Cryptocurrencies: A Look Back at How We Got Here
As we get ready to say goodbye to 2020, Bitcoin is nearing all-time highs, replicating a huge spike that we saw three years ago during the 2017 Bitcoin boom. A lot has happened in the cryptocurrency world at that time and a lot more is likely to change in the near future.
There are many people that profess knowledge of what will happen to the value and adoption of cryptocurrencies. But the reality is, none of them can be certain in their predictions.
However, by looking at the history of cryptocurrencies, we can glean a lot that may help us more accurately predict their future.
2008 - A Time Before Crypto
The internet is the biggest technical innovation that most of us have seen in our lifetimes. It has revolutionized the way we live our lives, giving us all of civilization’s information at our fingertips, making instant global communication possible, and allowing us to buy and sell on the other side of the globe.
Social media companies like Facebook and Twitter have made it possible to chat, share our thoughts, and even stream live videos with friends and strangers for free. Online casinos have brought games like slots closer to people who don’t live near a land-based casino, while online recipe banks like BBC Good Food allow us to explore different cuisines from the comfort of our own homes.
One area that wasn’t subject to the same level of disruption was the financial industry. Although online and mobile banking existed back in 2008 (and before), the same financial institutions were in control of them. Apart from the ability to access our accounts remotely, the same rules, restrictions, and fees applied.
Satoshi Nakamoto’s Revolution
That was until late in 2008 when a person under a presumed pseudonym Satoshi Nakamoto registered the domain “bitcoin.org” and published a white paper that outlined the concept of the cryptocurrency.
In January 2009, Nakamoto mined the genesis Bitcoin block, giving birth to the world’s first and (at the time) only cryptocurrency.
However, it wouldn’t be the only cryptocurrency for very long. The Bitcoin source code was released into the public domain, allowing others to develop their own networks and tokens. This gave birth to names we know today like Litecoin, Ripple, and Ethereum.
Cryptocurrencies remained a relative niche concept for several years, being the interest of finance and computer enthusiasts.
Building a Footing as an Asset Class
Although Bitcoin and the altcoins are called “currencies”, they have behaved more like a store of value, similar to precious metals like gold and silver. Most people buying it prefer to hold it in the hopes that its value will increase, hoping for a future profit.
In July 2020, Bloomberg reported that investors prefer to hold the volatile cryptocurrencies rather than using them for transactions.
Despite the talk of Bitcoin replacing traditional money in day-to-day life, much of the growth in its value can be attributed to people speculating that this increase will occur, thanks to its depreciative qualities.
A Future as a Currency?
Much of the excitement that caused the 2017 Bitcoin boom was caused by predictions that it would soon be replacing cash as the main way that people bought and sold goods around the world.
As some of this excitement wore off, the bubble burst, and many people began questioning whether it would even be possible for cryptocurrencies to take the place of fiat giants like the dollar and the euro.
However, the reality of an overnight take over of global financial markets that some had hoped for was never going to happen. Any switch to cryptocurrencies will be a long and gradual process.
This began back in 2010 when an early adopter used 10,000 BTC to buy just two pizzas. Back then, one Bitcoin was worth less than a single cent. Today, the same number of Bitcoins would be enough to buy a giant mansion or about 14 million pizzas.
Companies are slowly beginning to adopt digital currencies as payment methods, with many big names including Starbucks and Microsoft being some of the early adopters. Services like Coinbase are also helping to make them universal by offering debit cards that are connected to a cloud-based crypto wallet.
Ultimately, the value of Bitcoin and other cryptocurrencies is contingent on two factors. The first is whether a large enough number of people continue to believe that they are a good store of value. While this seems likely at present, there is no way of knowing this for certain.
The second is whether businesses and consumers are willing (and able) to transact using these digital tokens. It seems that over many years (and possibly decades), this could be possible, though the hurdles that cryptocurrencies need to overcome to do this are huge.
Therefore, as an investor, much of your focus should be on examining and weighing up these two factors when deciding on whether (and how much) of each currency to buy.
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