It’s safe to say Cryptocurrencies are on-trend right now. If you’re not at least slightly familiar with the term, I’d guess you’re reading this from under a rock. Slowly but surely, more and more of our lives are being absorbed into the digital realm and currencies are the latest victim. But is it right to call them currencies without the crypto prefix?
I’m sure the mainline response to the question is: no, cryptocurrencies are not real currencies. And it’s easy to see the logic in that. How can dogecoin, created as a satirical joke on the hype of cryptocurrencies be compared to the US dollar?
Most alive today will find it hard to call anything not backed by a nation-state a real currency. But from a historical standpoint, the US dollar is a relatively new creation itself. The Federal Reserve Bank ( a name chosen to avoid the negative reputation already associated at the time with central banks) was formed in December 1913 and began printing the US dollar as we know it the following year.
Going back a little further in history, the creation and proliferation of currencies has been an inertial process. The most commonly accepted currencies change hands with the rise and fall of empires and dictators. The most successful currencies were ones that held up best on a range of characteristics like: durability, portability, divisibility, fungibility & hardness.
Surprising to some but no coincidence, history is often broken into 80 -100 year periods. Roughly the full length of a healthy human life. It also ‘happens’ to be the average timespan between major historical conflicts and changes in reserve currency status. The Fourth Turning (written by Neil Howe and William Strauss) is a good start for those interested in reading more on the cycles of history.
Not quite 100 years after the birth of the US dollar, a mysterious bunch of cyberpunk computer savants under the moniker of ‘Satoshi Nakomoto’ invented bitcoin. As to their reasons, a hint was coded into the initial release, known as the genesis block. It was the title of the newspaper the day it was launched:
‘The Times 03/Jan/2009 Chancellor on brink of second bailout for banks’
Effectively it clues that bitcoin was a response to the perceived injustices of fractional reserve banking and the 2008 financial crisis. A counter to the inflationary nature of the current monetary system. With a fixed supply, it’s attempting to function like a hard asset in stark contrast from the current monetary base, which has gone parabolic the world over starting in the early 2000’s, partially thanks to ever-lower interest rates.
It is, in essence, the first known version of digital scarcity. With its creation, the term blockchain technology was unleashed to confuse the world. From a technical standpoint, Bitcoin and blockchains, generally speaking, are digital ledgers using encryption, like an online accounting book with a certain amount of ‘coins’ owned by whoever holds the password to move them from one digital address to another.
But from a historical perspective, it is an idea that marks the beginning of the crypto revolution.
To start your research there are some general types of coins to look out for. Safe to say Bitcoin and Ethereum can be considered the majors with first-mover advantage and imo, a lot can be said for network effects. Outside of the majors are altcoins (alts), which is where things can get overwhelming for the newbie. There are a seemingly endless number of alts with ever more launching on exchanges frequently. It’s difficult to categorise them all but there have been some distinct trends in the types of projects launched over time.
Layer 1’s are base layer blockchains similar to BTC or ETH but usually with some claim to why they’re an improvement i.e. quicker or cheaper transactions. Many ‘Layer 2’s’ have been launched as a solution to scalability issues, an attempt to reduce congestion and fees on the BTC or ETH base layer.
Non-Fungible Token’s (NFT’s) are the latest development in the crypto space. NFT’s are like a form of digital art with the owner verified on a blockchain. CryptoPunks were the first set of NFT’s to gain popularity and are selling for obscene amounts of money – the rarest combinations of pixels selling for millions of dollars. It may seem strange to claim ownership over a particular configuration of pixels, let alone pay millions of dollars for them. But NFT’s can come with use cases. One such use case is adoption in the gaming sphere with players earning NFT items and characters as a reward for spending time in-game. Known as the play to earn model.
DeFi (shorthand for decentralised finance) the trend before NFT’s became the word that confused all outside the crypto loop. The projects generally aim to offer financial applications disrupting the stranglehold traditional institutions have over money markets. Ethereum was the first described with the term and it kick-started the DeFi wave.
Often involved in providing liquidity for lending like a bank, they use staking rewards to incentivise participation in the network. Which provides the staker with an extra % of tokens after locking up their tokens in a liquidity pool for a particular period of time. Usually higher rates the longer you’re willing to stake.
The interest rates on staking are significantly higher than anyone is getting in their traditional savings accounts but they don’t come without risk. If it looks too good to be true, it often is. Some offer 200% annual rates but are also 100% going to rug you for all the tokens you staked.
There are a number of projects out there with all kinds of supposed purposes from the attempted privatization of data to streaming micropayments and countless others.
Of course, there are also many with little thought of the use case pretending to be legit, and beyond that, an even larger supply of tokens that don’t even try to pretend. Colloquially known as ‘shitcoins’ mostly easily viewed, bought and sold on a website called poocoin.com for those interested.
"Up until relatively recently, I and many others had written cryptocurrencies off as a gimmick on the rare occasion it crossed my path. Said gimmick is now so prevalent the Federal Reserve themselves are addressing it."
These coins will lose 99%+ value if you hold them for long. But a niche group of self-titled degenerates attempt to buy into these tokens on launch or preferably presale and basically gamble on selling the pump and dump within a very short time for a profit.
The whole space is deeply ingrained in meme culture and, unsurprisingly, tokens with the most relevant meme pump the hardest. But it is essentially just a new way to gamble – hoping on a greater fool to buy your bags.
It is crucial when researching to come to an understanding of the tokens use case. This involves a high degree of critical thought, as much of what you’re likely to read is advertisement and wishful thinking. Reading white papers is usually a good start when attempting to evaluate a project. But it will take time and effort before you can decipher complete gibberish intended to confuse from a practical use case.
The internet was considered somewhat of a gimmick as it was beginning to gain traction. Many were unable to see the changes to our lives the effects exponential growth in technology can have. Up until relatively recently, I and many others had written cryptocurrencies off as a gimmick on the rare occasion it crossed my path. Said gimmick is now so prevalent the Federal Reserve themselves are addressing it.
A Fed meeting took place in February 2021 between board members and a number of big-name experts in finance including Ray Dalio and Paul Tudor Jones. The notes are a pretty bland summary stating that some attendees saw Bitcoin (and other cryptocurrencies) as an alternative store of wealth, like digital gold. Others noted current price levels exhibited bubble-like characteristics and those that didn’t quite understand the tech questioned its vulnerability to cyber-attack. Ray Dalio submitted a report to the Fed from his fund Bridgewater Capital titled ‘Our thoughts on Bitcoin’. Well worth a read for yourself here.
Put simply, they described it as a developing storage of wealth, with regulatory and competitor tail risks. They also noted that liquidity in the market is not yet big enough to enter with the funds billions of dollars. Finding in their data that although there are talks of institutions entering the market, these are mostly just hedge funds and small family offices.
It should be said many feel like this point in time is eerily similar to the dot com bubble. It can be argued it is the logical progression. The invention of the internet brought with it exponential change to the way we live our lives. Those with the fortune and insight to invest in the right projects created generational wealth for themselves and their families. But then, as is now, the vast majority of projects are doomed to fail. So do your own research and invest accordingly – never more than you can afford to lose.