Despite the major pullback in 2018, however, cryptocurrencies are on the upswing again. Of all the markets, crypto may be the riskiest, but if you’re willing to put in the time and research, the market is ripe for winning trades.
Cryptocurrency – Essence
Cryptocurrencies are digital currencies – they do not exist in fiat form and have no intrinsic value. The fact that cryptocurrencies have no intrinsic value should not scare investors, as the fiat currencies in circulation around the globe aren’t backed by physical commodities, either. The ‘crypto’ in cryptocurrency refers to the fact that it’s based on cryptography. Blockchain, the technology that enables cryptocurrency, uses a sophisticated form of cryptography.
Blockchain is a list of records, also called blocks, which are interlinked and verified using cryptography. The technology of blockchain eliminates the need for a third party to verify information or some data between two parties. In a sense, a single person cannot own the information given. Instead, a community of users controls the list of records. So, the primary new feature that blockchain represents is the elimination of the so-called “trusted party” to verify and facilitate the digital blocks of information recorded and amended on the blockchain.
Top 3 Crypto Broker Comparison
According to Wikipedia, the very first cryptography work was developed by Stuart Haber and W. Scott Stornetta in 1991. After that, the Merkle trees were added to the cryptographic design by Bayer, Stornetta and Haber in 1992. What the Merkle trees did was enable the storage of more than one document on one single block.
Then, in 2008, a person, or a group of people, called Satoshi Nakamoto, invented the technology of blockchain. It is not really clear who is Satoshi Nakamoto and why exactly he came with the idea and when he developed it. According to some sources, Satoshi was prompted to come up with an innovative solution for the “regular” people who were tired of the traditional banking services and the clashes they brought to the world. The Financial Crisis of 2008 is cited as one of the top reasons why Nakamoto started developing blockchain and eventually, Bitcoin in 2009.
The largest cryptocurrency by market capitalization, Bitcoin is built on the technology of blockchain. Bitcoin became so popular because it is the first cryptocurrency to have sold the so-called double spending problem. Double-spending occurs in digital cash transactions each time a single digital token is spent more than one time. According to sources, this is a problem since all digital files on the digital tokens can be falsified and mishandled.
Nakamoto used the words “block” and “chain” separately in his first paper, but later the word became popular as simply “blockchain”. The blockchain technology developed after 2014 is known as Blockchain 2.0. This new, more sophisticated version of blockchain, allows users and the community to build better and “smarter” smart contracts around the world. The underlying idea of blockchain and what is rumored to have inspired Satoshi Nakamoto to create the technology is that all people around the globe should have equal and fair access to their information, money and privacy. Essentially, the idea is to potentially change how wealth is distributed among individuals”.
According to Coindesk, there are three major reasons why blockchain works as a technology, and hence, why bitcoin is so successful. The three features are: private key cryptography, the P2P network and the program itself (the protocol of blockchain). So, in a sense, blockchain provides identity, system of records and a platform. While it certainly has some limitations, blockchain has progressed to disrupt multiple industries since its creation in 2009 by Nakamoto. Traders hesitant to jump right into cryptocurrencies can still profit off blockchain technology with a lower level of risk.
Key differences between cryptocurrency and conventional currencies:
- Cryptocurrencies have no physical form – they are entirely digital.
- Cryptocurrencies are anonymous – when you use your bank account (debit card, credit card, checking or savings account), the vendor gets your personal information
- Cryptocurrencies exist outside the reach of the legal system and financial regulators – they can’t be frozen or garnished by government agencies, although regulatory changes are currently under way
- Cryptocurrencies aren’t backed by a central authority – traditional currencies are backed by central governments and banks
- Crypto exchanges are relatively unregulated – Forex and other markets are heavily regulated.
Brief history of cryptocurrencies
1998 – 2008 Two proto cryptocurrencies, B-Money and Bitgold, were under development, but never formally launched.
2008 Someone writing under the pseudonym Mr. Nakamoto published a paper about a peer-to-peer digital cash system dubbed ‘Bitcoin’ to a cryptography forum.
2009 The Bitcoin software was made publicly available and the first Bitcoins were mined.
2010 The first Bitcoin transaction was recorded. Someone traded 10,000 Bitcoins for two pizzas. Those same 10,000 Bitcoins would be worth about $80 million today. The first cryptocurrency exchange, bitcoinmarket.com, was launched, and ultimately failed.
2011 The first Bitcoin alternatives emerged, Namecoin and Litecoin among them. Bitcoin reached parity with the USD.
2013 The first Bitcoin crash occurs; the value of one Bitcoin plummeted from $1,000 to less than $300. It would be years before it reached $1,000 again. Mt. Gox, the largest crypto exchange, launched – it would ultimately handle over 70% of all Bitcoin transactions.
2014 Mt. Gox inexplicably goes offline, resulting in the theft of 850,000 Bitcoins that were never recovered.
2016 Ethereum, the first legitimate Bitcoin competitor, was launched in the world’s first ICO.
2017 Bitcoin’s price breaks $10,000, and then reaches up to $20,000 per coin in December.
2018 The year of the Great Crypto Crash – cryptocurrencies lost 80% of their market capitalization.
2019 All but four of the top 20 cryptocurrencies have recovered from the crash and are currently trading in the green.
Key cryptocurrency facts
- Cryptocurrencies are extremely volatile. Bitcoin, the largest crypto by market cap, gained over 3,300% in a single year. Between 2010 and 2017, Bitcoin went from $0.01 to over $20,000 per token. On the other hand, it has had four corrections of over 50% in a five-year period – by comparison, the S&P has only had three 50% corrections in almost 100 years.
- Cryptocurrencies have no underlying value. As they aren’t backed by governments and have no tangible fundamental backing, it’s extremely difficult, if not impossible, to assign cryptocurrencies a realistic value.
- There’s a huge interrelated market. Blockchain, for one, is booming due in part to the cryptocurrency market. Other industries, such as graphics card manufacturers, are also seeing double-digit growth due to the growth in ‘miners’, or people who process crypto transactions.
- The barrier to entry is low. Blockchain makes it possible for anyone with a team of coders and a little seed capital to bring a new crypto coin to market. That’s why there are over 2,000 cryptocurrencies with up to 100 new ones being launched every month.
- Institutional money is flooding into crypto. Until 2019, most institutional investors avoided the crypto market, but that’s changing in a big way. With the launch of crypto ETFs and other vehicles, institutional investors are jumping in to profit off the market’s volatility. The effect of institutional money is too new to quantify, but it could drive prices up even more.
- Many major financial players are sceptical of cryptocurrency. Even though crypto is gaining traction as a legitimate investment, major players predict the crypto boom won’t end well. Jamie Dimon, CEO of JPMorgan Chase considers Bitcoin a fraud. Warren Buffet has also stated his negative outlook on the future of cryptocurrencies.
- Taxes become a problem. Just because cryptocurrencies are basically unregulated, they’re still subject to taxation. In the US, capital gains taxes apply, and in most EU countries, an investor will pay either capital gains or income tax on any crypto gains.
The future of cryptocurrencies
While Satoshi Nakamoto envisioned a decentralized and very “rosy” future for cryptocurrencies, his predictions are already 11 years old. Blockchain and cryptocurrencies pose a major challenge to central banks and governments.
That said, the crypto market isn’t positioned for smooth sailing. Many coins were ridiculously overvalued in the bull run up to the 2018 correction, and many people jumped out of the market. It became clear that an overall lack of knowledge about cryptocurrency and a generalised herd mentality that hyped the early gains grossly distorted the market. It’s not necessarily a bad thing that traders are taking a step back to learn more about this brave new world.
A few trends for the future are already emerging:
- ICOs, which fell off precipitously during the crash, are back on the rise. As new coins come to market, it’s even more important for traders to educate themselves before plunging funds into a new coin.
- Margin trading will ease off after the mega losses in the 2018 crash. At the same time, coins that trade directly with fiat currency will take off.
- Volatility should level off – which is not to say that crypto volatility will fall in line with traditional markets, only that the years of 3,000% gains are probably over. Traders will still find plenty of price movement to profit from, but investors will likely not see quadruple-digit gains.
- Lots of coins will disappear. The bear market choked off a lot of new currencies, and the threat of new regulatory regimes will choke off many more. This requires a heightened sense of caution for traders.
- Security tokens, which are backed by a stake in the company launching the coin sale, are poised to take off. Regulatory uncertainties have hindered the rise of security tokens, but as regulations are clarified, these new coins should gain popularity.
The Advantage of Asktraders Guides
As we discussed, the cryptocurrency market is fluid, volatile and constantly evolving – it’s nearly impossible for a retail trader to stay on top of trends and trading strategies.
The AskTraders guides and trading community solves the knowledge gap. We maintain a knowledge library of essential crypto basics, as well as topical articles about news and trends in the crypto universe. If you’re ready to trade crypto – or just want to know more – it’s a one-stop-shop for up-to-the-minute information and analysis. If you have questions, AskTraders’ guides have the answers.
Come back regularly for current news and insights about cryptocurrencies and proven trading strategies.
Ultimately, cryptocurrencies are an exciting, fast-paced, and completely unpredictable market. It’s ripe for profit in the hands of a knowledgeable trader – it’s no wonder it’s one of the fastest growing markets, even in the face of uncertainties. AskTraders is here to help you decide if crypto is right for you, and how to make your best trades once you’re ready to take the plunge.