My Dear Friends,

Even if your interest in the ups and downs of the financial markets tends towards zero, it was difficult to miss the media coverage of the roller coaster ride cryptocurrencies had in recent years. Probably the best-known and most valuable is Bitcoin (BTC). We receive news of the latest crash almost every day, followed the next moment by yet another rally and a new all-time high.

Celebrities with varying expertise talk about their cryptocurrency investments on social media. In March 2021, the market capitalisation of all cryptocurrencies was $ 2.32 Trillion. The annual growth rate (CAGR) is forecast to be 15,5 %.

A worldwide hype has caught the increasing attention of even the most conservative investors, and cryptocurrencies might soon rank alongside private equity or venture capital as investment opportunities. 

So, is crypto just another shiny bubble ready to pop, or are we witnessing the dawn of a financial revolution? Let’s dive in and separate the hype from the real game-changers!

The History

Ever-repeating collapses of the traditional financial markets with devastating results for businesses, currencies, people, and governments alike were the driving force for the development of cryptocurrency. The idea was to build a currency that would upend the global  monetary system as we know it: 

1. A currency independent from governments and central banks 
2. A currency that does not need a physical exchange for a transaction as it only exists in the digital sphere
3. A currency that would allow the democratization of investing and boost financial inclusion
4. A currency that can not be traced to a single owner
5. A currency that can not be duplicated 

A truly brilliant idea, but There Is a Catch:

Digital assets are super challenging to secure because digital files can be hacked, lost or damaged.

1. Secure ownership: in a contract with the bank holding money on someone’s behalf, the bank has to agree that what is in the bank account is owned by the owner of the account and no one else. If the money gets stolen, the bank becomes liable. This is not the case for digital wallets, which are a kind of cryptocurrency ledger.
2. National banks and the banking system guarantee that a banknote can not be duplicated, which assures its value.

The general idea was first published in 1998, but the blockchain had not completely developed a vital element to facilitate the creation of a cryptocurrency.  2008, the development of blockchain technology was completed, and a major financial crisis hit the global financial markets – In 2009, the launch of a currency with the name Bitcoin happened.

An anonymous person or group with the pseudonym Satoshi Nakamoto posted a peer-to-peer electronic cash system to a cryptography mailing list. 2010, the first cryptographic exchange was launched; in 2011, one Bitcoin was valued at one Dollar; in 2013, one Bitcoin had the equivalent of $100; in November 2017, one Bitcoin hit the $ 10.000 mark to nosedive by 50% in 16 days in 2018.  At the beginning of 2020, one Bitcoin was estimated at $7000 to rise by 700% to $ 64.000 in April 2021.

By November 2021, there were around 7000 cryptocurrency variants; some were Bitcoin clones, and others were built from scratch. Others say 10.000 different cryptocurrencies exist, but due to the creation process, nobody really knows. Some are actively traded, some discontinued or inactive, and most have few to zero followers.

An estimated 1,3% (106 Million) of the world´s population own cryptocurrencies- mostly in countries like Southeast Asia, Africa, and Latin America. With a total of 70 Million wallets and a total market capitalization of $ 2.32 trillion( November 2021), it is the 5th most circulated currency globally.

The surge of many cryptocurrencies, not only Bitcoin and other digital tokens, increased interest in cryptocurrencies by 16% between January and February 2021. 

What is a Blockchain

First things first, there is no such thing as “A Blockchain”. Blockchain is a technology that enables digital data storage, similar to a diary, with regular entries. So, cryptocurrency and blockchain are not the same, but the first would be non-existent without the latter. The technology is truly disruptive, and once fully developed, it can be used in a multitude of industries and will improve many aspects of our lives, from banking to health care.

Imagine blockchain as a kind of ledger that needs to be filled with stories/records/blocks. These records are added in a linear and chronological way, like a chain growing in length with more and more records being added, like a colossal bookkeeping system. These records(blocks) are linked by cryptography, a system that keeps information secret. All data recorded and linked in a blockchain is stored on a multitude of decentralized computers. Every single computer stores the same complex information of a chain.  

Every computer of a particular blockchain is needed to make a change, for example, to enable a transaction. Like a peer-to-peer network that monitors and validates whatever happens within a chain, every transaction or change to a record. The system would recognize unauthorized manipulation of any data, and the manipulated data block would be excluded from the chain.  

Blockchain technology is a tool for cryptocurrencies and makes businesses and administrations more cost and resource-efficient. Because all entered data is validated, disagreeing parties can find a solution without involving a third party. Patient data can be stored and transmitted where and when needed, and controlled payment systems for goods can be facilitated.

Notaries will become obsolete as contracts no longer need authentification; transferring money from one country to another will be less bureaucratic and better controlled. Administration and transaction costs can be substantially reduced, and border controls will be faster as data is continuously updated and made available around the world in a split second.

Blockchain technology has enormous potential but is beginning to be a thoroughly reliable and efficient technology. Security issues are due to a lack of standardization of digital systems, adaptations, and new technological developments.

How to become a cryptocurrency owner

Mining is one option; cryptocurrencies enter circulation by “mining”. Everybody from everywhere can become a miner. Mining began as a well-paid hobby, with a chance of earning 50 BTC(Bitcoin) every ten minutes; today, miners need to be part of a mining pool, and earnings have gone down considerably and will, with rising demand for cryptocurrencies, continue to do so.  The miner adds coins and completes and encrypts blocks so they can be added to the chain. The rewards are coins plus the fee cryptocurrency users pay a “miner” for safely and securely recording their transactions into the blockchain.

Miners also get a transaction fee, and coin owners have to pay each time coins are transferred from one wallet to another. Mining is like a computational arms race; companies or individuals with the most computing power (Hash Rate) will be able to mine the most bitcoins. Cryptocurrency mining is computers solving very, very complicated math equations; the more of a currency needs mining, the more complicated the equations become.

To do this, computers need special hardware and a prohibitive amount of electric power, so electricity is the actual cost factor of mining apart from the equipment, which, compared to the possible electricity bill, is negligible. Every miner is part of the blockchain´s peer-to-peer network and has the function of an auditor, verifying the legitimacy of a currency by validating every transaction.

A less stressful method is to buy the currency. Exchanges like Coinbase sell cryptocurrency, and some institutions offer cryptocurrency ETFs.

A cryptocurrency exchange is a place to sell,  buy and own cryptocurrency. Choosing an exchange needs some careful research; the ideal exchange, for example, will allow the withdrawal of the currency to a personal wallet for safekeeping.  

The next step would be to open a cryptocurrency exchange account and get a personal identification document with the key.  Before placing an order, a personal wallet outside the exchange account should be created. Only the owner will have a private key and can gain access to that wallet. The next step would be to connect your exchange account to a preferred payment method- a credit card or a debit account –  and the first order can be placed.

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Market Capitalisation: The valuation of cryptocurrency

Cryptocurrencies are traded at cryptocurrency exchanges (DCE) like Binance 1, Coinbase Pro2 (IPO, March 2021), or Kraken 3 – similar to trading at the stock market.

How does one determine the value of something which is artificial and has nothing real to be measured against? We know money was invented to make transactions easier. Rather than bringing 10 sheep to sign a contract to buy a plot of land, one could bring coins that symbolize the value of 10 sheep.

The value of cryptocurrency is based on scarcity and demand, similar to gold.  For example, Bitcoin is limited to a total of 21 Million coins; it is designed to secure a high degree of scarcity. As a result, high demand will make a coin more valuable. Or, as experts would say, the market capitalization raises the total number of coins that can not be increased; thus, cryptocurrencies claim to be resistant to inflation. 

Another purpose of cryptocurrency is to provide a system to secure assets and a safe payment system. So, a digital wallet rather than a bank vault stores personal assets.  Cryptocurrencies could be compared to gold: They are scarce, have no interest payment or dividends, and the fluctuating demand from investors drives the value.

Gold, however, has some other fundamental uses; a goldsmith can use it to make jewellery, technical devices need to contain gold and medical components can contain gold. JPMorgan forecasts that if Bitcoin became as popular with investors as gold, the price could rise to $146,000 ( currently $56.000) by the end of 2021

The currency dilemma

Cryptocurrency investors need a high-risk tolerance; within hours, a currency can skyrocket to flash crash the next moment. Social media hypes, a celebrity or an influencer can drive cryptocurrency demand, and the announcement of a tax on cryptocurrency assets can send the same currency into a nosedive a day later.  For the first time in 10 years, Bitcoin jumped the 10.000 Dollar mark in January 2021 to hit the $60.000 mark a few months later. During the same period, Ethereum, ranking just behind Bitcoin, is valued at $ 2.780,18 and only shows small upward jumps, leaving plenty of questions unanswered.

Anyone who likes to plan for a secure future while having a good night’s sleep should, at least for the time being, think twice before investing in cryptocurrencies.  For all with a high-risk tolerance, too much money, or very detailed insider information and a high degree of digital knowledge, it might be the right kind of investment and worth the risk.

Trading remains a wild west where fraud and theft are rampant. Crimes such as money laundering and selling drugs and weapons online are made easy. Defi platforms are exempt from regulatory enforcement.  Christine Lagarde –  chief of the European Central Bank, has already sounded the alarm bell over the “highly speculative investment class with “funny” transactions and interesting but reprehensible money laundering activities. She, like Mrs Yellen and many other heads of central banks, has called on regulators to ” curtail the use of cryptocurrencies for malign and illegal activities”. How no one proposed. Controlling a business model with a USP of guarantying total anonymity (no customer verification), and promising the owner´s absolute sovereignty over his crypto assets might prove to be very difficult.

Hacking a cryptocurrency network is done by using a blockchain system. Encrypted data storage and many independent computers with peer-to-peer monitoring make hacking almost impossible. However, individual wallets (holding personal assets) can be stolen by hacking. In 2018, a total of $1.7 billion in cryptocurrency was stolen, and in 2019, around $ 4.5 Billion; in 2020, losses fell by 57%, mainly due to steady improvements to security systems, a total of 122 attacks against cryptocurrency platforms were reported. Fraud was the dominant cryptocurrency crime in 2020. 

A new vice that gained traction due to the cryptocurrency system is ransomware. A sophisticated system that allows hackers to encrypt/lock to prevent computer users from gaining access to their data. Power plants, healthcare facilities, communication systems, security companies, and government administrations were attacked. To regain access, ransom has to be paid to a hacker – in cryptocurrency. A cryptocurrency that guarantees total anonymity of currency accounts has equal difficulty nailing the culprit.

Hacking any cryptocurrency network is very difficult because of how the blockchain system works. Encrypted data storage on many independent computers with a peer-to-peer monitoring system makes it very difficult to hack into a chain. However, individual wallets (which hold personal assets) can be stolen. In 2018, a total of $1.7 billion in cryptocurrency was stolen, and in 2019, around $ 4.5 Billion; in 2020, losses fell by 57%, mainly due to improved security systems; a total of 122 attacks against cryptocurrency platforms were reported, and fraud was the dominant cryptocurrency crime in 2020. 

A new vice that gained traction facilitated by cryptocurrency is ransomware – a sophisticated system that allows hackers to encrypt/lock users’ data systems so they can not gain access to data anymore. Power plants, healthcare facilities, communication systems, security companies, and government administrations were attacked. To have a system unlocked, hackers demand ransom, which has to be paid in cryptocurrency. A perfect system as cryptocurrency guarantees the anonymity of accounts so no traces can be found. A total of 350 Million was extorted in 2020, a threefold rise compared to 2019. 

There is another problem – however, not one caused by the system as such- keys/passwords are lost, so individual wallets can not be accessed anymore. 20% of Bitcoins are currently locked or lost due to forgotten keys.

Crypto: A Game Changer, But Not a Revolution—Yet

Cryptocurrency undoubtedly challenges the financial world, offering independence from traditional banking, governments and fiscal regulations. But it’s no magic bullet with volatility, regulation concerns, and security risks. Before diving in, know the risks, store assets securely, and invest wisely—because knowledge is your best asset in crypto.

One last thought before you go:

Curious minds make confident investors. So, same time next week?

– yours Harper