Now that you have some background about cryptocurrencies – what they are, and how they may be traded – let’s now explore how these digital assets have grown, and how they are increasingly becoming more widely adopted for commercial transactions, as well as used as legal tender by some sovereign governments.
We’ll also explore some likely reasons behind their allure, and how regulations and the potential for digital fiat currencies may be shaping their future.
But first, let’s address why we have so many digital coins.
You may recall from our previous lesson, there are more than 2,200 so-called altcoins in the digital currency space – each aiming to improve upon certain aspects of first-generation cryptos such as Bitcoin, or second-generation ones like Ethereum.
Many altcoins’ improvements typically involve offering higher transaction speeds or creating greater energy efficiencies.
These altcoins generally appear to achieve these enhancements through “proof-of-stake” transaction verification, which, among other refinements, is a quicker process than the “proof-of-work” required by cryptos such as Bitcoin.
While “proof-of-stake” and “proof-of-work” are both means to the same ends – they are both consensus mechanisms for authenticating new transactions, adding them to the blockchain, and creating fresh tokens – their results can be dramatically different.
Cardano (ADA), for example, can process more than 250 transactions per second – outpacing – by a wide margin – Bitcoin’s ability to handle about 5 at the same rate.
Among many others, Algorand (ALGO), Cosmos (ATOM), Tron (TRX), and Tezos (XTZ), are examples of altcoins that use some form of “proof-of-stake” process and are available to trade on exchanges such as Binance US, Coinbase, and Kraken.
Against this backdrop of massive cryptocurrency proliferation, you may now be asking – “How can I use these digital currencies in my day-to-day transactions?”
To address the commercial viability of holding Bitcoin, for example, companies such as Microsoft and PayPal each started accepting it as early as 2014, with Microsoft using it as payment for games and apps on platforms like Xbox, and Paypal using it to help lower its transaction fees.
More recently, the platform formed by the partnership between payments startup Flexa and Gemini enabled major retailers like Whole Foods and Home Depot to accept Bitcoin via their digital scanners, seamlessly converting Bitcoins into dollars.
However, Bitcoin isn’t the only digital currency eyed by retailers. AMC Entertainment CEO Adam Aron recently tweeted that the giant theater chain also expects to accept Ethereum, Litecoin, and Bitcoin Cash by year-end 2021 for online ticket and concession payments.
For their part, apart from investors using altcoins or stablecoins to purchase other cryptos such as Bitcoin, they each may have their own unique purposes in the digital asset space.
For example, altcoin Algorand touts that the objective of its “pure proof-of-stake” approach is to make it impossible for the owners of a small fraction of the economy to harm the whole system. Overall, Algorand says its PPoS approach ties the security of the whole economy to the honesty of the majority, rather than to that of a small subset.
Meanwhile, stablecoins, such as Tether (USDT), which, as the name suggests, generally tie their value to an underlying security, commodity, or index to mitigate the risk of volatility in the cryptocurrency sphere – which Bitcoin, among others, are prone to.
Indeed, protection against volatility may have helped the roll-out of El Salvador’s move to adopt Bitcoin as its legal tender, when the value of that crypto plunged around 20% on its first day.
Overall, however, the growing allure of cryptocurrencies may be traced not only to their high-level purpose of decentralized finance, but also to the heightened attention placed on the technology that has given rise to them.
In fact, the blockchain that computer programmers, or networks of programs, use to mine coins also has numerous other purposes– which has triggered the imagination of the public.
Beyond digital assets, blockchain’s potential applications may include managing privacy risks when sharing encrypted health information with providers, validating votes, which may be cast via smartphones, or lowering the transaction costs associated with financial settlement services.
Several global universities have also joined forces to embark on a way of using blockchain to create an infrastructure for issuing, storing, displaying, verifying, and sharing academic credentials.
From digital IDs, food safety, copyright and royalty protection, travel agency tracking, and digital art – or non-fungible tokens (NFT) – the potential uses for blockchain not only stretch far beyond cryptocurrencies, but give them added attention by association.
But the more popular cryptocurrencies seem to have become, the greater regulatory importance, and pushback, seems to be.
To date, it appears policymakers, including the SEC, have been struggling to find best practice approaches to regulate the more than $1.5 trillion market, while several countries across the globe seek their own digital forms of fiat currency.
China, for example, which has started a pilot program to introduce a digital yuan, recently placed a blanket ban on all cryptocurrency transactions and mining, viewing the technology, in part, as a vehicle for conducting criminal activity like money laundering.
And although no central bank digital currencies (CBDCs) have yet to officially launch, many central banks have been steering down this path. Along with the People’s Bank of China, other central banks with their fingers on the pulse of producing a digital fiat currency include Sweden’s Riksbank, the Bank of England (BoE), the Bank of Canada (BOC), the central banks of Thailand, Venezuela, Uruguay, Singapore, and the U.S. Federal Reserve, among others.
While many analysts have views in support of, or against, digital assets in general, there remain uncertainties over the outlook on cryptocurrencies, how they will be more broadly used in the commercial marketplace, as well as how regulations may shape investing in them.
Recent IBKR Podcast – October 2022
Video Sources – as of October 2021
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