Features and potential of crypto currencies – with special review on Bitcoin- magazine Economy and Business

 

author: Dejan Graorkovski

During the first few months of 2021, just as in the past year, the entire world and the domestic public witnessed the extreme price growth of the largest crypto currencies relative to their market capitalization. The oldest and most popular crypto currency (Bitcoin) reached growth of 600% in year 2020, and only at the beginning of this year its value was increased by another 80%. In addition, the value of the other most traded crypto currencies, as are Ethereum, Litecoin and XRP, has grown by 1.010%, 350% and 230%, respectively.

As a result of this vertiginous price growth, market capitalization of crypto currencies reached amount of 1,6 trillion USD, whereby the Bitcoin contributes with 68%. Such figures have not left unmoved even the strongest critics of Crypto Market.

Having in mind these developments, at the beginning of the text we shall try to explain the features of the crypto currencies and purpose for their creation. In addition, further in the text, we shall analyze the potential and future perspectives of this market segment, aiming to get clearer picture of the direction it might move to.

A crypto currency may be defined as a form of digital ownership used as an asset for exchange of goods and services. The method of providing security of transactions is enabled by use of technology named blockchain. At the same time, a control is carried out over the creation of additional monetary units through this technology, as well as confirmation for the currency transfer. Most famous and most valued currency, measured by the market capitalization, is the “Bitcoin”.

Bitcoin emerges at the beginning of year 2009 by a programmers’ group known under the pseudonym Satoshi Nakamoto. They describe it as “peer-to-peer electronic cash system”. This system is completely decentralized, i.e. not issued and controlled by any country or central bank. This type of currencies (crypto currencies), as well as those in the traditional form, may be used as an asset for exchange of products and services. However, unlike the “regular currencies”, the crypto currencies are coded by the use of Blockchain technology. That is so because each digital information may easily be multiplied, altered and is very simple to manipulate these.

Blockchain is a complex data base which contains in it all the realized transactions, and divides all the parties which participate in the system based on Bitcoin protocol. Everything is kept in the server’s network, and it functions as data base, so that each individual server contains all the transaction data, i.e. is decentralized. For a comparison, with the “regular currencies, the conventional network is based on centralized network, where the main participants are domineering centers, as are banks or government agencies.

Why are Bitcoin and other crypto currencies popular? There are several reasons for that:

  • Bitcoin supporters see it as currency of the future and are in incursion to purchase it now, under the assumption that it shall bring them considerable profit in the future;
  • Crypto currencies are transferred between the contracting parties based on the principle peer-to-peer, i.e. without intermediaries (financial institutions or payment systems) and with minimum commission;
  • Valets with crypto currencies cannot be controlled from outside, and therefore no one is entitled to freeze them or impose limits to the transfer amount.

Despite of the fact that there are around 7.000 crypto currencies at the market currently, the Bitcoin is the most popular and has highest value according to market capitalization. Therefore a question is raised, why is it so?

One of the reasons is that it built strong reputation as a first crypto currency at the market, i.e. the advantage of being a pioneer and thus getting high medium representation and confidence with investors. Furthermore, very interesting and important factor is that this currency has limited supply. Until now, around 18,5 million Bitcoins are in circulation, and the anticipated maximum is to create 21 million until year 2140. Having this in mind, the limited quantity combined with increased demand would influence to a significant price growth in the future. The remaining crypto currencies, as are Ethereum, LiteCoin and XRP, at the moment do not have limited supply, which is making them less attractive.

If we turn back to year 2017, the Bitcoin had high value growth as it had this year. But what is the difference? In that period, the growth was caused by the large supply from individual investors. Unlike that period, nowadays, the main instigators of the demand and the price are the institutional investors, mainly in the USA. Investments in Bitcoin by the company Tesla in amount of 1,5 billion USD have contributed to huge price growth. Other companies, as are Microsoft and Square, invested considerable amount of assets. Morgan Stanley has become the first large bank in the USA which offers access to Bitcoin’s funds to its wealthy clients.

All these developments could not be left unnoticed by the Central Banks of the largest world economies in terms of where the price could move to in the future. In one analysis developed by the Deutsche Bank, it is predicted that the Bitcoin shall remain “ultra instable” due to the limited trade of this crypto currency. It would imply that only few large supplies or exits at the market could considerably impact the balance between the supply and the demand. In the same analysis, illiquidity of this currency was stressed as high impediment.

In one of his recent addressing, the President of the FED – Jerome Powel, has stated that the crypto currencies further remain to be unstable value keepers (which is one of the principal features of the money). He featured these as speculative assets which in no way can be a replacement for the USD or other reserve currencies.

At the end, we shall pose the question which certainly is the most relevant this period:

Should I invest in Bitcoin or any other crypto currency?

 

The answer would be YES. But, only and if you have surplus of assets and high risk tolerance.

 

 

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