Cryptocurrency
Episode #6 of the course Introduction to capital markets by Doha Soliman, CFA
Welcome back! In today’s lesson, we’ll be covering cryptocurrencies.
Cryptocurrencies, such as Bitcoin, Litecoin, and Ethereum, are digital currencies that have taken the market by storm. You’d be hard pressed nowadays to read the business section of the newspaper without seeing columns and editorials about cryptocurrencies. Like more traditional currencies, cryptocurrencies are being traded, used as investments, used to finance corporations, and have financial instruments created after them (such as bonds, futures, etc.).
On the agenda today, we’ll introduce how cryptocurrency works and how to trade and use it.
So, why are they are called cryptocurrencies?
Cryptography Fundamentals
The concept of cryptography refers to secure communication in the presence of third-party adversaries. It is a measure of security that enables individuals to communicate safely through encryption—a digital lock placed on information to protect against theft.
While there are several cryptocurrencies gaining strength in the capital markets, the focus of this course will be on Bitcoin, as it is the first cryptocurrency created, as well as the one with the greatest value and growth worldwide.
Bitcoin
Bitcoin, the world’s first cryptocurrency, was created in 2009 with purpose to develop a decentralized worldwide digital currency. The supply of bitcoin is limited, and there is a cap of 21 million bitcoins. In addition, bitcoins do not get printed or created, they get mined.
In order for the currency to be decentralized, there is no central authority that regulates, prints, or protects bitcoins. This is rather conducted through the blockchain, an online ledger run by a peer-to-peer network. Members of the community can invest time and effort to add blocks to the block chain by solving complex mathematical equations and problems. Doing so gives them access to the newly minted bitcoins.
Since blocks can get added through this ledger, transactions are not instantaneous for digital currencies as they would be in physical banks. Transfers and trades tend to operate on a small delay as the block for the chain gets solved and thus, added to the blockchain.
As you may have heard recently, several corporations, banks, and governments have been skeptical of bitcoins and cryptocurrencies in general. The decentralization factor can be challenging to some central authorities. In addition, since bitcoins operate in a cyberspace and can protect one’s anonymity, several regulators have brought forth fears of potential criminal activity and terrorism funding being completed through online currency. For this reason, regulators worldwide are working to develop guidelines, laws, and policies for their nation’s borders with regards to digital currency.
Using and Trading Cryptocurrencies
The purpose of any currency is to utilize a monetary value to exchange goods and services. So, can you use Bitcoin at your local convenience store? Can you take Bitcoins out at your local ATM? The answer is, not yet. Since cryptocurrencies currently can’t be utilized the same way as we’re used to dealing with money, many individuals feel that cryptocurrencies may be worthless and simply the latest technological hype.
However, as cryptocurrencies gain momentum and capture market attention, they are growing in popularity and thus, purpose.
Some investors have begun lending individuals startup business capital in Bitcoins, others are trading cryptocurrencies, and many businesses around the world having begun accepting digital currencies as acceptable payment. There are also Bitcoin bonds and most recently, bitcoin mutual funds.
Whether cryptocurrency has a future or not is still unclear. However, despite all the opposition these currencies are facing, their prices have risen drastically, and the interest in them has increased, thus boosting their value.
The basic concepts we’ve covered today will help you understand the ongoing attention cryptocurrencies are receiving in the mainstream media. Tomorrow, we’ll discuss private equity and venture capital.
See you tomorrow!
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