Cryptocurrency – some call it the money of the future, while some refer to it as the 21st-century unicorn. But, whatever it is, the fact is that today it is a global phenomenon known to every major bank, all big accounting firms, all prominent software companies, and governments of all major countries.
What Is Cryptocurrency?
Cryptocurrency is a fully secure and decentralized digital currency, which is neither issued not is its value controlled by any central bank, but its creation is controlled by cryptography. Very few people are aware of the fact that Satoshi Nakamoto, the unsourced inventor of the primary cryptocurrency, Bitcoin in no way supposed to invent one. It was actually a side product of another invention he was looking for, which was “A Peer-to-Peer Electronic Cash System”.
In the regular currencies, new money can be introduced into the supply system through Quantitative Easing (QE), but in cryptocurrencies, the prices are purely determined by the basic economic principle of demand and supply. Since the introduction of Bitcoin in 2009, more than 800 alternative cryptocurrencies have been introduced by names like Altcoins, Ethereum, Ripple, and Litecoin.
Cryptocurrencies have more in common with precious metals rather than regular currencies. Just like precious metals, their creation is controlled, has limited minable amounts, and there is a cap on the amount of units produced. Confirmation is a critical concept in any cryptocurrency. Till the time any transaction in it is pending, it can be forged, but once it is confirmed it is like something is set in stone and is permanent. It cannot be forged and it cannot be reversed. The power to confirm these transactions lies in the hands of miners and once a transaction is confirmed every node adds it to its database and it becomes a part of the immutable record of the blockchain.
Due to its revolutionary properties, Cryptocurrencies are seen as the dawn of new economy and are fast becoming a part of portfolios along with other investment instruments like equities and bonds.
All those investors who are in the Cryptocurrency market are aware that these digital currencies can vary a lot regularly. When compared to other classes of assets, they offer big swings either way.
Data released by BlackRock suggests that cryptocurrencies are many times more volatile when compared to the stock market of the U.S. The chief investment strategist at BlackRock, Richard Turnill wrote, “The volatility of the cryptocurrencies makes the gyrations in the U.S. equity market during the global financial crisis almost look placid.”
This statement alone is enough to emphasize how highly volatile the cryptocurrency market is. Those who deal in it should have a big appetite because it can lead to immense losses owing to its unique liquidity and operational risks.
With heavy uncertainty on one side and a stratospheric record on the other, these cryptocurrencies do add value to a portfolio. The only secret is that the exposure in this should not exceed more than a minuscule dose and one should be mentally prepared to lose it completely.