CRYPTOCURRENCY - Basics
“First, they will ignore you,
Then they will laugh at you,
Then they will fight you
..and then they will buy bitcoin”
– Mahatma Gandhi
Okay so the last bit was DEFINITELY not said by Mahatma Gandhi, but it very much applies to the new-age cryptos.
Almost everyone around seems to be talking about bitcoins – how it is the future of money and how the dollar is just going to vanish in thin air. Though the USD will not vanish per se, it’s true that bitcoins or cryptocurrencies are causing a major shift in the financial landscape.
What are cryptocurrencies?
Cryptocurrency or crypto is digital money that acts as a medium of exchange, just like the USD or Indian Rupee. Most of these digital currencies are decentralized i.e. they are not controlled by any authority. This is unlike our regular paper money which is managed by the respective central governments or banks.
A peculiar feature of cryptos is that these digital currencies operate on the BLOCKCHAIN TECHNOLOGY. This blockchain technology is essentially a network on which transactions are recorded in an encrypted fashion. This gives a security advantage as due to transparency, traceability becomes easier in case of malfeasance.
This independent and transparent nature of cryptos is what attracts enthusiasts.
Are cryptos better than paper money?
Fiat currencies, such as the USD, Indian Rupee, Chinese Renminbi are the tangible currencies that we can touch, unlike the cryptos.
In 2015, China caused a major shake in the global financial market when it decided to devalue the Renminbi. This was the inception point of the infamous US-China trade war. The effect was so intense that from 2016 onwards, US stocks fell massively, despite the US being in a massive bull run from 2009-2018.
This small(but major) incident points to an interesting loophole in the current money system – it is backed by humans. And all humans are prone to error.
But why does this affect you?
An average citizen of India usually puts all his/her money in a bank account, as a safety measure as well as to get some returns. Now, if the Indian government decides to increase the inflation to 10%(from 5%) and decrease the FD rates, or increase the supply of money in circulation, the value of money will become half. This means you will be actually LOSING MONEY!
Thus, fiat money is backed by humans who are mostly driven by greed.
How do cryptos come into the picture?
- Cryptos operate on a decentralized network, with full transparency. Additionally,
- A number of cryptocurrencies are FINITE in supply – for example, there are only going to be 21 million Bitcoins in production.
So from a technological point of view, cryptocurrencies might be better than the fiat currencies.
So will cryptos replace Fiat currencies?
The first paper money was introduced by the Chinese Tang Dynasty in the 7th century, but it wasn’t until the 11th century that it truly began to be used. To replace such a system, it would take any new innovation a considerable period of time.
- Every technology has an adoption cycle
Whenever there is a new invention, it takes time for people to adjust and accept it. For example, when cell phones were introduced, only a handful of people had them. Now in 2021, almost every second person has a smartphone. - Volatility of cryptos
The volatility of any asset class is high if the size of the market is small. What that simply means is that currently, the crypto market is at a very nascent stage. Thus, even a minor action (such as a tweet by Elon Musk) can either skyrocket or bring the value of the cryptos.
But as the market size increases with time, there will be stability and the volatility will gradually decrease.
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