So, you have heard of cryptocurrency, but what is it?
Generally, cryptocurrency is a digital form of payment that can be exchanged online for goods or services. There are over 6,700 cryptocurrencies traded publicly and many more being added through initial coin offerings (ICOs), the equivalent of an initial public offering for a stock that is listing on an exchange.
Cryptocurrencies operate on a technology called blockchain. Blockchain is an emerging technology that is decentralised, meaning it is not managed by one person or organisation, rather is spread across an online network of digital infrastructure – put simply, across many computers that record transactions.
The total market capitalisation for all cryptocurrencies is greater that $2.2 trillion.
Why is everyone talking about cryptocurrency?
Cryptocurrency has become incredibly popular due to some supporters seeing them as the currency of the future. The same way that money, that is, coins and notes, are used to exchange goods and services, it is believed that a digital medium of exchange is the way of the future.
This vision has two key implications:
- No more central banks!
Cryptocurrencies could mean that there is no longer a need to have central banks managing the money supply and artificially influencing things like inflation which erode the value of money.
- Heightened Security
Cryptocurrencies operate on blockchain, where a decentralised processing and recording system could be more secure than traditional payment systems.
Some have compared this transformational disruption of the way our financial system operates to the impact the internet has had on society.
Cryptocurrency as an investment – where’s the value?
As mentioned, cryptocurrency could prove to be a disruptive technology in the future, but what is driving its value? Unlike companies, they do not generate cash flow and grow in value through business and revenue growth; rather, cryptocurrencies operate more like a currency. The value of a currency is determined through supply and demand factors, in essence, how many people are selling and buying it and the price they are willing to transact act.
As indicated above, bitcoin, a strong proxy for crypto market performance has outperformed gold and broader equity market indexes. This growth in price has been driven by increased demand for cryptocurrency and wider subscription to the cryptocurrency asset class by institutional money alongside retail investors.
Some key points regarding an investment in crypto:
- Volatility is high.
Cryptocurrency is much more volatile than other asset classes such as equities. Movements of 10%+ are not unusual in crypto markets and tend to be highly sensitive to announcements by credible individuals and organisations. Since JP Morgan announced an end of year $146k price target on the 5th of January on Bitcoin, the asset has rallied over 97% since.
- Highly Speculative.
Many market participants trade the assets on a day-to-day basis and its volatility is an opportunity for traders to profit from its large deviations.
- Not all cryptocurrencies are the same.
Each cryptocurrency is built around a project and purpose. Some of these represent company missions to actively reach consumers, others are centred around infrastructure projects allowing you to transact and transfer one cryptocurrency to another. Understanding the long-term goals of a cryptocurrency and researching this space has formed conviction for some large hedge funds to pull the trigger on cryptocurrency as a long-term investment play.
How to invest in cryptocurrency?
There are many exchanges that allow you to trade cryptocurrency assets.
In Australia, the largest broker is CoinSpot, who provide access to over 200 assets and are currently ranked first on Australia’s top IOS finance Apps. Trading is as simple as depositing funds from your bank account and trading on the app or website.
Closely following CoinSpot is Binance, an international exchange that is well respected across the globe.
|Cryptocurrency||Market Capitalisation (as of 12th of May)|
|Binance Coin (BNB)||$103.3bn|
|Internet Computer (ICP)||$43.5bn|
|Bitcoin Cash (BCH)||$28.7bn|
Where can you learn more?
With any online information, reliability is a key consideration when doing research. The most respected platform globally is CoinMarketCap.com, who are a market research website for cryptocurrency. On this platform, you can read about the latest media articles and events related to cryptocurrency and monitor prices of different digital assets.
You can also find information about current prices, volumes, and market capitalisations of different cryptocurrencies.
We will be continuing to cover various topics related to cryptocurrency, so stay tuned to learn more as we break down this emerging asset class!