The price of Bitcoin in December 2020 hit an all time high of $42,000 attracting in the process a lot of interest from institutional investors to regular investors through to investment noobs and plebs. All of a sudden there is a whole lot of people who want to invest in Bitcoin and by extension any other cryptocurrencies that will give them a huge returns on their investments in the shortest possible time frame, many of these folks do not have a holistic understanding of what is obtainable in the cryptocurrency market and how to go about investing with caution. They just want to make money and this poses a problem.
The year 2017 saw a massive influx of newbies buying Bitcoin at its then all time high price of $19,000 with many of them having to watch the value of their investment reduce as the price of BTC took a negative plunge. It is the year 2021, the euphoria of investing in cryptocurrencies as a means of making some quick bucks is on the rise, just as in 2017 we are going to experience more of these erratic uninformed buying behaviors from newbies even as the valuation for the cryptocurrency market continue to increase.
Just as with any new concept, the best way to always participate and profit is to get proper knowledge and understanding of that concept from first principles. The cryptocurrency space is no exception to this rule, to profit from participating in the cryptocurrency market, a basic understanding of its concept is very vital, explaining this concept is the aim of this article.
Current Financial System
In today’s financial system, only about 8% of the world money is available in physical form, the rest are just generated digitally and the banks are the biggest institutions who digitally produce money. The central Banks in every country hold the monopoly to control the supply of money into the economy, the apex banks thus has the right to print a country’s currency excessively whether to bail out banks or some sort of economic intervention activity just as we saw in the year 2020 with the US Covid-19 stimulus package.
Current financial system also appears to face issues centered around proper documentation databases, there isn’t a proper database system that gives account for each and every currency note that is printed by the Apex banks. If you had your Dollar note damaged or misplaced today, there isn’t a database available to record that and account for it, there is therefore the recurring case of double spend and counterfeit.
The combination of excessive printing by the Central banks and poor ledger databases for these currency use have always led to issues such as inflation which in turn has led to increased economic crises such as The Great Recession of 2008. Since a large percentage of money used in most countries of the world are in digital form as just numbers and records of these number values, why can’t we have a financial system that is fully digital, free from excessive current excessive printing of a central entity and has an open-to-all ledger record of transactions for a particular currency. These ideas are what led to the creation of Bitcoin as well as the whole new world cryptocurrencies.
What is a Cryptocurrency?
The simplest way to define a cryptocurrency is to look at it from the standpoint of a virtual currency, a virtual currency is a digital currency that is only available in an electronic form unlike its fiat currency counterpart that is traditionally available in their physical form. Virtual currencies have been in existence for a long time with the most popular example being Paypal, virtual currencies are largely unregulated and not issued by the Central banks, early virtual currency were known to be centralized.
A cryptocurrency as every other form of virtual currency is transacted and stored through specific softwares. A cryptocurrency is built with an element of cryptography, this element of cryptography is referred to as the blockchain technology. This designated software ensures that cryptocurrencies transactions, transaction records and storage are properly in place in a way that eliminates the prospect of counterfeit and double spend situations mostly experienced with traditional financial systems.
The first successful cryptocurrency is Bitcoin, it was created by a person, or a group of people using the pseudonym “Satoshi Nakamoto” as an open source peer-to-peer currency meaning that all transactions happen directly between participants without the need for any intermediary to permit or facilitate them. Bitcoin also has a maximum total supply of 21 million that hedges against excessive printing in combination with it powered by the decentralized nature of the blockchain technology that makes it open and keeps a trusted ledger of all transactions on the network.
Since the creation of Bitcoin, there has been a rapid rise of other cryptocurrencies such as Etherum(ETH), Ripple(XRP), Binance Coin(BNB) etc. these uprise of new cryptocurrencies have offered new use cases that are totally different from what was initially proposed by the creation of Bitcoin, there should be currently more than a thousand cryptocurrencies available with the cryptocurrency market currently sitting slightly above a trillion dollars market capitalization valuation.
What is Blockchain Technology?
The most important element for the success and hype over cryptocurrencies is the concept of the blockchain technology which powers its working mechanism.
The blockchain is just a database system or ledger that records all the transactions and activities related to a particular cryptocurrency. A simple definition right but what makes this so special? You see there are alot of database systems available today, in accounting, we have what is called Peachtree which is used in recording accounting data in banks and other financial institutions, there is also Excel which is one of the most versatile database systems available, engineering majors will attest to the fact the Matlab software is a database system as well. The blockchain technology as a database system stands out from the rest because unlike others database systems mentioned whenever and whatever data is recorded on the blockchain stays there permanently and can not be edited, deleted or manipulated by a third party.
This singular characteristic of the blockchain technology is what makes cryptocurrencies applications more effective. Blockchains are special also because they are decentralized with no central control but rather data entries are confirmed by a network of different computers.
Basic Characteristics of a Cryptocurrency
Based on the fact that cryptocurrencies are modeled just as fait currencies, it therefore shares some similar characteristics. Understanding these characteristics will help you in making informed decisions when analysing what cryptocurrencies you will be choosing for your investment.
The total supply of a cryptocurrency is the total number of that cryptocurrency that will ever exist once it has been created. For Bitcoin, the total supply is 21 million, this means that only 21 million Bitcoin will ever exist, there is no code function that will allow for the printing of an extra Bitcoin.
Traditional fiat currencies do not have a capped total supply value, therefore making them prone to excessive and most often unregulated printing by the central banks. The concept of having a total supply for cryptocurrencies serves as a hedge against excessive printing that is often common with fiat currencies.
It is worth to note also that the total supply for cryptocurrencies can either be finite or infinite. When there is a cap placed on it such as Bitcoin’s 21 million supply or ChainLinnk’s 1 billion supply, then it is said to have a finite supply. A cryptocurrency supply is said to be infinite when it doesn’t have a cap to the number of cryptocurrency that will exist, there is however a code function that limit excessive printing that hedges against excessive printing and by extension inflation of such cryptocurrency, ethereum is a popular example of a coin with an infinite supply.
The circulating supply of any cryptocurrency is the number of that specific cryptocurrency that is currently in the hands of the public through trading on exchanges as well as those stored on private wallets. The circulating supply differs from the total supply talked about earlier because not all the cryptocurrency supply will come into circulation instantly, this is based on a lot of reasons ranging from blockchain governance model, through to mining difficulty and many others such as tokenometrics. Whatever the case may be , the circulating supply most often has a significant impact on the price of a cryptocurrency.
Cryptocurrencies are now considered as an asset class and therefore it is possible to invest in them through buying them, the money used in purchasing a cryptocurrency goes to make up for the valuation of that cryptocurrency. This monetary valuation is mostly referred to as the market capitalization of that cryptocurrency. The market capitalization of any cryptocurrency is the amount of money vested in that cryptocurrency and is measured through different trading exchanges.
All cryptocurrencies have a price tag they each carry, the price of any cryptocurrency is its perceived value by the market participants. In theory the price of a cryptocurrency is obtained by dividing it market capitalization by its circulating supply but in practice this value is influenced by a lot of activities such as the cryptocurrency use case, team activities, tokenomics and a host of other stuff.
Profitable participation in the cryptocurrency space starts with learning the basics of this whole new industry. It is a very large space with many new applications coming up on a daily basis, therefore a single article will not be sufficient enough to explain these concepts completely as well as dive holistically in current trends.
What remains important is that learning starts from the basics and not the top or randomly and this must go on continuously. This is what will help you in making informed decisions when it comes to investing in cryptocurrencies.