Investing in cryptocurrencies seems to be here to stay. The impressive rally carried out in the last year by the best known, bitcoin – multiplying by 10 the price it had 12 months before – has led many to wonder if this time is the final one.
Investing in cryptocurrencies is not easy and carries certain risks, but more and more people are interested in the subject , including Elon Musk, the founder of Tesla and one of the richest people in the world, who caused large variations in the price of bitcoin with his tweets about the cryptocurrency and with the announcement that Tesla had invested 1.5 billion dollars in it.
Although it is a world still unknown to the general public and the average investor , nowadays even central banks are already talking about this type of virtual currencies and we can see agreements such as the one reached by Allfunds Blockchain and ConsenSys (which is the software company of Ethereum, the main alternative to Bitcoin ) to promote the use of blockchain technology in the distribution activities of investment funds and other types of regulated industries.
In addition to Bitcoin and Ethereum – or Ether – other outstanding alternatives among the more than 7,000 existing cryptocurrencies are Ripple, Litecoin, Neo or Dogecoin, a digital currency whose value has also risen a lot, also being cited by Elon Musk in another tweet.
Next, we will review what cryptocurrencies are, what their evolution has been and what risks investing in cryptocurrencies entails.
How cryptocurrencies were born
Already in 1983, a cryptographer named David Chaum, doctor in computer science from the University of Berkeley (California) devised a cryptographic system called eCash, and in 1994 he would launch DigiCash, the first digital currency in history .
However, at that time electronic commerce and the internet had nothing to do with the boom they have reached today, so a few years later, the company went bankrupt.
In 2008, under the pseudonym Satoshi Nakamoto (the real identity is unknown, it is not known if it is a person or a group of people), an article was published on a mailing list dedicated to cryptography, describing a P2P system of money. digital. And in 2009, the Bitcoin software was launched, creating the network and the first coins with that name . In honor of its creator, each bitcoin is made up of 100 million satoshis , which would be the minimum unit of account (something like cents) .
Blockchain and mining
To keep track of transactions or monetary exchanges in bitcoins, a distributed database is used, which stores the information in scattered and chained blocks, forming a structure of “chain of blocks” ( blockchain ).
Bitcoins are created by a process called “mining” at a predetermined, predictable, and decreasing rate . This causes the “miners” to compete with each other to produce them. What does it take to make bitcoins? Computers, especially with a good graphics card, since a great processing capacity is required to calculate codes . This has led to the creation of spaces dedicated to bitcoin mining, where thousands of computers work non-stop, especially in countries where electricity it is cheap as energy consumption is high. For example, the German mathematician Marco Streng set up one of thousands of computers in Iceland, where in addition to cheap energy, the climate is cold, ensuring that the computers do not overheat.
What is the value of a bitcoin?
Initially, bitcoin was worth nothing, but it could have value as long as it is accepted as a means of payment . In May 2010, a forum user paid 10,000 bitcoins to another for two family pizzas. What at that time was 41 dollars, in March 2021 it would be about 170,000; As a curiosity, every May 22 Bitcoin Pizza Day is celebrated in commemoration of this fact.
In 2018, a person bought an apartment in Tarragona valued at 550,000 euros for 40 bitcoins, which he had received by inheritance years before. When he inherited them, they were barely worth 3,000 euros, but in March 2021 their value would be around 2 million.
The very high levels reached by bitcoin and other digital currencies have caused many to wonder what their real value is . It depends on whether they are accepted as a means of payment and, if we consider it as an investment, on what buyers are willing to pay for it.
The number of bitcoins is finite, since it was defined that way at its creation – perhaps because if something is scarce it is more likely to have value – so that the maximum limit is 21 million coins . Currently there are about 19 million, approximately 90%, but each time mining is slower and more difficult, so it is estimated that between 2030 and 2040 it would reach 99%, but 100% would be reached around 2140 (if the “Miners” still have incentives to create them).
Can cryptocurrencies be another form of money?
Many analysts have influenced the possible role of cryptocurrencies as a decentralized form of payment, apart from central banks, and in fact they are already beginning to be accepted more regularly . Perhaps for this reason, the monetary authorities have begun to consider the possibility of creating their own cryptocurrencies.
Thus, China is testing the e-Yuan (DC / EP or Digital Currency / Electronic Payment), proposed to make payments through mobile phones, the Bahamas has authorized the deployment of its own cryptocurrency, and countries such as Canada, Turkey, Switzerland or the Eurozone itself are also studying their alternatives.
Can cryptocurrencies be a safe haven like gold?
In recent times , some cryptocurrencies such as bitcoin have been compared to gold in their role as a haven for investors in troubled times . The precious metal’s own bullish rally in 2020 encourages this comparison, and the scarcity of both assets is also in the same line.
When there are expectations that inflation will rise, gold becomes a refuge because its value is not influenced by the fact that there is more or less fiat money in circulation , or that it is worth more or less; The same happens in the case of cryptocurrencies, and more if we consider that there is a maximum limit of them, as we explained previously for bitcoin.
Mining for gold is difficult and expensive, and transportation and safekeeping of the precious metal is too . This would provide an advantage to bitcoin as a haven for investment, since it does not have to be transported or stored and can be immediately transferred anywhere in the world.
On the other hand, gold does have a value on its own , since it is used not only in jewelry, but also in the manufacture of various electronic products (computers, mobile phones, etc.), in medicine or even in the aeronautical industry, for its qualities of excellent conductivity and malleability.
Instead, cryptocurrencies only have that value depending on whether they are accepted as a means of payment ; Therefore, investing in them has a high added risk, since if they do not have that function, they are worth nothing.