If you’ve been investing in financial markets then chances of coming across this word are highly possible. So far on our website, we have written plenty of articles about various projects, we’ve explained defi protocols, NFT’s, crypto staking, and a lot more. Even after all that, people who are looking for the basics don’t get to understand the fundamentals and they leave with a mindset of cryptocurrency being too complex for them to understand.
This article is a fundamental explanation of the term ‘Cryptocurrency’ and I’ll try to break it down as simply as possible for everyone to understand even for those who have no background in trading or investing directly. Quite possibly you’ve heard this IPL season from your favorite Bollywood celebrities describing it as the future but what makes them say so apart from huge paychecks?
You see, money as a concept has kept changing forms. People attach emotions with an object that creates value & transforms itself into a currency. A random thought, what makes us think that a piece of paper with some symbols and images saying 100 is worth any goods or services? Even if we think so, who makes those laws and why we trust that piece of paper?
Bitcoin boom in 2017
Ever since it reached $20,000 in the year 2017, it has grabbed attention of many tech savvy folks and investors. Although the next bear market ended up destroying homes and lifesavings of people, the market has been growing pretty fast since then. In 2020 alone, the total value locked in defi space grew from less than $1 billion dollars in 2018 to over $100 billion dollars today. Higher risk and returns have managed to grab the attention of young investors and people who are willing to opt for a slighly more riskier alternative over bank savings.
In 2021, we have platforms offering staking services for stablecoins providing upto 12% annual yields. That’s in US dollars and all of those platforms are backed by insurance providers. Platforms like Aave and Compound are working as banks on the blockchain. There’s no one physically present to accept deposits & withdrawals or lend money to people but that’s happening all using Smart Contracts.
Crypto exchanges have grown rapidly across the world and especially in India where the charges for buying Bitcoin or other digital assets have gone down drastically. Anyone who’s willing to put in their money can start with as low as Rs 100 at minimal or almost zero fees. Binance for example, even makes their own cryptocurrency cards and offers savings plan to people who can earn interest on their idle crypto assets.
If someone has read this far, you may be wondering what on earth is a cryptocurrency?
‘Crypto’ & ‘Currency’
The word ‘Crypto’ stands for cryptography. A cryptocurrency uses cryptography to secure, validate and make monetary transactions. No individual or organization controls the issuance and creation of these assets. That being said, there’s an exception here as well with the case of stablecoins. Bitcoin for example, has a fixed predecided supply of 21 million within it’s code. Not any single person, government or entity can change that alone. That makes it an exceptionally good store of value as the government can’t devalue Bitcoin by printing more Bitcoins.
Now you might be thinking how is all this conducted fairly? There we have public blockchains. Every single transaction made on the network has a transaction hash attached to it. Anyone and everyone in the world can see what’s happening behind the curtains. Bitcoin’s peer to peer network is very similar to how torrents work. There’s no middleman in between to control the value transfer, it is two parties anywhere in the world making transactions instantly 24/7.
The word ‘currency’ has a lot more terms attached with it. People might say that real estate is a good store of value but that can’t be used as a currency. Nobody can carry buildings inside their pockets. Gold can be a good store of value but we can’t buy a Rs 10 biscuit with Gold. Currency is something that’s divisible, widely accepted by people as a medium of exchange and recognised as a legal tender by the government. Hence, the veterans suggest people to consider Bitcoin as an asset and not as a currency.
Why should anyone invest in Cryptocurrency?
- If you are concerned about Government destroying your wealth by printing more money, you should look for alternatives which are Hard Money that can’t be faked by anyone.
- If you want to diversify your investment portfolio beyond traditional stocks, bonds and mutual funds, then Cryptocurrency could be your next destination. However, I won’t suggest investing beyond 5-10% of your net portfolio in high risk assets like cryptocurrency.
- If you want to send money overseas or to a friend within minutes, then stablecoins like USDC, USDT or BUSD can be helpful for you. Freelancers can also get paid from their clients using these options. We’ll make a separate article on stablecoins but for now, it is just a dollar pegged cryptocurrency.
- If you want to experiment with a new form of investment, then Cryptocurrency could be certainly an area to explore. People can join in and vote on proposals raised on a DAO, or lend their crypto assets to somone specifically at their own will. Blockchain makes it all transparent and visible for everyone.
- If you want to play games like Axie Infinity or Decentraland then you must be a part of the cryptocurrency industry.
Apart from these there can be many other causes for which people start investing in cryptocurrencies. In nations like Argentina, Zimbabwe, Lebanon, etc with inflation rates going beyond 40% each year, hard assets like Gold, Bitcoin, Silver act as a hedge to protect the savings of the people from getting eroded overnight.
Whenever the Central banks start printing money in form of Quantitative Easing or bailouts, generations of wealth stored in fiat money gets diluted. In the long term, there looks no certain future with Fiat Currencies but with Bitcoin that keeps falling shorter in supply every four years, the dollar, euro, yen, INR all are getting softer every day and Bitcoin keeps getting harder. Be wise and start stacking sats.