What’s the future for digital currencies?

The following guest post is courtesy of Ipek Ozkardeskaya, Senior Market Analyst at FCA regulated broker London Capital Group Holdings plc (LON:LCG).

Ipek Ozkardeskaya, LCG

The world is heading towards a digital age in currencies, faster than many would’ve imagined. The change is happening so fast that the next generations will potentially stop using paper money as we do today.

As the online shopping and the e-commerce took off globally, we witnessed the rise of another form of currency: the cryptocurrency. The bitcoin is the most famous cryptocurrency among some 700 cryptocurrencies that are known to be in circulation today. An unidentified programmer introduced the bitcoin on October 31st, 2008. The bitcoin is based on a complex peer-to-peer system, where transactions directly take place between the users. This means that the bitcoin is a decentralised currency, without any central bank involvement.

At the beginning, only the connoisseurs used the bitcoin for a limited amount of transactions. Nevertheless, the bitcoin rapidly became a worldwide phenomenon. As the currency spread over the globe, its value became granted among its users. The users could effectuate real transactions with their bitcoins through online operations. The phenomenon expanded to the point where leading online businesses such as Amazon, Home Depot and CVS started accepting payments by bitcoin.

Very rapidly, most of these forward-looking companies had to drop the idea of accepting payments in cryptocurrencies, simply because a perfectly decentralised currency caused sizeable legal problems.

The governments’ inability to control the money in circulation was one of the major problems. Besides, combined with Tor, a free software that prevents people from learning your location, the bitcoin created a highly performing dark web platform where arms and drugs traffic picked up overwhelmingly. The cryptocurrencies became very convenient for illegal transactions and money laundering purposes, simply because of their nearly perfect anonymity. Hence, the world’s leading governments stepped into the scene to stop the spreading of this new form of currency.

Is bitcoin valuable?

Yes, the bitcoin is valuable. The definition of a ‘currency’ involves ‘a form of money in actual use as a medium of exchange’. In fact, it only takes an asset to be widely accepted as an exchange tool to reach the status of a ‘currency’. Therefore, any object, commodity or asset could become a currency. For example, cigarettes were known to be the most basic currency in prisons, as they could be exchanged against a favour or a service among the prisoners. However, if the size of smokers were to diminish, many of them would stop accepting cigarettes in exchange of a service, therefore cigarettes would lose in value as a currency as they would be no longer ‘generally’ accepted as a medium of exchange.

As a result, the cryptocurrencies are attributed a value by the market, or simply by the community of users who trade them. As of today, one unit of bitcoin is worth $862. There are more than 16 million bitcoins exchanged on numerous bitcoin exchanges. The market capitalisation of the bitcoin is over $13.8 billion US dollars.

The bitcoin is even quoted on the Bloomberg terminal.

The future of the cryptocurrencies

‘The cryptocurrencies have been invented, they can no longer be dis-invented’ says Adrien Treccani, director at Metaco SA in Switzerland, an expert in distributed ledger technologies. The digital currencies are set to spread more, and among all digital currencies in circulation, the bitcoin has the greatest chance to be one of the most popular ones, given how successfully it fought back numerous attacks; both speculative, technical, and governmental. ‘The bitcoin was announced dead almost 30 times, yet each time it got through and resumed its ascension’ said Treccani. ‘The bitcoin has a solid credibility today; we are no longer talking about the gold coins in World of Warcraft.’

The next critical milestone in digital evolution is believed to be the creation of ETFs (Exchange Traded Funds) that would trade on traditional markets, such as the Nasdaq. This would not only facilitate hedge funds and institutional investors’ access to the bitcoin, but would only provide them a way of storing the value on their balance sheets, which is technically very difficult today.

Official digital currencies may be on their way

Finally, the world’s leading central banks consider issuing their own, official digital currencies, not to jeopardise cash yet to complete their pallet of offering. Could the official digital cash harm the non-central bank backed currencies of today?

‘The advantage of bitcoin is that it offers investors a very interesting risk profile, given that it has a limited correlation with traditional assets’, according to Treccani. The digital currencies are recognised as a ‘new commodity class and are here to stay’.

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