After the launch of Bitcoin, the world’s first cryptocurrency, there were a lot of naysayers criticizing the project and dismissing its potential. However, contrary to their beliefs, Bitcoin and the cryptocurrencies that followed have gathered momentum in recent years.
In the eyes of crypto enthusiasts, this was simply a natural transition. Just like people moved from gold to paper money in the past, so too in the digital era in which we live, people have shifted to cryptocurrencies or digital money.
In this guide, we’ll talk about what makes crypto assets better than traditional fiat currencies. We’ll mention some of their challenges, and how they can be avoided or solved. Finally, we’ll discuss why cryptocurrency is the future, and what investors should expect.
Why Choose Cryptocurrency?
In order to understand why so many people are investing in cryptocurrencies, let’s take a look at their main features and use cases.
The main incentive for designing the first cryptocurrency, Bitcoin, back in 2009, was to replace the central authority in charge of people’s transactions with a new model based on cryptographic proof. This model is implemented on a peer to peer (2P2) network that uses blockchain technology to store and secure the transactions.
As a result, cryptocurrency transactions are faster, cheaper, and more private than bank transfers. The blockchain only incurs a small mining fee with no additional service costs. Even if you’re making an international payment, the procedure is quite straightforward, unlike wire transfers where the processing time of the recipient’s bank typically delays the payment.
Moreover, when sending cryptocurrency, both the sender and recipient’s names are hidden. Instead, the blockchain shows their public key, i.e., an encrypted address that functions as a pseudonym. That’s why we say that cryptocurrency transactions aren’t anonymous but pseudonymous.
Scarcity refers to the total supply of a given cryptocurrency or the number of coins in circulation. Unlike the unlimited supply of fiat currencies, the supply of most crypto assets is limited. For instance, Bitcoin’s founder, Satoshi Nakamoto, hard-capped his coin at 21 million BTC.
What’s even more interesting, despite the growing demand, is that the cryptocurrency mining process continues at the same rate. When the demand for the crypto assets increases, so too does their mining difficulty. This supply inelasticity is what causes price volatility, a quality that turns cryptos into a risky but profitable investment.
Cryptocurrencies are gradually turning into global virtual currencies thanks to their multifaceted utility. On the one hand, they’re lucrative investment assets that allow investors to diversify their portfolios. On the other, they’re becoming increasingly used as mediums of exchange.
During the COVID-19 pandemic, contactless payments have become both a necessity and the rule, resulting in more and more merchants accepting cryptocurrencies as a payment method. For example, in partnership with the payment processor Salamantex, over 2,500 merchants in Austria support payments made with Bitcoin, Ethereum, or Dash.
On top of that, leading payment companies like PayPal, Visa, and Mastercard are standing up for crypto assets as well.
Cryptocurrencies are also increasingly used as utility tokens. It all started when the Ethereum platform created the first self-executable smart contracts, where tokens were used to foster a bond between the involved parties. In turn, smart contracts made it possible for developers to build decentralized applications.
What Are the Challenges of Cryptocurrency?
One of the main challenges that cryptocurrencies are facing today is the lack of regulation. Their decentralized nature makes it harder for governments to design suitable regulatory frameworks. On the one hand, this might compromise their decentralized nature but on the other, it can provide better user protection.
In countries like Australia, the US, the UK, and Canada, cryptocurrencies are treated as property. As a result, crypto profits are subject to capital gains tax.
Another challenge that affects crypto investors is the unstable and volatile nature of the crypto market. You should be very careful when choosing the asset you want to invest in, as you don’t want to be an easy target of experienced investors’ pump and dump schemes.
These investors, known as “whales”, create a hype around a new cryptocurrency to lure novices to buy coins and drive their price up. When this happens, the whales sell their shares, but the tricked investors lose their money.
What Does the Future Hold for Cryptocurrency?
We’ve seen how cryptocurrencies are used today, now let’s see what the future has in store for these assets.
Central Bank Digital Coins
The interest in both stablecoins and central bank digital coins (CBDCs) is on the rise across the world. For example, the Bank of China is currently testing its CBDC pilot program in some major Chinese cities. The Bank of England, the Bank of Sweden, and the Bank of France are all showing interest in CBDCs as well.
Experts predict that this shows their readiness to recognize the potential of cryptocurrency and blockchain technology. They see it as a step towards solving the problem with financial inclusion in many under-developed and developing countries.
Bitcoin’s All-Time High
At the start of 2020, a lot of experts predicted that Bitcoin’s price would experience a major surge after its halvening. A halvening takes place every four years and marks the date when the Bitcoin mining reward gets cut in half. The last Bitcoin halvening was in May 2020.
Since then, Bitcoin’s price has more than doubled! In an interview for Forbes, Bloomberg analyst Mike McGlone predicts that Bitcoin can reach $20,000 or even more by the end of the year, hitting a new price record. This might cause a chain-reaction leading to other cryptocurrencies gaining in value.
Ethereum and the Rise of DeFi
Next to Bitcoin, Ethereum is the second most popular cryptocurrency on the market, both in terms of its value and market capitalization. When talking about utility, we mentioned that Ethereum is used to fuel smart contracts and decentralized applications. Apart from them, developers can use the Ethereum network to build new cryptos too.
In order to improve the performance of the network and increase its scalability, Ethereum is planning to launch the Ethereum 2.0 blockchain. Among other improvements, this blockchain will use a different consensus mechanism called Proof of Stake that requires less computing power to mine new coins. The PoS will make the network more scalable, secure, and decentralized.
Although we can only speculate on the future of cryptocurrency, we can’t neglect the fact that the majority of these predictions are highly promising. One can never be too careful when dealing with a volatile market, but we’re confident that if you do your research and choose a reliable cryptocurrency, there’s no room for doubt.
We encourage you to invest in cryptocurrency and speak to a Coin IRA Crypto Specialist about the benefits of opening a Cryptocurrency IRA account. That way, you’ll be both saving for your future and protecting your assets from inflation and devaluation. It’s easier than you might think!