Chances are, you’ve heard of cryptocurrencies; Bitcoin, Etherium, there are a number of names for these new and popular currencies. But what exactly are they, how did they start, what do they do, and why is there such a fervour around them? This month we will dive into all of these questions as we step back and take a look at the evolution of cryptocurrencies.
Please note, this is not intended to influence any financial decisions with regards to purchasing cryptocurrencies, this is purely educational content designed to inform you about this topic.
What exactly is Cryptocurrency?
Put in the simplest terms: a cryptocurrency, or “crypto”, is a digital currency. It can be used to buy a select range of goods and services, most notably a Tesla in the United States. However, most of those who invest in cryptocurrencies do not do so to purchase goods and services with them, it is to buy into a commodity (of a kind) that has value they’re betting will go up.
Think of cryptocurrencies as digital tokens. These tokens go up and down in value, depending on market sentiment. The tokens themselves do not carry any intrinsic value, they aren’t like gold or silver, or copper. They are a very volatile, and yet very popular investment vehicle.
You’ve probably heard of Bitcoin, the most prominent and expensive type of cryptocurrency. Bitcoin has risen to incredible popularity and value, with some investors tipping that it’ll reach $100,000AUD per single token by the end of the year. However, cryptocurrencies are an unregulated financial space currently, which means investors need to have a high-risk tolerance, and not be afraid to lose the money they invest.
How did Crypto start?
Bitcoin, the original cryptocurrency, was first launched in 2009. The coins, and the Bitcoin system itself, was designed to mimic a cash transaction, but in a purely electronic manner. It was designed to facilitate easy person-to-person transactions without having to go through a formal bank, or a central monetary system. The coins were designed without any assigned or intrinsic value, and since 2009 their value has been determined by how much traders are willing to pay for it. Theoretically, this means Bitcoin, and any other cryptocurrencies, could fall to $0 value per token if the market deems them worthless.
Bitcoin was the first cryptocurrency and is by far and large the most notorious. One of the defining features of Bitcoin is that there is a limit to the number of coins that are available, capped at 21 million coins. However, each of these coins can be subdivided into a million sub-coins, also known as Satoshi’s.
So, how does Cryptocurrency work?
As we’ve outlined, cryptocurrencies are digital tokens, commonly mistaken for a form of electronic money- which they are not. Crypto cannot physically exist as coins or notes, and the value is linked to market sentiment. These tokens are created from a code using an encrypted string of data blocks, known as a blockchain.
Blockchain is a decentralized technology spread across many computers that manages and records transactions. This is part of the appeal of Cryptocurrency; it is incredibly secure and near untraceable. This is also what gives regulatory bodies and federal authorities caution, as it creates a huge opportunity for illegally moving money.
Is Crypto Money?
In short, no, cryptocurrencies are not money. They are tokens that are assigned a value depending on market sentiment. It cannot be used to pay for, and accept payment for, many goods and services. Some countries, such as Russia, are in favour of it becoming a recognised monetary policy, however the Australian Government has not yet released any such statement.
Cryptocurrencies can be used to make payments in some select situations, such as buying Teslas in the US, however currently in Australia we do not have such arrangements for any goods and services. The purchase of cryptocurrencies at this stage would be purely as a high-risk investment, to see how high the price could go.
So why is Crypto so popular?
Cryptocurrencies are a very popular investment vehicle currently, appealing to a huge demographic for a number of different reasons, such as:
- Some speculate that cryptocurrencies will be true monetary currencies in the future and are racing to buy them before they become more valuable, and more costly.
- Many supporters and investors like crypto because it removes central banks from managing the money supply, with the hopes that cryptos will outpace inflation.
- A large portion of spectators and investors believe that cryptocurrencies will continue to go up and up in value, and they see it as a way to grow their wealth.
Are cryptocurrencies a good investment?
This really depends on your risk tolerance, your understanding of currencies, and your unique financial situation. There is lots of speculation that cryptocurrencies will go up in value, but there are also many investors who see this as pure speculation. It ultimately comes down to your personal stance, and whether or not you believe investing money into cryptocurrencies is a sound financial decision for you.
If you’re after more information on the topic then check out this webpage from the RBA, it is full of great information on Cryptocurrencies that can help inform any financial decisions you make.