An Intro to Crypto
To start this off, I would like to read the readers with a thought experiment. If you needed to leave 100 million dollars to an heir in 100 years, how would you do it? Would it be cash in your current fiat currency? Would it be real estate? Knowing you now have 100 years of property tax liability? Would you purchase a precious metal? Knowing that we mine ~2% of the total gold supply yearly and over 100 years the in flux of gold supply would diminish your value? Has anyone thought about a new resource that has a finite supply of availability? Bitcoin may be a new alternative asset to retain and store value over with no foreseen inflation characteristics.
In 2009, Bitcoin was introduced as a cryptocurrency and has grown significantly since then. As of September, 2017 the price of Bitcoin reached a peak of $4960 per Coinbase, a digital asset exchange company (Coinbase, 2017). Bitcoin has grown from a value of $0.08 at the ICO (initial crypto offering) in 2009. The value has grown by 6,200,000% sincecreation of the coin.
A cryptocurrency is a digital currency that uses blockchain technology. Blockchain technology keeps an official online ledger of all transactions dating back to the initial creation of the coin. Similar to the internet blockchain is an open infrastructure that allows companies or individuals to make transactions without using a middle man, which reduces the fees of transferring currencies and speeds up the process (Underwood, 2016). Since the creation of Bitcoin there have been many other coins that have been created. Some coins follow similar protocols to Bitcoin while others are set to act differently than Bitcoin. Litecoin for example, acts as the silver to Bitcoin being the gold, meaning that the patterns in which the market values the coins is very similar. While the protocol of Litecoin is merely a copy and paste of bitcoin’s protocol and follows the market evaluation of the coin very similarly. Ethereum is another coin currently thriving since the creation in 2015 by the Ethereum Foundation which is a non-profit. Ethereum is a coin that is setup to include self-enforcing contracts and a secure system for online crowd funding (Chan, Buterin, & Wilcke, 2017).
The current market cap of the top 100 coins total to be $396,106,880,255, as of November 3, 2020. While Bitcoin alone has a market cap of 254 billion dollars and Ethereum at 43 billion dollars. To put these amounts in perspective, the gross domestic product of Washington D.C., formally known as the District of Columbia in 2016 was 109 billion dollars (United States; Bureau of Economic Analysis, 2016). Even with digital currencies being relatively new, as they continue to grow financial institutions will need to determine whether to adopt this new form of technology.
The adoption of cryptocurrency for use in our economic system rather than as an investment is slow coming, but being currently adopted. Large banks within the global economy are evaluating and testing fiscal models in which they could adopt cryptocurrency. Banks such as Bank of Canada, Monetary Authority of Singapore, Peoples Bank of China, and Deutsche Bundesbank are working on prototypes on handing block chain based settlements of financial assets (Chiu & Koeppl, 2017). As the market valuation of these digital coins grows, then large banks and financial institutions will be compelled to evaluate the coin for application in their financial systems.
Current applications for cryptocurrency are limited but have potential if wide-spread adoption were to take place. International payments could take place quickly while current bank transfer could take days. Self-enforcing contracts using Ethereum based blockchain technology could revolutionize the way loans are conducted through financial institutions or the way contracts are paid for services provided. Third party applications would not be needed to exchange digital currency since the blockchain acts as the ledger and debits and credits each party. Cryptocurrency can act as a digital form of cash which could pose questions on how governments will intervene, since the digital currencies can be exchanged privately like a cash-to-cash transaction. Opposition of Bitcoin as well as various other cryptocurrency are worried that the anonymity of cryptocurrency adds risk that citizens could be unintentionally drawn into illegal activity (Tuttle, 2014). Making purchases with Bitcoin for example is not illegal but could potentially be used for illegal activity. In October, 2013, the FBI shut down a deep web market place which sold illegal items in which Bitcoin was the form of payment. The seizure resulted in the FBI seizing 114,000 Bitcoin (Tuttle, 2014). Similar to fiat currency, digital currencies such as Bitcoin can also for legal or illegal purchases.
These cryptocurrencies are not under anyone’s control and are decentralized from all forms of government. While bitcoin being the largest and most dominate coin currently available there are many other coins currently being created daily and failing daily. While the future of bitcoin is uncertain it seems sure that cryptocurrency will have a significant impact on our currency financial systems and future development of payment systems.
Have you taken a position in any cryptocurrencies? How do you see crypto effecting the future? Leave your comments below!
Coinbase. (2017). Retrieved September 11, 2017, from https://www.coinbase.com/
Underwood, S. (2016). Blockchain beyond bitcoin. Communications of the ACM,59(11), 15-17.
Chan, M., Buterin, V., & Wilcke, J. (2017). Ethereum Project. Retrieved from https://www.ethereum.org/
Chiu, J., & Koeppl, T. (2017). The economics of cryptocurrencies. Retrieved from https://www.chapman.edu/research/institutes-and-centers/economic-science-institute/_files/ifree-papers-and-photos/koeppel-april2017.pdf.
Tuttle, H. (2014). Making cents of bitcoin. Risk Management, 61(4), 16-18,20. Retrieved from http://cmich.idm.oclc.org/login?url=https://search-proquest-com.cmich.idm.oclc.org/docview/1530132386?accountid=10181