By Medha Rijal
Introduction
We synonymously use terms such as Bitcoin, Ethereum and Dogecoin but how many of us are aware of these currencies? If I walked into a room, how many people could I expect to trade in cryptocurrencies? How has the cryptocurrency market evolved over a considerable period of time? What is the future of cryptocurrencies?
Well, all these questions resonate with one point which states that investors are still not comfortable with cryptocurrencies. I have had multiple conversations with people who understand finance but are not comfortable with investing in cryptos.
Ever since the inception of cryptocurrencies, there has been an emergence of different kinds of digital currencies. It was in 2008, that a paper was anomalously shared by Satoshi Nakamoto. True to its title, “Bitcoin : A Peer To Peer Cash Electronic System” it explained the technology by which bitcoin functioned.
With a market capitalisation of ~$1 trillion, Bitcoin was the first form of virtual currency to be traded and is now valued ~400% higher than what it was six months ago. There are other cryptocurrencies such as Ethereum and Litecoin, however these do not stand a chance to the value that bitcoin holds. Even though Ethereum has the second largest market capitalisation, it has only 19% of the market capitalisation that Bitcoin currently stands at.
With a surge in the value of cryptocurrencies, investors want to understand the nuances around virtual money. Do cryptocurrencies have a promising future ahead? What are the steps that global governments are taking to get a better hold on these currencies? Are cryptocurrencies going to eventually replace fiat money?
What Are Cryptocurrencies ?
Cryptocurrencies are like real money but are present in a digital monetary form. It is digital money that is encrypted by a set of transactions and stored in a public digital ledger known as blockchain. These currencies are encrypted with a specialised computer code known as cryptography. Cryptocurrency is designed like a puzzle, making it difficult for hackers to crack.
Just like the dollar or the Indian rupee, cryptocurrency is also a form of a currency but it is designed in order to exchange digital information. These currencies are not bound by the rules and regulations of traditional banking so the regulations of SEBI and the RBI do not apply while dealing with a bitcoin or an Ethereum. The transaction is solely between the buyer and the seller.
Bitcoin is the most common type of cryptocurrency traded in the market. This was the first cryptocurrency to be introduced in the market. 40% of the cryptocurrency market is comprised of bitcoins.
It was in 2010 that a bitcoin was used for the first time. This was a transaction where two pizzas were bought in exchange of 10,000 bitcoins. This was the first time that the value of a bitcoin was attached to cash.
The process of creating new bitcoins is known as mining. It is an interesting fact to note that there are only 21 million bitcoins in the market. Of these 21 million bitcoins, only ~18.5 million coins are mined and the remaining 2.5 million are left. The logic behind this is that if there are less bitcoins and more people, the demand would be higher for these coins which would automatically result in a higher price.
The Future Of Cryptocurrencies – Types Of Cryptocurrencies
If we were to look into statistics there are more than 10,000 different types of Cryptocurrencies. As per data quoted by Statistica, there are more than 7 million active users of bitcoin as of September 2010.
Bitcoin is the oldest and has the largest market capitalisation in comparison to all the other cryptocurrencies. There are currently ~18.5 million bitcoins in circulation.
| Currencies | Price ($) | Market Capitalisation ($) |
| Bitcoin | 49,208.60 | 907 billion |
| Ethereum | 2188.62 | 247 billion |
| Binance Coin | 481.34 | 72 billion |
| Tether | 1 | 49 billion |
| Dogecoin | 0.2039 | 23 billion |
| Litecoin | 227.64 | 14 billion |
Understanding The Sale & Purchase Of Cryptocurrencies
The selling and purchase of cryptocurrencies dates back to more than a decade. Just like there are stock exchanges for the buying and selling of stocks, there are exchanges which are specifically present for the buying and selling of cryptocurrencies.
An exchange is a portal where investors buy coins in exchange of fiat money. Coinbase and Cash App are two well known cryptocurrency exchanges.
While trading in cryptocurrencies, it is important that we are aware of the different rules and regulations listed down by the country in which we wish to do the trade.
For instance in 2018, the RBI had banned the use of cryptocurrencies by entities in India. Securities & Exchange Board of India(SEBI) in April 2020 overturned this ban where it stated that there was no damage done to the banks regulated by the RBI. As of now cryptocurrencies are not illegal in India but there is no concrete regulatory framework protecting the interests of investors.
To open an account an account holder would need to have his KYC documents in place, a currency exchange account and he should have decided on the method of making the payment.
The Future Of Cryptocurrencies
Although the usability of these currencies cannot be denied, there is still a lot of hesitation when it comes to transacting in bitcoin. The reason for the hesitation of an investor boils down to the fact that these currencies are not regulated by central banks and governments.
In addition to this, still a lot of investors don’t understand how cryptocurrencies work. There are question marks when it comes to the value and benefits associated with it. Even though people invest in the stock market, they are still hesitant to buy a bitcoin. It is the fear of the unknown which deters people from making any kind of an investment in the cryptocurrency market.
A major deterrent is the volatility that is associated with the cryptocurrency market. If we were to refer to data in the past , there has been a rise in the prices of bitcoin by 125% in 2016. The year 2017 saw a rise of more than 2000%. The sudden rise and fall of these currencies makes investors hesitant to invest in cryptos. It is advisable to only invest a small amount which investors can afford to risk as it is difficult to measure the volatility.
The Future Of Cryptocurrencies in India & Global Economies
If we were to examine the Indian economy, it was recently in the month of March that the government compulsorily imposed all companies disclose their respective investments in cryptocurrencies. This move looks positive for the growth of the cryptocurrency market in India as this initiative would bring about transparency in the financial statements of companies.
As per data reported by the Telegraph, there have been recent speculations that the US Treasury might start investigations on money laundering that could possibly take place in different cryptocurrencies. The news resulted in a downfall in the value of bitcoins. As of 18th April 2021, the price of bitcoin fell by 15 pc. This plunge was the largest downfall in the last two months.
The South Korean government had announced on 16th April, 2021 that it will from now onwards implement an enforcement which will track down all activities and scams that involve cryptocurrency. The government is now looking at targeting all illegal activities that took place through digital currencies during the enforcement period from April to June.
Concluding Remarks
If we were to look at the future of cryptocurrencies, credibility and acceptability can increase if policy makers and regulatory bodies are more welcoming. Financial Literacy is one area where the core focus is lacking. People are not aware of the technology so they do not want to be a part of it.
Although there has been considerable growth in the past decade, there are still roadmaps that can make the future of cryptocurrencies favourable to excite investors thereby, leading to an increase in the cryptocurrency network. The jury is still out, but cryptocurrencies have certainly created a stir in the hornets nest as a store of value.
This article is authored by Medha Rijal. She is an active blogger and writes about topics such as financial planning, investments and wealth management.
To read more topics related to women and investments, do have a look at the article, Why Women Should Take Their Own Investment Decisions.
