Cryptocurrency as you probably know is a virtual currency that means there’s no physical coins or bills and these currencies can be exchanged between two individuals without the need of any trusted third party involvement like the Banks etc. It is “Decentralised” meaning a Ledger in form of Block chain is used to record transactions and these records are publicly available to verify the ownership of the currency so it cannot be counterfeited.
The main features of a cryptocurrency are :
Trustless: This means that nobody has to trust anybody for the system to function. In regular currencies (fiat currencies) people have to trust the central authority to make the right decisions and this can become a weakness which might cause a problem as seen in few parts of the world, this weakness does not exist in cryptocurrencies because all the transactions are publicly verifiable.
Decentralised: It means that since the transactions of the cryptocurrencies are recorded and verified in blockchain which is publicly available it is nearly impossible to manipulate the transactions or create new bitcoins.
Verification: Cryptocurrency transactions require two factor authentication, they are also time stamped and verified by miners.
Immutable: It means that nothing can be changed, once the process starts since there is no central or third party authority, it cannot be manipulated unless the entire network all over the world is compromised.
All of these features make cryptocurrencies the safest mode of monetary transactions.
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Types of cryptocurrencies:
There are more than 7,000 cryptocurrencies on the market today and listed below are the most popular ones in terms of Market cap.
Bitcoin:
Bitcoin was the first blockchain based cryptocurrency which was introduced in 2009 by Satoshi Nakamoto and is still the most popular and valuable cryptocurrency. There is only a finite number of Bitcoins available which is about 21 million of which 18.5 million have already been mined thus making it a rather scarce commodity. Mining of a Bitcoin is similar to auditing as miners verify the legitimacy of transactions in a Block of the Blockchain and get a chance to get bitcoin as a reward in exchange there by providing an incentive to prevent “Double spending”. As of now Bitcoin value is at an all-time high of about $33,000 with a market cap of more than $600 billion. Bitcoin has 79% of the cryptocurrency market share and this gives it a worldwide acceptance that other lesser known rivals don’t have, making it one of the best options in cryptocurrency.
Ethereum:
Ethereum is the second most popular cryptocurrency with respect to market cap. Ethereum is an open source, blockchain based software platform which has its very own currency called Ether. It has a market cap is more than $80 billion as of 2020.What makes Ethereum different is that it has its very own programming language which can be used to create applications and It also supports other cryptocurrency exchange on its platform. One of the main features of a crypto currency is that it is decentralized and Ethereum takes this decentralization to a new level by not only decentralizing the money but also has its applications.
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Tether:
Tether is another Blockchain based cryptocurrency which was first launched in 2014 but started trading in 2015.What makes tether different from other cryptocurrency is that it is backed by other fiat currencies like the dollar, euro or Japanese yen etc. Tether was introduced to be kind of a bridge between fiat currency and cryptocurrency and its valuation is maintained at 1to 1 ratio of US dollar, the reason for the introduction of tether is a reduce the volatility generally associated with crypto currencies like Bitcoin and Ethereum and this new breed of crypto currency is generally known as “Stalecoins”. Stalecoins are one of the major source of liquidity in the cryptocurrency market.
Tether has a lot of controversy surrounding it, one of them is has the owners have not yet legally guaranteed that tether will be exchanged with US dollar.
Among the many cryptocurrencies Bitcoin is the most popular and is synonymous with Crypto currency
Though cryptocurrency seems like the best form of currency available it’s not without any drawbacks, the anonymity and the security provided by the cryptocurrencies make it an ideal currency for online illegal activities like money laundering and buying illegal goods and services. The governments around the world are finding it very difficult to impose regulations to prevent such activities because of the inherent nature of cryptocurrencies and this is also a reason cryptocurrencies are viewed with such scrutiny.
Is crypto currency an asset class to invest in? Well the answer is a “Yes” and “No” . Cryptocurrencies have been a controversial asset class, what we have to understand is that its not possible to arrive at the intrinsic value of cryptos , and the price of cryptos is primarily driven by FOMO, i.e. Fear of missing out.
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Here are few facts that has made cryptos especially Bitcoins rally…
1. Fidelity launched a passive bitcoin-only fund last year through Fidelity Digital Assets.
2. PayPal enables its users to buy sell and hold cryptocurrencies in Oct 2020
3. As per PWC Crypto Hedge fund report that the total AuM of crypto hedge funds globally increased to over US$2 billion in 2019 from US$1 billion in the previous year
All said and done its going to be extremely risky for retail investors to invest their money either for short term or long terms goals, however if you are the adventurous type you may dabble with cryptos with a small portion of your savings, Whereas if you are an HNI investor you may allocate a portion of your assets that is dedicated to exotic asset classes.