Future of crypto currency

A cryptocurrency is a digital currency that is created and managed through the use of advanced encryption techniques known as cryptography. Cryptocurrency made the leap from being an academic concept to (virtual) reality with the creation of Bitcoin in 2009.1 While Bitcoin attracted a growing following in subsequent years, it captured significant investor and media attention in April 2013 when it peaked at a record $266 per bitcoin after surging 10-fold in the preceding two months. Bitcoin sported a market value of over $2 billion at its peak, but a 50% plunge shortly thereafter sparked a raging debate about the future of cryptocurrencies in general and Bitcoin in particular.2 So, will these alternative currencies eventually supplant conventional currencies and become as ubiquitous as dollars and euros someday? Or are cryptocurrencies a passing fad that will flame out before long? The answer lies with Bitcoin.

The Future of Cryptocurrency

Some economic analysts predict a big change in crypto is forthcoming as institutional money enters the market.3 Moreover, there is the possibility that crypto will be floated on the Nasdaq, which would further add credibility to blockchain and its uses as an alternative to conventional currencies.4 Some predict that all that crypto needs is a verified exchange traded fund (ETF).5 An ETF would definitely make it easier for people to invest in Bitcoin, but there still needs to be the demand to want to invest in crypto, which might not automatically be generated with a fund.

Understanding Bitcoin

Bitcoin is a decentralized currency that uses peer-to-peer technology, which enables all functions such as currency issuance, transaction processing and verification to be carried out collectively by the network.6 While this decentralization renders Bitcoin free from government manipulation or interference, the flipside is that there is no central authority to ensure that things run smoothly or to back the value of a Bitcoin. Bitcoins are created digitally through a “mining” process that requires powerful computers to solve complex algorithms and crunch numbers. They are currently created at the rate of 25 Bitcoins every 10 minutes and will be capped at 21 million, a level that is expected to be reached in 2140.7

Alternatives to Bitcoin

Despite its recent issues, Bitcoin’s success and growing visibility since its launch has resulted in a number of companies unveiling alternative cryptocurrencies, such as:

•            Litecoin – Litecoin is regarded as Bitcoin's leading rival at present, and it is designed for processing smaller transactions faster. It was founded in October 2011 as "a coin that is silver to Bitcoin’s gold,” according to founder Charles Lee.13 Unlike the heavy computer horsepower required for Bitcoin mining, Litecoins can be mined by a normal desktop computer. Litecoin’s maximum limit is 84 million – four times Bitcoin’s 21-million limit – and it has a transaction processing time of about 2.5 minutes, about one-fourth that of Bitcoin.14 15

The Future

Some of the limitations that cryptocurrencies presently face – such as the fact that one’s digital fortune can be erased by a computer crash,. What will be harder to surmount is the basic paradox that bedevils cryptocurrencies – the more popular they become, the more regulation and government scrutiny they are likely to attract, which erodes the fundamental premise for their existence.

While the number of merchants who accept cryptocurrencies has steadily increased, they are still very much in the minority. For cryptocurrencies to become more widely used, they have to first gain widespread acceptance among consumers. However, their relative complexity compared to conventional currencies will likely deter most people, except for the technologically adept.

Should You Invest in Cryptocurrencies?

If you are considering investing in cryptocurrencies, it may be best to treat your “investment” in the same way you would treat any other highly speculative venture. In other words, recognize that you run the risk of losing most of your investment, if not all of it. As stated earlier, a cryptocurrency has no intrinsic value apart from what a buyer is willing to pay for it at a point in time. This makes it very susceptible to huge price swings, which in turn increases the risk of loss for an investor. Bitcoin, for example, plunged from $260 to about $130 within a six-hour period on April 11, 2013.18 If you cannot stomach that kind of volatility, look elsewhere for investments that are better suited to you.

Conclusion

The emergence of Bitcoin has sparked a debate about its future and that of other cryptocurrencies. Despite Bitcoin’s recent issues, its success since its 2009 launch has inspired the creation of alternative cryptocurrencies such as Etherium, Litecoin, and Ripple. A cryptocurrency that aspires to become part of the mainstream financial system would have to satisfy very divergent criteria. While that possibility looks remote, there is little doubt that Bitcoin’s success or failure in dealing with the challenges it faces may determine the fortunes of other cryptocurrencies in the years ahead.