Cryptocurrency is the new gold or something can go wrong?
What is cryptocurrency
Cryptocurrency is a digital asset that doesn't have "physical" equivalent in form of banknotes or coin; it exists virtually but allows to pay for real goods.
"Cryptocurrency is a computer code with a built-in supply limit to raise coin's value," says Vitaly Golovanov, bitcoin entrepreneur. Not all of them have a limited issue but most like bitcoin, ethereum, litecoin and others do.
Cryptocurrency is supposed to replace traditional money because it is decentralized (it is not issued by the one public body) and help its owners to remain anonymous.
"Cryptocurrency is a virtual money that doesn't exist physically, it can't be literally "touched",” points out Dmitry Yukhnevich, CEO at Linkprofit. “It is issued within the Internet and not regulated by a state or any other authorities. One of the main feature of cryptocurrency is protection from forgery. It has a encrypted data that can't be copied."
At the moment bitcoin can be used to pay for goods and services, to make transactions, transfer coins to other users. It can't be withdrawn in cash, but it can be traded for fiat money on special exchanges.
Cryptocurrency has a number of advantages:
- Transparency – everyone can join the system and earn living by mining virtual coins.
- Confidentiality – bitcoin transactions can't be tracked by third parties.
- Protection from hackers or forgery. Due to blockchain, funds are fully protected from possible attacks.
"To understand what is cryptocurrency, imagine that you occurred to be on the inhabitant island with a group of people you don't know,” tries to explain Vadim Petrov, deputy director of web-development department at QBF.
These travelers have goods that they can sell or rent to each other but no one has cash – they only have credit cards and money can be withdrawn only on the continent. To make a fair exchange in this conditions they may create their own currency, for example to write down all their operations with a combination of digits.
In this case as the expert warns all the records of trade operations must be kept carefully so that no debts would be forgotten. Whereas workbook is enough for functioning of the virtual currency on this island, when it comes to information about this type of transactions around the world it can only be kept on a powerful computers.
Transactions data is spread among all computers connected to the network for permanent storage with full anonymity provided. They are located not separately but in the special blocks. Miners are those people who work on creating these blocks. They in fact act as a mint and get reward with the currency they develop.
Reasons for its emergence
It seems clear what is cryptocurrency. But what were the reasons for its emergence, since as we know nothing can develop in empty spaces.
As dollar was once backed by gold, bitcoin is backed by full anonymity and limited issue (21 million bitcoins can be issued in total) and protection from forgery.
Cryptocurrency may be considered as some kind of protest against "reckless" policy of central banks towards money creation as well as unlimited power of monitoring authorities, believes one of the experts at development and innovations department at FxPro.
Cryptocurrency has emerged when technically advanced society strived for decentralization and independence, as well as getting the best from globalization while keeping romantic ideals of anarchy.
Sometimes cryptocurrency is called "new gold". Is there really similarity between virtual money and noble metal or it's just the above mentioned strive for romanticism?
As Vitaly Golovanov, bitcoin entrepreneur says, cryptocurrency has to be mined like gold. But the process of mining is carried out with help of various electronics: video cards, asic and others. Cryptocurrency is mined when hard drives are calculating a computer code which becomes more and more complicated. Cryptocurrency as well as gold has its own resource, so it is limited in quantity.
Daria Arefyeva, founder and head of international association CryptoFriends, organizer of blockchain festival ICO Hypethon, shares this view: "Bitcoin is the new gold because it is limited and it is difficult to mine like gold."
Story from Daria Arefyeva:
"When Satoshi Nakamoto, bitcoin creator, wrote a white paper for bitcoin he said that its supply would amount to 21 000000 tokens. When bitcoin was just launched, its price was about a few cents. But the more people learned about it and bought this new currency, the more grew its price. One of the reasons for such a massive hype is that everyone knows that someday it won't be possible to mine bitcoin anymore and it may take place very soon. The higher demand, the faster growth of its price we observe. As of today, it is valued at more than $4000 which is $3000 higher than price of gold. Bitcoin has been long compared with gold within blockchain community. It is considered as a more effective storage which is becoming more and more interesting for business."
However, there are opposite opinions. Konstantin Gubin, managing partner of the Group RB Partners, believes that “new gold” is just a catchy and pointless term. It only exists for the sake of a witty remark.
There is no regulation for bitcoin
Despite the difference in opinions, bitcoin exists and continues to grow in price significantly. What is this cryptocurrency backed by and why this mysterious virtual money is so valuable?
Experts believe that bitcoin is backed by the balance of supply and demand as well as people’s faith in ability to build a new economy through collective efforts. For the whole world, bitcoin is a currency you want to use. It gives independence and transparency of transactions. This is the currency that the bank does not stand behind. If compared to the dollar, the US currency is backed by typewriters, banks and regulators. Whereas bitcoin has no regulators.
The dollar is a centralized currency, some people controls its exchange rate, and others says how it will develop further. What will happen to bitcoin depends on every user of blockchain network. This is a decentralized network, where a completely different paradigm of the new economy is applied. It has been inspiring people so much since 2008 that in 2017 we see such a high price of bitcoin. "In fact, the dollar – it's just a piece of paper, and bitcoin – a technology that is available to everyone. And anyone can become a part of this system," says Daria Arefieva.
The dark side of bitcoin
"As the popularity of bitcoin has been growing, the exchanges, speculators, marginals kept joining the game. Some of them raised money for various projects, including murder of politicians or selling drugs. All this has become a headache for governments and law enforcement agencies, but each event of this kind aroused more and more interest in cryptocurrencies, thus increasing their price. As a result, the value is based on all these factors," notes the specialist of the development and innovation department of FxPro.
It should be noted that, indeed, bitcoin and other cryptocurrencies are extremely popular for payments in darknet, part of the network used for illegal trade – drugs, weapons, etc.
The value of bticoin from the point of view of economic theory is explained by Konstantin Gubin, managing partner of the RB Partners Group:
"The value comes from social interaction: bitcoin is a decentralized tool that ensures the security of transactions at the expense of the community. The institutional theory of money argues that money is valuable because the state declared them valuable and in confirmation of this collects taxes, that is, recognizes the value for themselves. All modern money is nothing more than an agreed-upon entries in accounting. In this sense, blockchain-based register of transactions is the same thing!”
The exchange rate is determined by supply and demand, this is exactly how the "community consent" is realized.
Aleksei Pospekhov, CEO at FUTUR CAPITAL, believes that the cost of cryptocurrency can not be linked to conventional fiat money, since its supply and demand reflects the multifaceted connection of various processes in the crypto world. Besides capitalization of all cryptocurrencies is at the level of about 100 billion euros. For comparison, the M1 (Monetary aggregate) of the Swiss Franc amounts to about 8 trillion euros.
Will it burst or not?
All that grows, sooner or later either ceases to grow or burst like a giant soap bubble. There has been enough of such examples in the economy. Could this happen to bitcoin?
"A certain ceiling is currently reached, it's not about supply and algorithms, but rather a project as a whole. At the moment, cryptocurrencies are increasingly spreading into the real world, they have become easier to use, but at the same time there is a feeling of a growing bubble and large investors are staying away from the cryptocurrency, as they expect it to collapse,” says the specialist of the development and innovation department of FxPro.
“To consider bitcoin as a means of saving is very dangerous as well. Governments can not yet decide on the action plan, while China, for example, has already limited the activity of bitcoin-exchanges. What can prevent other countries from doing the same thing? If you can not prohibit and regulate, then there is the possibility of depreciation, since cryptocurrencies are also strongly affected by it, like all other assets in the world.”
Elena Masolova, Investor in TokenStars. Serial entrepreneur with 3 exits, founder at Groupon Russia, Pixonic, Eduson and AddVenture Fund, is absolutely confident in the safe future of bitcoin: “Cryptocurrencies are here to stay, they serve as the store of value. It is not a bubble, but a part of the global economy.”
Konstantin Gubin, managing partner at Group RB Partners, is not sure about bitcoin as well as about other assets: “Does it look like a bubble? Yes, from this point of view the situation doesn’t differ from tulips, subprime mortgage, and other assets. But in fact, bitcoin is not worse than other fiat money.”
Having realized what bitcoin and what its value is, it is logical to ask – where to get them? If the employer does not pay salary in bitcoins (although it is worth asking, maybe he will agree), and the nearest bank refuses to change their national currency (there is nothing surprising about it, bitcoin is recognized only in a few states), bitcoin can be obtained independently or bought on the exchange. How to do this, as well as how bitcoin and blockchain are connected and whether it is possible to get rich on operations with cryptocurrencies – read the second part of the article.
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