The Cryptocurrency Frenzy – Why Do We Keep Talking About It?
Cryptocurrencies are stealing the show today. With all the discussions surrounding it, the question which seems most pertinent is why do we need a new currency at all? It seems everything is okay with the currency we use. But it’s merely because we have been using it for so long now that its inherent flaws only seem something we necessarily have to adjust to. The value of fiat money is to a large extent controlled by the government through interest rates, foreign exchange reserves, printing new currency, etc. Hyperinflation (Germany, 1918), Zimbabwe (1990s), Venezuela (2016), to quote a few, shifting to some other currency (USD generally), etc. have been consequences of an extensive money printing and forex reserve drainage at times. With cryptocurrencies, the power to control or create the supply of supply of money does not lie with the government. We can conclude that fiat money is after all not all perfect, and cryptocurrencies might just be the answer.
Cryptocurrency, a form of electronic cash, is different from the existing currency for one broad reason – Decentralisation. It is backed by the blockchain technology, which, in simple language, is a distributed ledger. A ledger, because it keeps records of all the transactions happening. Distributed, because there is no centralised storage. The database of the ledger is stored on several devices in a peer-to-peer network, each device replicating and updating information automatically. But how much does it help to have all the information with everyone? A great deal. Today, we rely on banks to secure our money and information.
To quote Satoshi Nakamoto, the pseudonymous creator of world’s first cryptocurrency Bitcoin, “Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.” With cryptocurrencies, it is extremely difficult to tamper with the ledger. All the transactions are permanently recorded in a chronological order and linked (chained) to form blocks, reversing or tempering with one node becomes near impossible.
Bitcoin was released in 2009 and is the most popular cryptocurrency for being the first one. It was released on open source; anyone could duplicate the code and tweak it as per their needs. Rival cryptocurrencies started to emerge in 2011, with Litecoin, Swiftcoin, and Namecoin. It began picking up value soon. Vancouver even launched the first bitcoin ATM in 2013. Microsoft accepted it from users purchasing game, proving its growing popularity. Today 1 bitcoin is worth more than USD 6000. Dash, Ripple Monero, Ethereum, and Stellar are some of the most prominent cryptocurrencies today. By opening the ICO to South Africans, Safcoin hopes to raise awareness and education levels among ordinary South Africans. With introducing this new currency exclusively for South Africa, Safcoin is expected to boost African trade and simplify the cross-border payment. South African e-commerce revenue is expected to reach $3.131 million in 2018, growing at a compound annual growth rate of 13.7% to reach $5.239 million in 2022. By then, e-commerce user penetration is expected to hit 43.8%, from 34.8% in 2018.
You can criticise cryptocurrency, but the fact that cannot be ignored is that people have made a fortune out of it. Ripple CEO, Chris Larsen, is notably the wealthiest man in terms of cryptocurrency net worth amounting to USD 7.5-8 billion (as per Forbes). Ethereum cofounder Joseph Lubin comes next in the list with USD 1-5 billion in crypto net worth. Other famous names are Changpeng Zhao, co-founder of Binance, the Winklevoss Twins- cofounders of Winklevoss Capital, and Matthew Mellon, an individual investor.
Even after a decade-long existence, cryptocurrencies are yet to be fully known by the general public. Arguments like ‘Cryptocurrencies have no value as you cannot physically hold them’ are given. Reality check: physical manifestation does not add to the value of a currency. The value of fiat money is determined by its supply and demand, and not by the fact that you can feel it in your hands. The other myth is that cryptocurrencies run on the principle of The Greater Fool- it only has value because people think someone else will buy it for a higher price. However, it should be realized that this is how financial markets run, a stock has a value because of the demand it has created. Same goes for trading in commodities and fiat currency also. The biggest misconception surrounding it is that it is a Ponzi scheme. This is essentially a baseless argument coming from a lack of knowledge. The new currency and the technology backing it has inspired a whole generation of business and innovation and is not stopping anytime soon.
However, one should be careful while investing in cryptocurrencies. They are indeed very volatile, so one shouldn’t go about haphazardly investing in the digital currencies, and certainly not put the life savings in it, but they can prove to be a good long-term investment option. Before investing in cryptocurrency, check out how much extra information is made available about it, and how frequently is it done. The cryptocurrency you choose should be such that there is a need for it, and the demand is growing. It is present as open source and is being continuously developed by the team behind it. Do not fall for the big claims some projects make. Check for the authenticity by checking the ethical background of the developers. These are just a few of the measures you should be taking to prevent falling for scam projects. Invest only after building a thorough understanding of the market and its nuances.