Let us start with a simple definition of cryptocurrency; a cryptocurrency is a form of digital money secured by cryptography which makes it nearly impossible to counterfeit or double-spend.
Most cryptocurrencies run on decentralized peer-to-peer networks based on blockchain technology. In contrast with fiat currency, there is no need for central bank authorities or any major government in charge of control, issue, and regulation of this form of money.
A fiat currency is government-issued, legal tender with value because the government says so, managed by central banks, giving them greater control over the economy because they can dictate how much money is printed. Paper currency is not backed by any commodity and has no intrinsic value, examples of fiat currencies are the U.S. dollar and the Euro,
The point is that the world’s monetary systems have many problems, and some view fiat money as being totally outdated. Here are some facts:
- Around 3 billion people have no access to any banking system, this is almost half of the planet’s population.
- Traditional payment systems such as bank transfers, credit/debit cards, and cheques can be slow and/or insecure.
- Middlemen, like intermediary banks, always take a cut of the process, making transactions costly and potentially sluggish.
This is where cryptocurrencies aim to solve some of these problems through the use of blockchain technology.
The Basics of Cryptocurrencies
As mentioned before, widespread adoption of cryptocurrencies might allow the removal of central banks and intermediaries from the monetary system altogether. The supply and creation of cryptocurrencies are confirmed and controlled by every computer that connects to its blockchain network.
For any type of currency (crypto or fiat) to be valuable, it must have some features, such as:
- Enough people should have it.
- Merchants must accept it as a form of payment.
- Easy for transactions.
- Society must trust that it has value and will remain valuable in time.
With cryptocurrencies becoming mainstream, it appears crypto is here to stay; offering a valuable alternative with the criteria mentioned above all checked.
Brief History of Cryptocurrency
Everything started back in 2008, with the release of the white paper developed by an anonymous entity under the name of Satoshi Nakamoto, and Bitcoin was born. The first-ever product using blockchain technology was described as a “purely peer-to-peer version” of electronic money.
For those interested readers, allow me to share the original white paper, which describes all the technical details behind it.
Cryptocurrencies like Bitcoin are created through a process called mining. Unlike industrial mining of precious metals like gold, mining cryptocurrencies involves powerful computers solving complicated cryptographic problems (also called “proof of work”). Once the problem is solved, miners involved in the solution get the reward from that block.
Bitcoin was alone until 2011, when Bitcoin enthusiasts started seeing flaws in its design, so they decided to create alternative coins, also known as altcoins, to improve Bitcoin’s design for things like:
Among the first altcoins created was Litecoin, which aimed to become the silver to Bitcoin’s gold. But as of the time of writing, more than 4,500 cryptocurrencies are now available, with a total market cap of around 1.92 trillion U.S. dollars. (source CoinMarketCap)
Key Benefits of Cryptocurrency
There are a number of potential benefits that cryptocurrencies may be able to bring through their decentralized environment:
Eliminating extreme money-printing
Governments have central banks, and central banks print money when faced with a severe economic problem (does this ring any bells). This process is also called quantitative easing.
By printing additional money, a government may be able to bail out debt or devalue its currency. However, many feel this approach is like putting a bandage on an open wounded leg. It rarely solves the problem, but the adverse side-effects can sometimes surpass the original issue.
For example, when a country like Venezuela prints too much money, the value of its currency drops so much that inflation skyrockets, and people can not afford to buy everyday goods and services. Their cash becomes barely as valuable as rolls of toilet paper.
“Most cryptocurrencies have a limited, set amount available. When all the currency is in circulation, a central entity or the company behind the blockchain has no easy way to create more currency or add to its supply.” .- This creates scarcity helping to maintain value over time
Opposite to what we usually hear from the various governments and central banks, cryptocurrencies may help overcome corruption. The 19th-century British politician Lord Acton said it best: “Power tends to corrupt, and absolute power corrupts absolutely.” With great power comes great responsibility. But when we give a ton of power to only one person or entity, the chances of their abusing that power increase.
Cryptocurrencies aim to resolve the issue of absolute power by sharing power among many people or, better yet, among all the network members. That’s the fundamental idea behind blockchain technology.
Eliminating the middleman
Every time we transfer with regular money, a middleman like our bank or a digital payment service takes a cut. With cryptocurrencies, all the blockchain network members are that middleman; their compensation is formulated differently from fiat money intermediaries, and therefore, it is insignificant. As crypto exchange becomes more accepted and commonplace the cost to transfer should continue to decrease.
Reaching the unbanked
A large portion of the world’s citizens have limited access or even no access to banks and payment systems. Cryptocurrencies aim to resolve this issue by expanding digital commerce worldwide so that anyone with a mobile phone or computer can start making payments. And yes, more people have access to mobile phones than to banks. More people have mobile phones than have clean water.
Giving People Custody of Their Own Money
Currently, central banks and governments control traditional fiat currencies. If we trust our government, that’s great, but keep in mind that at any point, the government could potentially freeze our bank account and deny us access to our funds.
Mobile Payments Made Easy
Cryptocurrencies allow us to pay with a simple two-step scan-and-pay. There’s no need to sign up, swipe a card, type a PIN, or sign anything. All you need to receive payments is to display the QR code in your crypto wallet app and let the other party scan your mobile or touch the two phones together (NFC radio technology). No bank to make us wait three business days for international transfers and no limitations on the minimum and maximum amounts.
Cryptocurrency transactions are bound by mathematics and energy. Cryptographic signatures prevent other people from stealing our money. Energy consumed by proof of work (PoW) prevents other people from undoing, rearranging, or losing our transactions. So long as we take the required steps to protect our wallets, we can be protected against many types of fraud.
Protect Our Identity
Last but not least, we can send payment without revealing our identity. Therefore, malicious actors cannot collect sensitive information to steal from us, as when we use credit cards.
How Does it Work?
The basics for a new user is to:
- Inform yourself
- Choose your wallet
- Obtain the cryptocurrency
- Spend or hold (hodl) the cryptocurrency
Let us take as an example the principal cryptocurrency -“Bitcoin”-
- Balances – blockchain: The blockchain is a shared public ledger on which the entire Bitcoin network relies. All confirmed transactions are included in the blockchain. It allows Bitcoin wallets to calculate their spendable balance so that every new transaction can be verified, thereby ensuring the spender owns what they are spending. The integrity and the chronological order of the blockchain are enforced through cryptography.
- Transactions – private keys: A trade is a transfer of value between Bitcoin wallets included in the blockchain. Bitcoin wallets keep a secret piece of private key or seed used to sign transactions, providing mathematical proof that they have come from the wallet’s owner. The private key also blocks the transaction from being manipulated once it has been issued. All transactions are broadcast to the network and usually begin to be confirmed within 10-20 minutes through a process called mining.
- Processing – mining: Mining is a distributed consensus system used to allow the confirmation of pending transactions by including them in the blockchain. It enforces a chronological order in the blockchain, preserving the network’s impartiality and allowing different computers to agree on the system’s state.
To be confirmed, transactions must be packed in a block that fits stringent cryptographic rules that the network will verify.
These rules prevent previous blocks from being modified because doing so would invalidate all the subsequent blocks. Mining also creates a competitive sequence that prevents any individual from quickly adding new blocks consecutively to the blockchain.
In this way, no group or individuals can control what is included in the blockchain or replace parts of the blockchain to roll back their spending.
Relevant Facts about Crypto
- The first transaction ever recorded to prove the concept of the value stored in Bitcoin to exchange for goods and services was on May 22nd of 2010. The programmer Laszlo Hanyecz paid 10,000 Bitcoins for two Papa John’s pizzas. The date is now celebrated in the crypto calendar as “Bitcoin Pizza” Day. At today’s price, Laszlo paid $576,000,000 for two pizzas.
- It was only in 2011 that Bitcoin reached $1 – just 10 years ago from today.
- With Bitcoin trading above $54,000, its market cap has reached 1 trillion USD. In comparison with what it took some technology companies to reach the $1T market cap:
- Microsoft: 44 years
- Apple: 42 years
- Amazon: 26 years
- Google: 21 years
- Bitcoin: 12 years
- In 2021, we can list the following developments:
- Tesla invested $1.5 billion in Bitcoin and announced that customers can now pay for cars with Bitcoin.
- VISA launched credit cards offering Bitcoin as a reward instead of air miles or cash back.
- Paypal launched a crypto checkout service.
- The same major banks that in 2016 claimed publicly that Bitcoin and cryptocurrencies were a great scam are now offering access to Bitcoin to their investors starting from Q2 of 2021, this includes banks such as Morgan Stanly, Goldman Sach, and some Central Banks in Europe, to name a few.
- Kraken CEO Jesse Powell predicts that for 2023 a single Bitcoin may cost the same as one Bugatti (1.5 – 2.5 million dollars)
- As of today, the Top 5 cryptocurrencies by market cap are:
- Bitcoin ($BTC)
- Ethereum ($ETH)
- Binance Coin ($BNB)
- Tether ($USDT)
- Dogecoin ($DOGE)
How to Trade Cryptocurrency?
If we consider the financial market to be like a language, once you learn to speak the language, it means that you are all set.
The cryptocurrency market is similar. If you already trade any other financial instruments and can read price action, well, let me tell you that you can also trade cryptocurrencies.
The price action in the cryptocurrency market behaves as in any other financial instrument, it respects key levels, including Fibonacci retracement and extension, and all technical indicators such as RSI, MACD, Stochastics, and Bollinger-bands.
Now, the advantage is that you can trade it as an OTC product (through the OTC market or crypto exchanges) or as a CFD (with a regulated broker). For instance, at Tradeview Market, we offer the following CFD’s for trading cryptos: Bitcoin (BTCUSD, BTCJPY), Ethereum (ETHUSD) and Litecoin (LTCUSD).
Personally, I started trading cryptocurrencies in 2016; then, starting in 2018, I began to use the cryptos as a long-term investment product. The crypto market can benefit active traders as well as long-time investors.
Remember to never invest money that you cannot afford to lose, and keep in mind that to limit your risk of loss any investment you need to understand not only the risk characteristics of that investment, but also your own risk tolerance.
I cannot be that bold as Kraken CEO and suggest that the Bitcoin price would reach $1.5 M in 2023.
I cannot read the future either, but what I can do is read the charts and suggest a possible (theoretical) trajectory. Bitcoin’s price action from the weekly timeframe shows a clear rising channel. We could forecast the next significant level at around the $90,000 handle through the Fibonacci extension tool and a potential touch of the rising channel’s resistance at approximately the $280,000 handle. These technical projections, however, are just that…projections based on technical analysis.
Chart source: https://www.tradingview.com/x/erO5i9PN/
As you can see, Cryptocurrencies are here to stay and will continue to evolve, get more mainstream, and might even replace paper money someday. However, the best path you could take is to learn the in and outs of Crypto so you can become a better trader and investor.
Senior Market Analyst