In our previous article, we talked about cryptocurrencies: history, the recent market crash, and their probable reasons. Now we’ll shed some light on what might be the probable future for cryptocurrencies, and about investing in cryptocurrencies.
Investing in Cryptocurrencies
“Should I invest in Crypto? Should I buy/mine and hold bitcoins or should I go for the altcoins? And if so, which altcoins do I go for?” Such questions are on many tech enthusiasts’ minds. To answer those, one has some insight into how this whole pricing mechanism works. Plus, they’re not exactly “yes” or “no” questions. You have to know about the characteristics of the currencies out there, their pros and cons, along with the goals they serve to achieve. And then make the right decision for you. Here are some helpful articles in this regard.
Learn about the whole system from A total overview of how cryptocurrencies work.
Here’s one about potentially beneficial cryptos to invest in.
How the Cryptocurrencies get their values
In the most basic way of explaining, cryptocurrencies gain their values from community involvement. That includes the user demand, the scarcity (for example – there could only exist 21 million bitcoins ever), or the utilization of the blockchain ecosystem they function in, along with the image and effectiveness of the companies that issue them. An investor should bear all those in mind.
One straightforward indicator of the coin’s value is the market capitalization or market cap for short. It is the total circulating number of coins multiplied by the value of one coin. Market cap is evidently the standard for determining their worth. Investors and market analysts always keep this index in close observation.
Mainstreaming the Cryptocurrencies: Challenges
So, Imagine you went to a nearby supermarket to buy groceries, or to a coffee shop. And you’ve been given multiple payment options, among them one is to pay with your preferred cryptocurrency. Wouldn’t that be convenient? More than that, wouldn’t that be a big achievement for crypto and decentralized finances?
However, as simple as it may sound, it’s not that easy at all. Up until this point, cryptocurrencies are way too unstable for everyday use. The scalability, transaction handling, delay, scarcity of regulations, all make it difficult. Bitcoin is still and seems to be continuing as the most used coin for p2p payments, and it is extremely volatile.
Volatility is a big problem
Right now all the popular cryptocurrencies have an extremely volatile nature. That means their prices go up and down aggressively in a very minuscule amount of time. Imagine the grocery scenario. You try to pay for your groceries but the payment window keeps changing the values of the items adjusting with the crypto value every 2 minutes or so. That wouldn’t be practical, would it?
So, until this volatility stabilizes in some way, it’s gonna be hard to make cryptos mainstream.
Are “Stablecoins” the answer, or the more bumpy road?
To cope up with the volatile nature of most cryptocurrencies, a new type of coin was introduced called Stablecoins. Popular stablecoins nowadays are tether, PAX, Binance coin, etc. These types of coins are normally asset-backed or algorithmic in a way so their prices remain stable instead of massive up-downs.
Ironically, they are yet to be proven to be a viable solution against regular cryptos. Most stablecoin projects tend to be a failure, and they have many drawbacks of their own. Including transparency and regulation issues, scalability, trustworthiness, and being economically unstable. So far, stablecoins aren’t looking good yet.
The Clash with Governments or “Centrally in Control” entities
Decentralization is a big threat to governments, or central banks, those in charge of “money” or “maintaining the economy”. The reason behind this is, what gives every government immense power, a big portion of that comes from being able to control money. By being able to control money, they can control citizens, the market, and economic fine-tuning, or even can go with corruption maneuvers. Now, crypto being mainstream will interfere with that power, big time. Because the sole purpose of crypto is to make this control decentralized. The more mainstream crypto becomes, the less control governments have over the “money”.
And it’s only logical that they will do everything in their power to bar this from happening. No government would want an economy they cannot regulate. This is exactly why the “Biden administration imposing tax” rumor is so believable. This is one of the major reasons some finance experts are skeptical about cryptocurrency’s future and they say governments will eventually put an end to cryptocurrency. However, the majority has a different opinion, and that is crypto is still in its baby phase, and it is bound to flourish in the future.
Is Crypto the internet of the 1990s
The Internet in the ’90s and even in the early 2000s was pretty much a play thing comparing with what we have today. The people were confused about its usage, the investors didn’t know where to invest, gave their money to whatever dot-com businesses they could find, and made a bunch of bad decisions. Moreover, it was just a good communication medium, not very versatile and multi-purpose. If we look deeper into this pattern, we see some significant similarities with cryptocurrencies, more specifically the underlying blockchain technology.
People still see bitcoin or any other crypto coin as an asset to hold, they don’t get the power of its underlying protocols. Within a couple of years, we can hope to see apps and platforms built on this protocol which will allow people to interact with cryptos better and move away from the view of seeing it as just an asset to hold as just an appreciating gesture, but as a tool to transfer value amongst people.
The recent crash is similar to the scenario for the internet between 2000-2004 when the value of dot-com IPOs fell from $96.5 billion to $15.4 billion. One couldn’t just make a fortune out of just buying a domain and handing out business propositions. The initial euphoria had worn off, and the investors got a lot more skeptical because they were slowly getting aware of the risks of losing their money to bad investments and not being on board the hype train. They didn’t stop investing, however. They just got wiser on where to invest. The messy situation was fading away and fruitful businesses started to bloom.
The blockchain aka crypto situation is probably the same, and it’s still in that messy situation of the 90s. Hopefully, we can expect to have a similar infrastructure and environment of today’s internet for this technology soon in the future.
DeFi, is it the future?
DeFi is short for “decentralized finance”. It’s an umbrella term for a set of financial applications. All of those applications follow the protocol of decentralization of blockchain technology. Seemingly, it is an effective system, if being trustless and secure is the priority for a transaction. It allows several entities to hold a copy of a history of transactions, meaning it isn’t controlled by a single, central source. It is also referred to as “open finance” due to its decentralized nature.
One of the major advantages of DeFi is the ability to eliminate all kinds of middlemen from the transaction. These intermediate entities can make transactions limited by speed and sophistication caused by human factors and internal regulations, and getting rid of them can mean fast and smart transactions such as cross-border payment settlements.
Most “DeFi” applications of today are built on the ethereum platform. They include:
- Decentralized Exchanges (DEX) where users can trade cryptocurrencies or currencies with each other without intermediaries
- Prediction Markets for betting on the outcome of future events, such as elections
- Stablecoins( previously discussed) etc.
DeFi is certainly showing potential to be big in the future. Since it is closely tied to blockchain and cryptocurrency, I think it’s safe to assume that DeFi’s fate will go in the same direction as these other blockchain-based systems.
Contributor: Istiaq Bin Salam Siaam
