Today, cryptocurrency is the hottest topic in the market. If you had the foresight to invest in cryptocurrencies a few years ago, you would probably be sitting on a goldmine. From uncles in the coffee shop to sophisticated businessmen, everyone is talking about it. Cryptocurrency has become THE global phenomenon.
Yet, despite its popularity today, cryptocurrencies was not invented to be what it is today. In fact, they emerged as a side product of another invention.
The birth of P2P electronic cash system
Back in 2008, Satoshi Nakamoto announced to the world that he had developed a peer-to-peer electronic cash system. Satoshi Nakamoto built a digital cash system without any central entity. Instead of having a central entity, the electronic cash system uses a P2P model.
Every time a transaction is being made, it is recorded on the ledger of every single peer connected to the network. Every peer in the network will have a list of all transactions, to check if the attempted transaction is valid or an attempt to double spend. This network is known as a blockchain, which is often used interchangeably to describe the network.
So, where does cryptocurrency come into the picture?
Like all “cash” systems, there is a need for currency. Currency is essentially a store of value, just like the money or gold that you own. The currency that is used within Satoshi Nakamoto’s P2P electronic cash system is known as cryptocurrency. It is designed to work as a medium of exchange using cryptography to secure the transactions, to control the creation of additional units, and to verify the transfer of assets.
How do you earn cryptocurrency?
In order to earn cryptocurrency, you need to mine for it. Because of the nature of the P2P network, it requires every user on the network to verify transactions made. This requires intensive computing from every user in the network. To attract users to be part of the blockchain, cryptocurrencies are given to those who help to maintain the blockchain as a reward.
Why are people investing in cryptocurrency?
It might actually be the future
One reason why this currency is receiving so much attention is the future that it portrays. The Singapore government has been encouraging businesses to go cashless. While cashless is the next stage of evolution for Singapore, many believe that cryptocurrency is the end-state that most economies will eventually turn out.
Cryptocurrency is the new gold
In the past, gold has been the go-to asset whenever investors are looking to hedge against any form of risk. This is because the market recognises gold as a store of value, even in the event of war. As such, the return of gold has a negative correlation against many other investment assets. With the emergence of cryptocurrency, the market has found a new darling for hedging.
Because of its nature, the value of each cryptocurrency cannot be created or destroyed. This creates a much more valuable hedge, compared to gold. The price of gold is dependent not just on its demand, but also on its supply. Moreover, even for those who are invested in gold, adding cryptocurrency into one’s portfolio creates additional diversification benefits.
Institutional investors are taking notice
According to new data from Fintech research house Autonomous NEXT, hedge funds that trade cryptocurrencies reached over 100 for the first time. Out of these 110 funds, more than three-quarters were launched in 2017. Assets under management across the 110 funds rose to US$2.2 billion.
Wherever institutional investors pump in their capital, it is bound to create waves. Furthermore, since institutional investors are putting their money in it, people interpret cryptocurrency as being a legitimate form of investment. Like every other legitimate investment assets, there is bound to be a long queue of people hoping to dive into it.
This results in a lot of speculation, people who don’t understand the what they are investing in, but nonetheless invest because others are doing so.
People have made a lot of money through cryptocurrency (but recent speculators may have also lost a lot)
Everyday, news outlets would be filled with cryptocurrency-related news and how it continues to break record highs (update: these days it’s all about how it’s going to crash and governments are going to ban it). The rate at which it grew in 2017 made everyone excited about it.
If you’ve been watching the news at all, you would have read about how some early investors have turned into millionaires. The most prominent would be backers of Bitcoin, the largest market cap cryptocurrency.
Those early investors bought into Bitcoin back when it was barely a cent. At its peak on Dec 18, with each Bitcoin worth more than S$20,000, 50 bitcoins would have been sufficient to become a millionaire. Because of how Bitcoin created millionaires, many people are jumping onto the cryptocurrency bandwagon in search of the next Bitcoin.
More recently though, governments around the world have threatened and are contemplating either banning or regulating cryptocurrencies, so as to reduce risks to investors. This uncertainty surrounding the future of cryptocurrency is causing the prices of digital currency to tumble.
Is this the right investment for you?
There’s definitely a high risk involved in cryptocurrency investing. The allure of making a lot of money in a short time has invited many speculators, and as quickly as Bitcoin prices soared in 2017, prices have tumbled following its peak as well.
It’s important to understand the technology behind your chosen currency and what the company hopes to achieve in the future. Knowing why you’re buying into it will help you ride the volatility and keep you from being swayed by speculation.
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