Friday, November 29, 2013

Cryptocurrencies | A New Paradigm or One Massive Bubble

It's an exciting time for those interested in technology, economics, and law. Recently I made a post about BitCoin. I thought a follow up post on cryptocurrencies would be appropriate. Cryptocurrencies are a peer to peer, de-centralized currency that is generated by people using their computers to solve mathematical equations - thus earning them a portion of the currency. It's an idea that most people have a hard time wrapping their heads around. BitCoin is just of the many cryptocurrencies that currently exist. For those who don't know anything about what BitCoin is, watch this video.

Understanding the BitCoin Boom

Bitcoin was the first cryptocurrency that took off. The currency is traded openly on various exchanges on the internet. The intent was that BitCoin would be an alternative currency when purchasing goods and services online. The benefits to using BitCoin is that is anonymous. The currency is not controlled by one single body or group, i.e. the government or any banking institution.

My last post noted that BitCoin was being traded for $300, and while I write this article they are being sold for a little over $1000. One can't deny that's a volatile market, where people are making and losing wealth in the blink of an eye. Many people are left with the question of, "How did this happen?"

BitCoin was once sold for pennies on the dollar. The idea caught on and investors and speculators started buying the currency. Articles, and worldwide attention only pushed the price up. Most notably linking the currency to an online illegal trading website known as The Silk Road. However, the price really took off when people learned that they could use mining devices (computer hardware) to exploit the amount of coins they got while mining. Devices designed specifically for "mining" were being sold, and the prices began to soar. An example of a mining device is shown in the picture above.

The problems with BitCoin

BitCoin is the guinea pig currency; It's the first and most exploited of all the cryptocurrencies.

BitCoin's utility as a "real" currency is extremely limited, as the price does not rise slowly proportionality over time. The price is volatile and can swing wildly. People do not buy BitCoins to use for goods and services. There is little to no practical use of BitCoin as a "real" currency. The only people who buy BitCoin is those who are looking to try and turn a buck when it balloons. The current and most realistic use of the currency is to purchase other cryptocurrencies, such as LiteCoin, or PrimeCoin. These transactions are completed through online exchanges, such as Cryptsy or Vircurex.

Moving Forward

Just because BitCoin is plagued with problems does not mean the idea is not valid and that this idea is simply going to go away. I believe that people want a cryptocurrency that can be used as an alternative form of money. A currency that would make people feel confident in purchasing at x amount of dollars, and knowing that the value will either go up and down slightly. The average person will not buy into BitCoin. Business does not have to adjust to accepting the currency if it's not going to be used as a real currency.

What I want from cryptocurrencies, that I can't get from BitCoin
  • faster transaction speeds
  • currency that focuses on a more "fair" way to mine, instead of "paying to win" with mining equipment.
  • less exploitation and manipulation
  • practical uses for spending the currency at mainstream businesses online or in person

Avoid the Pump and Dump 

Many cryptocurrencies are being created and will continue to be created. Some look like legitimate alternatives to BitCoin. Many aren't. Lots of coins are being artificially manipulated by speculators trying to pump a coin's value up - then cashing out, causing the value to drastically fall. 

Just like the Dot-Com Bubble you will see currencies emerge and fall. One thing is for sure, some of these currencies aren't going anywhere. From an investment standpoint buying a currency for a fraction of a cent may reap some rewards in the long run.

1 comment:

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