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“Ethereum, or some other Cryptocurrency is going to be the global standard of payment. It’ll be of greater value than national fiat.”
― Hendrith Vanlon Smith Jr

Investing in Cryptocurrency

Cryptocurrency is digital money that uses blockchain technology, which is considered secure because it can establish distributed consensus even among untrustworthy parties. Cryptocurrency blockchains resemble old-fashioned bookkeepers’ ledgers, except that the ledger is electronic, and everyone with access to the ledger can also be the bookkeeper. Investors worldwide have invested and are starting to invest in cryptocurrency. Though Bitcoin is likely the best-known digital money, thousands of cryptocurrencies already exist. Cryptocurrency can be considered one of the newest and most exciting asset classes available to investors.

 

Why Do Bitcoins Have Value?

Bitcoin (BTCUSD) is often referred to as digital currency and as an alternative to central bank-controlled fiat money. However, the latter is valuable because it is issued by a monetary authority and is widely used in an economy. Bitcoin’s network is decentralized, and the cryptocurrency is not used much in retail transactions. One can argue that Bitcoin’s value is similar to that of precious metals. Both are limited in quantity and have select use cases. Precious metals like gold are used in industrial applications, while Bitcoin’s underlying technology, the blockchain, has some applications across the financial services industries. Bitcoin’s digital provenance means that it might even serve as a medium for retail transactions one day.

Bitcoin does not have the backing of government authorities, nor does it have a system of intermediary banks to propagate its use. A decentralized network consisting of independent nodes is responsible for approving consensus-based transactions in the Bitcoin network. There is no fiat authority in the form of a government or other monetary authority to act as a counterparty to risk and make lenders whole, so to speak, if a transaction goes awry.

The cryptocurrency does display some attributes of a fiat currency system, however. It is scarce and cannot be counterfeited. The only way that one would be able to create a counterfeit bitcoin would be by executing what is known as a double spend. This refers to a situation in which a user “spends” or transfers the same bitcoin in two or more separate settings, effectively creating a duplicate record.

 

Key Takeaways

  • Currencies have value because they can function as a store of value and a unit of exchange. They also demonstrate six key attributes to enable their use in an economy.

 

  • The definition of value in a currency has changed over centuries from physical attributes to the velocity of its use in an economy.

 

  • Bitcoin demonstrates some attributes for a currency, but its main source of value lies in its restricted supply and increasing demand.

 

  • If the price of one bitcoin were to reach $514,000, Bitcoin’s market capitalization would reach approximately 15% of the global currency market

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