t have the value it has.
Every national government that has its own currency backs it to ensure its value. The United Kingdom, which uses pounds, has a government that ensures those pounds retain their value. What makes cryptocurrency different is that a government does not back it. There is no reserve supply to ensure that it maintains a certain value. Furthermore, there are no centralized laws that regulate it.
No government assigns value to cryptocurrency. But the people who use it have decided that it is valuable as a medium of exchange. The law of supply and demand comes into either increase or decrease cryptocurrency value based on how many people are using it. If many people want to use Bitcoin, but there is only a limited number of bitcoins to go around, value will go up.
That’s exactly what has happened over the past decade or so. There are plenty of cryptocurrencies that have very little demand and are oversupplied. Because of that, supply and demand says that they will not have much monetary value at the current time, so choose wisely.
When you think about money, you probably envision cash you can hold in your hand. Even the funds stored digitally in your bank account can be redeemed for physical cash. Cryptocurrency is different.
It’s entirely digital, and there’s no way to redeem it for cash other than to exchange it for a more traditional currency. How can we determine that cryptocurrency has any value if it is nothing more than computer code? The people who use cryptocurrency, rather than a government that issues it, decide that it has value.
Plenty of people will contend that because cryptocurrency is not backed by a federal reserve or national treasury or does not exist as cash, it doesn’t have any real value. They may have a point. There are downsides to cryptocurrency and the lack of government regulation exacerbates these downsides. However, they also ignore the principles of economics that cryptocurrency follows.
The fact is that cryptocurrency has increased in monetary value steadily over the past decade. Whereas one Bitcoin used to be worth a fraction of a penny, it’s now worth tens of thousands of dollars. The value of Bitcoin and other cryptocurrencies is very volatile mainly due to the lack of a federal reserve. But the fact remains that if you own one Bitcoin, you can trade it for a substantial sum of money.
The brains behind the development of cryptocurrency belonged to Satoshi Nakamoto. We don’t actually know who he really is. The name is a pseudonym and the real Nakamoto has yet to stand up and reveal himself. Nakamoto never set out to create a new currency form that has any actual value against the dollar. He was building a technology called blockchain, and he used Bitcoin to develop it.
Initially, Bitcoin was just a gamers’ side interest who thought that the new blockchain technology was pretty cool. As Bitcoin gained popularity through various online forums and the development of “wallets” to store people’s bitcoins, it began to acquire cash value. People began to see that Bitcoin may present an alternative to some of the financial problems the world was facing.
The economic recession that began in 2008 was the result of unethical banking practices. In the late 1990s and early 2000s, a few banks started offering subprime mortgages to people the lenders knew could not afford to pay back the mortgages.
The mortgages came with adjustable interest rates, so within a few years, the mortgage skyrocketed interest rate so that the monthly payments doubled or tripled. So many people defaulted on their homes and experienced foreclosure that the entire housing industry went into a crisis. The reverberations were felt worldwide, not only because of unethical banking practices in the United States. Banks in Iceland, the United Kingdom, and many other countries had also engaged in corrupt practices.
In 2009, when Bitcoin first debuted, the global economy was still in a freefall. The people who saw Bitcoin’s potential recognized it as a means of preventing the unethical banking practices that had caused the recession. Despite being unregulated, Bitcoin used blockchain technology that prevented the currency from being hijacked by bankers. Blockchain is a distributed technology, so each transaction has to be verified by multiple computers worldwide rather than a mortgage broker.
In the wake of the financial crisis, governments worldwide began pumping money into their economies to keep them afloat while introducing more and more regulations. Bitcoin users saw these fiscal policies as unsustainable and unhealthy for economic growth and unable to prevent a future economic meltdown. The answer seemed to be a move away from government-backed traditional currencies in favor of a more decentralized economic system. In other words, Bitcoin.
Before the currency began to gain in popularity, the first generation of Bitcoin users exchanged it on online forums for fun. They were mostly interested in what blockchain technology could do and how it could be implemented. Some people exchanged bitcoins for small services.
A year after Bitcoin’s creation, its monetary value was still a fraction of a cent. This value was determined by the first Bitcoin transaction when someone offered 10,000 bitcoins to whoever would order him a pizza. With the pizza costing $25, one bitcoin’s initial value was established at one-quarter of one penny. Today, that transaction would be worth well over $100 million.
Bitcoin, which was released in October of 2008, set out not to create a new economic system but rather a blockchain technology. Blockchain would make a business’s practices more transparent to prevent another financial meltdown. This technology works by time-stamping a digital transaction and sending that transaction to multiple computers for verification. It is designed so that those transactions cannot be reversed or monopolized.
Because many different computers verify them, there is no single entity in control. As such, blockchain presents a more democratic means of running programs and managing accounts. Today, the usefulness of blockchain is being explored far beyond the world of cryptocurrency. Banks, technology firms, and many other industries have adopted blockchain or are looking at how they can adopt it to improve their business.
Naturally, cryptocurrency didn’t stop with Bitcoin. Several others created other types of this interesting form of paying for things online. Vitalik Buterin was a Bitcoin enthusiast and programmer who realized that the potential of blockchain technology and cryptocurrency went far beyond a few microtransactions among computer programmers.
He developed a program called Ethereum, which runs a series of decentralized applications. Anyone with sufficient programming knowledge can build an app on Ethereum, and using those apps requires a cryptocurrency called the Ether.
The internet is heavily centralized, and many governments have taken steps to regulate it. While some regulations may be necessary – such as measures that protect children – others are seen as glorified attempts at censorship.
Because Ethereum runs on a blockchain, it cannot be censored, and none of the data on it can be erased. Ethereum has revolutionized the internet by providing a means around government attempts at censorship and making transactions publicly available.
Is cryptocurrency sustainable over the long term? Quite possibly. Some of the more enthusiastic cryptocurrency users suggest that it is the only economically sustainable model over a long time. And the value of some of the most prestigious cryptocurrencies has steadily gone up despite crashes and swings along the way.
The promises of cryptocurrency include that it will remain unregulated. That means, it will not be subjected to unethical or unsustainable fiscal policies such as ones of the 2008 economic meltdown. Many people who hold cryptocurrency believe that should another breakdown occur, their financial futures will remain secure.
Bitcoin and the Ether are far from the only cryptocurrencies that are available. There’s DigiByte, founded in 2014 to make transactions faster than Bitcoin. Maker is the cryptocurrency that supports the Maker digital ecosystem, and Binance Coin underpins the Binance cryptocurrency exchange.
There are hundreds, if not thousands, of other cryptocurrencies on the market. None of these other cryptocurrencies have come close in value to Bitcoin or the Ether. However, those at the top of the market and with the greatest public visibility have seen steady increases in value over the past few years.
You may be wondering if just anyone can create a cryptocurrency. The answer is yes. Anyone who has the programming knowledge to create a blockchain app can get onto Ethereum or a similar program and build an app that uses a particular cryptocurrency.
But creating a cryptocurrency is not the same thing as making a cryptocurrency with value. Very few have actual value, and several cryptocurrencies appeared to be gaining value but ultimately failed. The cryptocurrencies to look for are those that have sustained growth over a period of several years.
Litecoin was developed in 2011 as an alternative to Bitcoin. As the first cryptocurrency and the pioneer in using blockchain, Bitcoin came with its share of problems that would need to get worked out by later generations. Changing Bitcoin protocols is extremely difficult, so one way to improve Bitcoin is to create a new cryptocurrency altogether.
Litecoin was designed to run similarly to Bitcoin while smoothing out some of its challenges, including its long processing times. While one Bitcoin transaction takes about 10 minutes to process, Litecoin transactions only require 2.5 minutes. Charlie Lee, the creator of Litecoin, also designed it to have four times as many tokens available as Bitcoin, making it less prone to the bubbles that have plagued Bitcoin.
Ripple is an oddity among cryptocurrency. Many cryptocurrency users prefer to use the digital economy instead of traditional banking institutions, thanks to ideologies that support unregulated financial transactions and public data availability. It was designed to facilitate transactions within banking institutions, so it is a bit of a “middleman” between cryptocurrencies and traditional banks.
Ripple is needed because banks are adopting blockchain and need some form of cryptocurrency to process blockchain transactions. The value of Ripple has been steadily increasing, and its adoption by traditional banking institutions makes its long-term success more likely. People looking to invest in a cryptocurrency that has a sustainable future may want to look at Ripple.
The Internet of Things is a means whereby different machines can communicate with each other without human input. The development of the Internet of Things uses blockchain to enable different devices to exchange data.
Blockchain transactions require a digital token – cryptocurrency – to be processed, and the cryptocurrency that was developed specifically for the Internet of Things is called the IOTA. Like Ethereum and Ripple, IOTA serves a utilitarian purpose that other cryptocurrencies, such as Bitcoin and Litecoin, cannot. IOTA may be a cryptocurrency worth investing in, as the Internet of Things seems to hold more promise than speculation.
DogeCoin features the image of the dog Shiba Inu from the “doge” Internet meme. The currency began as a joke and its creators never intended for it to be worth much. They built the program to create so many Dogecoins that supply would always exceed demand so the monetary value would always remain low.
But Dogecoin built up a surprisingly large internet following and it did gain monetary value. The Dogecoin community has a reputation for being lighthearted and using their cryptocurrency to support good causes, such as providing clean water. In 2014, the Dogecoin community pooled their cryptocurrency funds and paid for the 2014 Jamaican bobsled team to go to the Winter Olympics.
The vast majority of cryptocurrencies are worthless. They were designed to facilitate transactions on a single program, and unless that program becomes valuable (most will not), that cryptocurrency will never gain value. But there are quite a few cryptocurrencies that have real-world value.
They are not just a medium of exchange by enthusiasts in online forums who exchange bits of computer code. They can be and have been used to solve real-world problems, from facilitating traditional banking transactions to paying for a team to compete in the Olympics. Cryptocurrency has far exceeded anything Satoshi Nakamoto could have anticipated.
Most retailers still only accept traditional currency. However, some retailers do allow for cryptocurrency payments. Overstock.com, Microsoft, and BMW are just three of the dozens of companies that accept Bitcoin payments.
While you can’t use Bitcoin to buy products on Amazon, Purse is an escrow service that enables users to use their bitcoins to buy things on Amazon. Individual vendors on Etsy can allow Bitcoin to be used as payment for their products, and some online marketplaces are exclusive to Bitcoin users.
While the acceptance of cryptocurrency by traditional retailers is promising, don’t expect to see the day that cryptocurrency payments are universal. One reason is that many cryptocurrencies are worthless, have always been, and always will be. Other cryptocurrencies have held promise but failed to acquire real-world value.
And many retailers are simply unaware of the cryptocurrency world. Those who accept cryptocurrency want to build up their own accounts of cryptocurrency so that they can be part of its massive growth in market value. There probably would be more retailers accepting cryptocurrency if they were aware of its presence.
The exchange rate of cryptocurrency is still extremely volatile. Even Bitcoin, which has been around the longest and is the most stable, is still prone to booms and crashes in value. There is no guarantee that it will not continue to hit market bubbles.
The Ether, which has a real-world application and is more stable than many other cryptocurrencies, can still lose half its value over a concise amount of time. In some ways, accepting cryptocurrencies as payment feels like prospecting for gold instead of adding money to the bank.
The fact that some cryptocurrencies promise such large returns is a huge red flag to many would-be investors. Any promise to double your investment quickly is almost always a scam. Within Bitcoin’s history, there have been numerous embezzlers who have designed programs to hold people’s Bitcoins, with the promise that they will double their value. These pyramid schemes collapse and devastate the holdings of the people who deposit money into them.
Because there is no regulation in the cryptocurrency world, finding these scams and prosecuting them is extremely difficult. For a national government to attempt to break up a cryptocurrency pyramid scheme, it must first acknowledge the reality of cryptocurrency. Many governments have been unwilling to do so. The best way to avoid cryptocurrency scams is to do your homework. Make sure that the cryptocurrency itself is reputable and has a strong history. Look out for promises to double, or triple your investment quickly. Also, never invest more money than you’re willing to lose.
Cryptocurrency itself is not a scam despite being decentralized. This makes it very difficult for scam artists to manipulate. Cons are much easier in a centralized system that focuses on one person or entity.
Still, not everything is rainbows and unicorns in the world of cryptocurrency. One of the biggest drawbacks is that their values are extremely volatile. They can double or halve their value within a matter of hours. The volatility alone makes many investors see them as unfit for long-term gain.
Regulation refers to laws that hem in the practices associated with a government’s currency. The United States government is constantly issuing policies to regulate the dollar. It changes interest rates to protect the dollar’s value, and it implements tariffs on foreign goods to keep the dollar strong against other national currencies.
Because cryptocurrencies have no central entity governing them, they are entirely unregulated. There are no laws that govern it. People have used them for illicit means, such as in the infamous Silk Road scandal. Furthermore, others used them to develop an entire economy separate from national economies.
Those with a libertarian mindset who believe that the government should intervene as little as possible into the lives of individuals and society, see the lack of regulation in the cryptocurrency world as a huge bonus.
Those who use cryptocurrency are not beholden to fiscal laws that govern the dollar’s use, so cryptocurrency provides more freedom. Cryptocurrencies are also much less prone to the unethical banking practices that precipitated the 2008 financial crisis and the government’s response. They may ultimately be more immune to economic downturns than traditional currency.
Regulation is not always a bad thing. Environmental laws that politicians implemented in the 1960s and 1970s helped clean up rivers and lakes that were becoming too toxic for the ecosystems. The Clean Air Act helped clean up the smog that was devastating big cities around the country.
While some see the economy’s regulation as a bad thing, others see some rule as necessary to provide protection. While some fiscal policies, especially those that the government implemented following the 2008 recession, have been disastrous, others have been helpful. Some proponents of fiscal regulation are concerned about what the unregulated crypto-economy means for the economy. Cryptocurrencies are much more prone to use on the black market, and having unregulated currencies that are continually crossing national borders could impact the traditional economy.
Junk economies are in such a catastrophic state that there is little chance that the country will recover without substantial international help. Failed states such as Somalia, Yemen, and Venezuela have junk economies that will likely never improve unless they begin using another country’s currency.
Cryptocurrency cannot save an entire economy. However, it can provide a means for some individuals in these junk economies to escape poverty. If someone can buy cryptocurrency while its value is low and watch its value go up, they will start building wealth.
A decade ago, one bitcoin was worth less than a penny. Its value did not increase up to a dollar for a good while after. However, it did not look back once it began growing. There were bubbles and crashes along the way. Nevertheless, what was once a fraction of a penny is now worth tens of thousands of dollars.
The same holds with the Ether, whose growth has been slower and steadier than the bitcoin but has still trended upward. Litecoin and many other cryptocurrencies have also seen a positive change.
When you open a bank account, you have to provide your real name and documentation. Why? So that the bank can be sure that the person holding an account there really is you. With cryptocurrency, however, users remain completely anonymous. Users’ information is encrypted. But the blockchain’s data is publicly available. Furthermore, users have their own IDs rather than their own names associated with their accounts.
No one can track who a single cryptocurrency user is. Case in point? We still don’t know who Satoshi Nakamoto is, even though he has historically held a substantial number of the bitcoins in circulation. If we could trace a person’s identity through blockchain, we would certainly have identified who started the whole thing.
The Silk Road scandal provided a lot of exposure to the emerging world of cryptocurrency. At the same time, it also caused a lot of bad press. Silk Road was a website that exploited Bitcoin’s anonymity to sell illicit products, including illegal drugs. People who used the website could buy those products without divulging their true identities.
When the scandal came to light, those who had created the website faced prison terms. The government began to ask serious questions about how it should handle the emergence of the crypto-economy. People might have otherwise been interested in Bitcoin and other cryptocurrencies. But they decided that they did not want to be a part of it. You know, something that people might consider the black market. Still, in the years following the Silk Road scandal, studies have shown that most of the use of Bitcoin and other cryptocurrencies has been for basic goods and services, not illegal drugs.
One benefit that cryptocurrencies provide is that they are tax shelters. True, the dollars you earn and use to buy the cryptocurrency will eventually get taxed. But as the cryptocurrency itself increases in value, and as you use cryptocurrencies to buy more cryptocurrencies, they cannot tax that money.
Governments have tried to implement methods of taxing cryptocurrencies. Some wallets that people use to hold cryptocurrencies have conceded to tax laws and issue tax documentation. However, others have upheld the anonymity that is intrinsic to the crypto-economy and evaded efforts at taxation.
Despite the benefits of cryptocurrency, it is not a panacea for all of the world’s financial problems. There are certainly some enthusiasts who see it as the global market’s future. But people may overstate that usefulness. One reason why cryptocurrency benefits may be overblown is that many people buy cryptocurrency and hold onto it just to be part of its increasing value. If all that cryptocurrency does is increase in value, then it really is nothing more than a bubble waiting to crash.
Investors have to tie the value of cryptocurrency to its real-world usefulness, not just its ability to increase in value over time. As long as it is useful in blockchain transactions to develop blockchain apps and the Internet of Things, it will maintain value. But it will likely never overtake traditional currency.