What is the Future of Cryptocurrency?

Introduction

 

Investing in cryptocurrency is like riding on a roller coaster. The highest point will grant you that “top of the world” feeling; lowest will feel like “getting your head bumped” into the wall with stars circling around, that nervous dizzy state is what every investor dreads. But well crypto is just like that, it will let the investor fathom heights but will also make them get the aftertaste of peaks i.e. falling of course. 

 

Better known by its acronym “crypto” this digital currency has showered billions on a few investors but also burnt millions of many, so what does the future of cryptocurrency look like? This much anticipated question has always been a topic for debate. 

 

Let’s dive into the world of cryptocurrency but first, let’s understand what is a cryptocurrency?

 

What is a Cryptocurrency?

 

“Decentralized” in terms of cryptocurrency means a network that is free from the regulations of governments and other financial institutions.

 

Cryptocurrency is a “decentralized” digital currency that is built using a blockchain network. The “decentralized” network is a key reason behind the crypto success. Cryptocurrencies are not regulated by any specific institution; it is “people’s digital currency” that is strengthened by the “collaborative people power”. 

 

(Must Check: What is Cryptocurrency?)

 

Bitcoin, Ethereum, Litecoin, Polkadot, Binance Coin, and DogeCoin are some examples of popular cryptocurrencies. First crypto was the biggest evolution, now NFT ( Non- Fungible Tokens) and Bitcoin ETF (Exchange - Traded Fund) are also gaining widespread popularity in some countries. 

 

(Please Note: Data for countries is taken from Investopedia)

 

 

Blockchain (The network for building cryptocurrencies)

 

Blockchain is a secured database (a personal ledger) that keeps record of monetary transactions. Bitcoin blocks store data related to monetary transactions. Every new block on the blockchain is stored in a linear and chronological manner. New blocks are added at the end of each “chain network”. 

 

( Related blog - Blockchain and AI )

 

These widely distributed chain networks can only be modified when the majority of the users have agreed for the modification. Each distinct block on the blockchain network has a hash code. ( These hash codes are highly secure as they are combinations of previous and new block code). Hash codes are built using a math function that transitions digital information into a string of numbers and letters. 

 

 

Crypto Critics V/S Crypto Optimists

 

This never ending debate on the future of cryptocurrency has segregated the world into two groups on one side, crypto critics are predicting the end of this virtual hype “cryptocurrency world” on the other hand crypto optimists are envisioning a bright future for “cryptocurrencies”. 

 

Lets take a close look at some statements of Crypto Critics to understand crypto predictions of the future. 

 

1. Warren Buffet (American businessman, Philanthropist, Successful Investor, CEO Berkshire Hathway)

 

"Cryptocurrencies basically have no value and they don't produce anything. They don't reproduce, they can't mail you a check, they can't do anything, and what you hope is that somebody else comes along and pays you more money for them later on, but then that person's got the problem. In terms of value: zero."  

 

2. Peter Krugman (Neo Keynesian Economist, Winner of Nobel Prize in Economics, Contributor of International Trade Theory)

 

‘Cryptocurrencies, by contrast, have no backstop, no tether to reality. Their value depends entirely on self-fulfilling expectations — which means that total collapse is a real possibility.’

 

3. Bill Gates (Co-founder Microsoft Corporation, Software Developer, American Businessman)

 

“Unless you’re the world’s richest person, you shouldn’t be buying bitcoin"

 

Now it's time to look at the statements of crypto optimists to understand the broader picture. 

 

(Please note - Below mentioned statements are taken from CNBC)

 

1.  Ivory Johnson (Founder Delancey Wealth Management, Certified Financial Planner)

 

“Cryptocurrencies will disrupt traditional finance because one of their most attractive utilities is the ability to efficiently transfer payment across borders with little or no cost, delay or foreign currency fluctuations.”

 

2. Dragan Boscovic (Director Blockchain Research Lab, Arizona State University) 

 

“Central bank authorities are busy developing regulations on cryptocurrency. They recognize that digital currencies are native to the digital economy and are on their way to becoming mainstream in the next 10 years.”

 

3. Frederick Kaufman (Author of best selling financial guide Money Plot)

 

“Before 2071, the dollar will have more in common with crypto than with silver or gold, so there is no need to doubt the longevity of encrypted algorithms as stores of value and media of exchange.“

 

Refer to the podcast by FutureScapes that features Ellie Rennie, Research Fellow at Digital Ethnography Research Centre to discover more about the topic. 

 

 

Two Sides of the Coin- Acceptance and Rejection of Bitcoin

 

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Countries that accept and reject payments made in bitcoin

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Every country has a different outlook toward the digital currency world. While some countries are heavily leaning on this new age financial investment others are apprehensive about its environmental impact.  

 

Countries mentioned below have given a nod to bitcoin payment and trading. 

 

1. El Salvador 

 

El Salvador has made bitcoin its second official currency. People can trade in bitcoins. People in El Salvador can make payments in restaurants and shopping outlets via bitcoin. It is legally accepted and recognized in El Salvador. 

 

2. Australia

 

A large number of the population in Australia holds bitcoin. Bitcoin payments in Australia are legal. There are many major companies adopting Bitcoin payments within the Australian territory. 

 

3. The European Union 

 

In the member states of EU countries digital currencies are spared from Value Added Taxes (VAT). European Union Countries have developed their own rules regarding cryptocurrencies, payment made in bitcoin is legal.

 

4. The United States 

 

United States, accepts trading of bitcoin and other cryptocurrencies. Cryptocurrencies are traded on the world’s biggest stock exchanges As all the big software companies are in the USA, this country stays ahead in the advancements of digital currencies. 

 

(Related blog - Largest Stock Exchanges

 

5. Canada

 

Bitcoin is a legal mode of payment in Canada. It is widely accepted in restaurants, coffee shops and thrift stores. Canada has centralized and decentralized cryptocurrency exchanges to facilitate trade in cryptocurrencies. 

 

A lot of countries are unwilling to hand over the liberty of bitcoin mining and currency generation to its people. 

 

 

Countries mentioned below are suspicious about cryptocurrencies and prohibit participation in crypto trading. 

 

1. Russia 

 

Russian government restricts payment in bitcoin and other cryptocurrencies. Bitcoin trading is illegal in Russia. 

 

2. Bolivia

 

The Central Bank of Bolivia has prohibited trading in bitcoin and other cryptocurrencies. 

 

3. Columbia

 

Ecuador has banned the trading of bitcoin via passing a bill in the legislative assembly. All major cryptocurrencies are also banned in Columbia. 

 

4. China

 

China has banned all the major cryptocurrency exchanges, and mining platforms. Trading in any form of cryptocurrency is illegal in China. 

 

5. Vietnam 

 

The official financial authority of Vietnam i.e. The State Bank prohibits bitcoin payments. 

 

 

Crypto- The Non Green Impact

 

The world of cryptocurrencies might be a magical door to making billions for some, but its non green environmental practices cannot be ignored. Cryptocurrency mining is a major contributor to increased carbon emissions. As the mining process is undertaken on top notch computers that have extremely high consumption rates, these processes extract tons of electrical energy. 

 

According to an estimate, bitcoin's electrical energy consumption has skyrocketed to reach 1694.83 kWh, which in simple terms is equivalent to the power consumption of a single household in the US for 58.09 days. 

 

Bitcoin’s electrical energy consumption has surpassed the consumption rates of smaller countries like Netherlands and Ireland that consumes an average of 6,238 kWh and 4,200 kWh respectively. 

 

Not only the consumption rates are alarming, the electronic waste of 82.70 grams and carbon footprint of 805.05 Kg CO2  (equivalent to carbon footprint of 1,784,261 visa transactions) are also some key factors that shed light on  how this hyped “decentralized” currency demands exorbitant amounts of energy. 

 

 

A Magic Wand for Investors

 

Cryptocurrency market is highly volatile, it follows a “high risk higher return policy”. Market fluctuations can be the outcome of changes in the supply and  demand cycle. Other factors like trading volume, market beta can also stimulate a change in the cryptocurrency rates. 

 

This highly volatile market has painted a dreamy picture in the investors mind. Cryptocurrency annual average returns supersede the annual returns that traditional source of investment guarantees. 

 

Fixed Deposit offers an annual average return of 6.95% per annum. 8.66% is the average annual returns on mutual funds. (U.S. Large Cap Stock). Although different stocks provide different annual returns, the estimated average annual return on stocks is 10%. 

 

Cryptocurrency average annual returns have been more than 50%. Annual returns for 2017 were 1318.0, 2019 brought the annual return of 87.2 and for 2020 return was 302.8. Ethereum (ETH) , Binance Coin (BNB), Binance Cash (BCH), Polkadot (DOT) are few stable cryptocurrencies that will lead the “future of investments”. Crypto stayed on top and won the trust of many investors in 2020. 

 

 

Last Note

 

“You can’t stop things like Bitcoin, it’s like trying to stop gunpowder. It will be everywhere, and the world will have to readjust. World governments will have to readjust. “ John McAfee, founder of McAfee Inc.

 

 

Every coin has two sides. At times “heads” rallies forward, at times “tails” dominate the trail. Cryptocurrency, functions in a similar way, it lures the potential investors through its lucrative returns, but they are always suspicious about the future crash. Though crypto might be a “two day virtual hype” for some but for crypto millionaires it is truly a magic wand. This future investment may lead the investment game only if “sustainable and environment friendly” practices are adopted for its mining process.