“Double your money overnight and make your fortune” or “You are going to miss out on something big dude.” That’s how most of us got interested in the subject of Cryptocurrency and personally invested in the space.
As renowned investors say — Half knowledge is no knowledge and investing in a product that you don’t completely understand will definitely land you in trouble in the long term. While in theory developing sustainable and disciplined financial investing through thorough research sounds like the right thing to do, in reality, it is very difficult to adhere to this and not get distracted by many get-rich-quick schemes that lure you with exponential returns.
After hearing a lot of noise around the Cryptocurrency ecosystem, having spent significant time understanding the underlying concepts and personally investing in it as well, I thought I should share my views on one of the most heated topics currently. Since Cryptocurrency and its ecosystem is a vast topic, I have decided to launch a series about my understanding on the same –
- Part 1 — Genesis of the crypto ecosystem? — An Introduction
- Part 2 — Bitcoin — Problem it’s trying to address?
- Part 3- What are Bitcoin Mining and the Economics behind the Bitcoin mining business
- Part 4 — Landscaping of Entire Cryptoecosystem (USD 740 bn — Greater than combined GDP of Malaysia and Thailand or 1/3rd of India’s GDP)
- Part 5 — Key Challenges
- Part 6 — Valuation — View Point
- Part 7 — Should I enter or exit?
What is the currency?
Let me start off with the three key characteristics of a currency.
Leaving aside the debate whether it can be a global currency or not , the point to note here is that Bitcoin satisfies all three basic parameters of a currency but the circle of trust extended by the Central Authorities is missing. One must note that all the characteristics of a currency are ring-fenced within the circle of trust and once this trust in the system is broken, it is difficult to bring it back.
The genesis of Cryptocurrency = Loss of Trust + Unpredictability + Mismanagement leading to loss of trust in Central authorities:
As history suggests, there have been multiple occasions in the past where Central Banks have broken this important component of Trust and the general public like you and me have suffered without any fault of ours, the recent Demonetization being one such event. The impact is significant as our hard-earned money becomes worthless based on the whims and fancies of these Central Banks which are often controlled by Governments. Below is a chart that states key historical events where the trust of the general public was broken and the entire economy was shattered.
What is Cryptocurrency?
As there is no formal definition of a cryptocurrency, I have tried to breakdown the definition in a simple form after interacting with Domain experts and reading different literature on the subject.
Bitcoin (1st Crypto): Created in 2009 by Satoshi Nakamoto (Unknown personality), it is a form of currency that is created and held digitally.
How is it created?
- Created digitally by a community of people that anyone can join; No single person controls it
- Bitcoins are ‘mined’ using computing power in a distributed network
- No. of Bitcoins that can be mined is capped at 21mn in the source program (76% of this has been mined to date)
- The technology behind the functionality of Bitcoins: Blockchain
Let me also list down some common myths about Cryptoecosystem:
- Bitcoin is the only Cryptocurrency/asset: There are ~1,400 active cryptocurrencies/assets in the entire ecosystem. Bitcoin is just one of them and accounts for 30% of the entire ecosystem in terms of market capitalization
- Arbitration is not possible: Typically when a trading ecosystem of a new asset class is developing, there are several possibilities of Arbitrage gain primarily on account of inefficiencies across countries, exchanges, etc. It does exist here as well at this point in time
- It’s a bubble: Humans are rational human beings by nature but become irrational when they get trapped by greed caused by the euphoria of Fear of Missing out (FOMO) created by the people around them. This is not the only instance of irrationality! If we look back and read the history of Tulip Mania (1637), South Sea Bubble (1711), Radio in the 1920s, and the recent Internet bubble — All share similar characteristics. The only difference with Crypto is, thanks to Social Media and Rising Internet Penetration levels across the globe, the news is spreading like wildfire luring people by the thousands leading to disproportionate Demand and hence this bubble!