How Do Cryptocurrencies Work?
Bitcoin, the first cryptocurrency, was created in 2009 by an anonymous person or group of people known as Satoshi Nakamoto. Satoshi explained that Bitcoin was created as a way of removing third party intermediaries, such as banks, from the equation of a money transfer.
In short, it comes with advantages such as good speed transactions and anonymity.
We will not elaborate on the technology behind this, but instead, I invite you to stay with me as we explore why both people and institutions chose to invest in Crypto.
Cryptocurrencies as Financial Instruments
Crypto isn’t all just about person X sending money to person Y. In fact, crypto can be very rewarding, if you know how to play your cards right.
For example, a Defi lending platform offers crypto loans in a trustless manner, aka, without intermediaries, and lets users enlist their crypto coins on the platform for lending purposes.
Thus, you can also take a crypto loan in a peer-to-peer system, from another user, pledging your assets to secure financing. In the case that you fail to repay the loan, the lender will liquidate or cash out the cryptocurrency.
You also have plenty of other options to generate passive income, such as Crypto staking and Yield Farming, subjects that we’ve already discussed here, at Cryptomatics.
In short, if we compare this to Banks, if you take out a loan from a bank you can even have a negative interest rate while with crypto the interest rate can go up to 500% per year. Now that’s an offer that is hard to refuse.
What Determines the Cost of Crypto?
The price of cryptocurrencies is notoriously volatile – the price of any coin can go up or down by even 10% in one day. But what determines this?
Among the factors are the supply of Bitcoin and the market’s demand for it. Bitcoin has a maximum supply of 21 million with about 19 million being already mined. As the supply comes to an end, more people want to buy it due to the fear of missing out.
There are also factors such as the cost of producing Bitcoin through the mining process, the rewards received by miners, the number of competing cryptocurrencies, regulations, and news.
If the price of Bitcoin goes up, people become confident and invest in it. When it goes down, people get scared and sell it. This is why cryptocurrencies register such high volatility levels.
The price of Bitcoin stood at barely above zero in 2009 and it took it two years to surpass $1. In 2013, when the Electronic Frontier Foundation began accepting Bitcoin, the price grew over several months, going past $1,000 for the first time by the end of the year.
This is just one example, but is quintessential since Bitcoin’s price is usually very important as it determines the price of other cryptocurrencies.
When the total market cap of the crypto market reached a level of over $3 trillion in late 2021, it was due to Bitcoin’s price rising which also helped other cryptocurrencies rise.
Crypto As a Short-Term and Long-Term Investment
Regarding short-term investment in crypto, people who do it aren’t really interested in the utility of the cryptocurrency as they are more interested in the price history.
Since the market is highly volatile, many traders are attracted to it and decide to buy Bitcoin when the prices are low only to sell it when the prices go up again thus making a profit.
But others consider Bitcoin to be a great store of value which would mean it represents a long-term investment. Younger generations, in fact, tend to prefer Bitcoin or Ethereum over gold as a store of value or hedge fund.
There are already dozens of companies around the world that have Bitcoin holdings. Among them, we can mention MicroStrategy, Tesla, Galaxy Digital Holdings, Square Inc., and Meitu.
Is Crypto the Future?
The legal status of cryptocurrencies varies substantially from one jurisdiction to another and is still undefined or changing in many cases.
Some countries have banned cryptocurrency completely – like, China, Nepal, and Bolivia.
On the other hand, El Salvador is the first country in the world to make Bitcoin legal tender with more Salvadorans having Bitcoin wallets than traditional bank accounts.
The reason why countries aren’t in a hurry to make such steps is because crypto will allow its citizens to spend money without the government knowing and they don’t wish to lose that control.
If you ask somebody if you should invest in crypto and they are completely sure in saying “yes” or “no,” you have to wonder what they know that you or the general market don’t.
What you need to do is to look at facts – if you had invested $1 in one Bitcoin ten years ago, that $1 investment would have turned now into one worth thousands of dollars.
The crypto market started small, with just one coin, and now there are over 8,000 cryptocurrencies that you can choose from.
We are not going to offer a “yes” or “no” answer either. We only invite you to take a look at this graph and data, keep in mind what we said, do your own research on top of this, and to conclude with a Satoshi quote:
“If you don’t believe it or don’t get it, I don’t have the time to try to convince you, sorry.”