Crypto or Bust: Cryptocurrencies in the US
Crypto or Bust: Cryptocurrencies in the US
Cryptocurrency is simply a form of payment that can be exchanged for goods and services, much like the US dollar (USD), or any other worldwide currencies for that matter. Cryptocurrencies, however, have a different set of characteristics that can either make them a worthwhile investment with unlimited potential or bottomless money pit where wealth goes to die.
Cryptocurrencies are entirely digital, and highly encrypted. Even though most cryptocurrency units are called ‘coins,’ ‘tokens,’ or units, they are not tangible – there is no actual coin. The only way for these units to trade hands is to use an online exchange specifically designed for cryptocurrencies, like PayPal. Each time any unit changes hands, the transaction is recorded on a public ledger. While the individuals trading the units are depicted as a random set of characters to protect their identity, the number of units traded are published for all to see. That technology, called Blockchain, provides the foundation on which all cryptocurrencies are built, and makes cryptocurrencies nearly impossible to counterfeit.
The supply of cryptocurrencies is determined by the specific currency’s creator. Currently there are more than 6,700 different cryptocurrencies that are traded publicly. Each currency will follow the rules set by the creator of that currency. Bitcoin, for example, will only ever have 21,000,000 units in circulation. Knowing that the supply of Bitcoin is limited has driven the demand to places never seen before. Ethereum units, on the other hand, have no limit. The USD value of each unit, then, would be determined by economic factors, like supply and demand.
Cryptocurrencies are not unregulated by any government. That said, federal monetary policy changes that influence the USD (inflation, deflation, interest rates, money supply, etc.) will not directly affect the value of crypto units themselves, only their value in terms of the USD. USD, though, regardless of its value, is inherently guaranteed by the US government. Cryptocurrencies, on the other hand, are neither guaranteed nor are they secured by an underlying asset that provides a baseline for its intrinsic value.
Volatility. As mentioned above, the value of any cryptocurrency is driven by economic factors like supply and demand. As such, unit values suffer from extreme volatility. Take Bitcoin for example. In January 2017, one unit was worth approximately $900. By the end of that year, each unit was trading for nearly $20,000. Twelve months later, the value had crashed to under $4,000. The price has since increased to $48,667, as of February 16, 2021.
In a nutshell, cryptocurrencies were designed as a way for people to have more control over their money, allowing the currency values to fluctuate organically within the economy instead of being influenced by governments, banks, corporations, etc. To date, however, it has proven to be a speculative investment vehicle instead. That said, investing in cryptocurrencies should only be undertaken by those who understand the risks: you could experience huge gains or total losses.