Cryptocurrencies have had a wild ride over the last two years. In 2017, Bitcoin’s price skyrocketed from around $1,000 to almost $20,000 by December 31st. Then, in early 2018 it fell back down below $6,000 before hitting nearly $11,000 earlier this week (June 3rd). If you had invested in Bitcoin when it first launched in 2009 by buying 10 Bitcoins at $0.05 each (plus fees), those coins would be worth over $500 million today! It may seem like cryptocurrencies are going through some growing pains right now but they are on track to becoming an accepted currency used by billions of people worldwide within the next few years.
Cryptocurrencies are a new asset class and they are hard to evaluate.
The first thing to understand about cryptocurrencies is that they are a new asset class. This means there isn’t a whole lot of history to go on when it comes to valuing them, and that makes them hard to evaluate. The fact that there’s no historical data available also means predictions about future prices are more difficult, as there is less information from which to make calculations.
Cryptocurrencies were created with the intention of becoming currencies for use in the real world—like cash or credit cards—but their value has been driven primarily by speculation so far instead of actual usage (although this is beginning to change). The price fluctuations we’ve seen over the past few years have largely been driven by speculators placing bets on where they think a coin will go next; if we’re honest with ourselves most of us have probably done something similar at least once in our lives!
In a recent interview, Jeremy Allaire, co-founder of Goldman Sachs-backed Circle, said he views Bitcoin as a digital store of value.
So, what is a store of value?
In short, a store of value is an asset that can be used to exchange for goods and services in the future. Gold has been used as a store of value for thousands of years by humans. Stocks are another example of an asset that can be stored away from its owner and sold later on at a higher price than it was purchased for (assuming you don’t trade in stock options). Cryptocurrencies like Bitcoin are also thought to hold intrinsic value because they can be traded for other cryptocurrencies or fiat currencies on exchanges like Coinbase or Kraken.
Cryptocurrencies may be the reserve currency of the internet.
It’s difficult to answer why cryptocurrencies hold value, but they are certainly valuable and they do hold value. The best way to understand why this is so is through an analogy: A dollar bill can be used as a medium of exchange, a unit of account, or a store of value; it’s all three at once! If you have dollars in your pocket, you know that they will always be worth something because other people accept them as payment for goods and services. This is what makes dollars useful—they’re good “money.” Similarly with cryptocurrencies: they are a form of money that exists only online. They can be exchanged with other cryptocurrencies or fiat currency (government-issued currencies like USD) such as USD/GBP/EURO etc., but their most important use case is as an asset class – the same way gold has been used throughout history as an investment vehicle for storing wealth safely over long periods of time without inflation risk (because gold does not lose its value).
demand and scarcity.
Like other assets, cryptocurrencies have been driven higher in price by a combination of demand and scarcity. Where there is demand for something and it isn’t easy to get your hands on it, the price will tend to rise. In this case, cryptocurrency buyers are willing to pay more for their coins than their face value because they know that the supply of cryptos at any given time is limited (and growing more limited).
Cryptocurrencies aren’t backed by any government or central bank—they’re decentralized digital currencies with no physical manifestation like cash or gold bars. They’re also not tied to any commodity: they can be exchanged freely online without anything being produced or consumed as part of that transaction (unlike most other commodities). Cryptocurrencies don’t hold any intrinsic value either; unlike U.S. dollars or euros which can be used as legal tender anywhere in the world, these digital tokens only have worth based on what others will trade them for at a given time.
The Global Race
There is a global race to build and control next generation payments networks. The prize is enormous: the ability to shape how the next generation of commerce will operate, and who will be able to participate in it.
This race is between the world’s biggest tech companies, its biggest governments, its biggest banks and financial institutions, as well as its largest energy companies (which often have deep ties with governments).
The US and China have been investing heavily in blockchain technology, a decentralized ledger system that allows peer-to-peer transactions without the need for a third party. Both countries are hoping to become global leaders in this field, which could give them control over the mechanisms that facilitate payments, including currencies.
However, it is important to note that both countries are not strictly interested in blockchains for their own sake but rather for what they can tangibly do: power autonomous systems that will give them control over their respective national infrastructures and economies.
A number of cryptocurrencies have big name investors behind them who can help push up the price and market sentiment.
Cryptocurrencies are not just used by random individuals on the internet, they also attract big names in finance. For example, Coinbase is backed by some of the biggest investment banks including Goldman Sachs and Fidelity. In addition to this, several VC firms are also invested in crypto projects such as Andreessen Horowitz and Union Square Ventures (USV). Another group that has expressed interest in cryptocurrency is central banks themselves; for example, Bank of England governor Mark Carney has said he is “open minded” about adopting blockchain technology at a later date.
As the world population grows and more people gain access to smartphones, the internet, and mobile payments—all of which are necessary for cryptocurrency participation—we will see more participants in cryptocurrency markets.
In 2018 alone, there is expected to be over 2 billion people with access to smartphones and the internet who can potentially participate in cryptocurrency markets. By 2020, Gartner predicts that 6.4 billion people will use mobile phones as well as 5.5 billion people who have active social media accounts (this is up from 4 billion users in 2017).
Everyone is looking for the next great investment, but it’s important to understand what drives price movements in any asset class. Cryptocurrency prices are driven by a combination of factors including speculation, market sentiment, investor demand and scarcity. In our view, cryptocurrencies are the next big thing in finance and will continue to grow as more people come online and want access to digital payment solutions that are fast and secure.