If you haven’t heard of the term cryptocurrency by now, then you’re probably living under a rock. If you have heard of cryptocurrencies before then you probably know about bitcoin and maybe a few other cryptocurrencies (e.g., ethereum, litecoin). Chances are your friends or family members were ranting and raving about why cryptocurrencies are a valuable investment opportunity.
But now most people aren’t ranting and raving about cryptocurrencies anymore especially if they bought their bitcoins after November 2017 i.e. the event horizon for the bitcoin bubble. During November 2017 bitcoin prices hit US$6,300 and continued to climb to a staggering US$19,300 by December 11th and it was all down hill from there.
Now a year later bitcoin is hovering around US$6,270, below where it was a year ago. Many have lost thousands of dollars due to this bubble bursting and has reminded everyone that cryptocurrencies still aren’t currencies.
Currencies don’t have this much volatility unless the country’s economy from which they’re being issued is crashing e.g. Venezuela. A more proper term would be crypto-investment.
A Brief History
Bitcoin was the first cryptocurrency and was originally created in January 2009 by Satoshi Nakamoto, a moniker used by an unknown person or people who created bitcoin. Bitcoin was intended to be a decentralized form of currency that could be quickly transferred electronically without the delays of normal wire transfers.
Not long after, litecoin was released in 2011 becoming one of the earliest spinoffs of bitcoin; other cryptocurrencies followed soon after. Due to lack of government oversight and the possibility for using bitcoin anonymously, bitcoin was quickly adopted as a form of payment on the black market.
Before bitcoin became a mainstream investment option, it was the most used currency for nearly all transactions made on darknet markets for illegal goods and services.
Due to bitcoin being used for illegal activity, governments began to regulate bitcoin and other cryptocurrencies as much as they could which meant regulating the exchange markets they were purchased on. Doing this made cryptocurrencies safer and more attractive for the general population to invest in.
Prices May Vary
Cryptocurrencies are not always priced the same. There are multiple exchange marketplaces where cryptocurrencies can be purchased but prices may vary from exchange to exchange, even for the exact same quantity of cryptocurrency. At the time of writing this article 1 bitcoin was selling for as low as US$6,246 on one market and as high as US$6,507 on another market.
Nearly a US$300 dollar difference for the exact same amount. With any currency conversion you’ll get different rates depending on who is doing the conversion and where it is being converted, but never a difference of nearly US$300. Cryptocurrency exchanges have been mired by fraud and security breeches from the get-go.
Since exchanges weren’t government regulated in the early days of bitcoin trading, many exchanges had coins stolen worth millions of dollars. The most prominent case of “missing” bitcoins happened with Mt. Gox, a Tokyo based bitcoin exchange.
Mt. Gox claimed that 850,000 bitcoins had gone “missing”, this included bitcoins that belonged to Mt. Gox and their customers; amounting to over US$450 million when this happened.
If that amount of bitcoins was stolen today it would be worth over US$5.3 billion. Government regulation and oversight of these exchanges has made them far more reliable today than they were in the past but it still has only been four short years since Mt. Gox shut their doors for business.
Currently Coinbase is one of the most reputable and reliable cryptocurrency exchanges and offers high volume purchasing for US customers.
Cryptocurrencies as Payment
Some businesses take cryptocurrencies as a form of payment. Why they do this I have no idea, why they shouldn’t is far more understandable. Once upon a time 1 bitcoin equaled a value of US$13 and eventually it doubled to US$26, meaning .5 bitcoin was now valued at US$13.
At first this may sound great for a business having the money they made from a purchase double in value but the inverse to this is when the the value of bitcoin falls. Later if bitcoin prices were to fall to US$6.50 for 1 bitcoin then that means the business just lost 50% percent of what they earned prior when bitcoin was still US$13.
In order to maximize profit made on sales these businesses would have to convert their bitcoins to another more stable currency, the currency they use as their main form of payment. Converting bitcoins to another currency takes time and finding a buyer that will pay the desired price for the bitcoins can be difficult and time consuming.
By the time the bitcoins have been exchanged for another currency they could have lost or gained value after the initial transaction that landed the bitcoins in the business’s wallet. Cryptocurrencies simply aren’t an option as a form of payment for most businesses due to the volatility of their value and still some businesses accept them as a form of payment.
The Future of Cryptocurrencies
At worst cryptocurrencies are high risk investments and low risk investments at best. They’re not a true viable option for a decentralized currency yet. In order for a cryptocurrency to become a viable currency, a huge portion of people would have to buy a single form of cryptocurrency e.g. bitcoin, and use it as any other currency is used.
Yet even if this happens there are still limitations. In many countries cash is still king and few transactions are made electronically, because of this the adoption of bitcoin as a currency could only be viable in tech driven nations and regions.
Governments will never endorse or back any cryptocurrency since backing a decentralized currency would limit a government’s agency to control their economy and money printing. Cryptocurrencies will remain valuable assets and forms of payment for illegal goods and services.
Whether or not cryptocurrencies will eventually become a true currency is up for debate but for now they’re far from it.