Currencies are an important consumer device in managing every financial transaction in the world, and for that reason many investors turn towards currency rates in explaining trends in the global markets. Oftentimes currencies are the “behind-the-scenes” of certain large scale economic trends—in my opinion and in that of many others, global currency rates stand on the top of investors’ important list of things to keep watch of. Indeed, the influences of currencies on financial portfolios are far-reaching; they subtly dip their toes in a long “economic pool” ranging from individual consumer to large-scale international relations.
The recent surge in cryptocurrencies, or digital currencies, has brought investors and economists to the edges of their seats as they watch a new era of modern currency unfold. Bitcoin, the most popular cryptocurrency around today, stunned global investors last Thursday when its value jumped to an all-time high of $1,875.08. This 3.5% rise was record-breaking, and at the time this was published, the value stands at the high $1906.59.
Readers not familiar with Bitcoin might ask what it is and how it works. Simply put, “Bitcoin is a cryptocurrency and a digital payment system” (Wikipedia). It was invented by an unknown Japanese programmer under the name Satoshi Nakamoto and was released open-source in 2009. The system is simple in principle, but highly complex under the hood: Bitcoin works as a peer-to-peer system, where transactions take place directly between users and no intermediary is involved. The system is unique in that no bank or higher organization regulates the distribution and transaction of the currency; this is contrary to traditional international currency transactions, where a long line of brokers and banks lay hands on the money before the currency transactions or conversions can be completed. In other words, Bitcoin and similar cryptocurrencies are decentralized; the system works without a central repository or single administrator.
But how do who keeps this system in check if Bitcoin doesn’t have a single authoritative firm or organization regulating it? The solution is elegant and yet highly effective and powerful: we use a public distributed ledger. The ledger—known as the blockchain—can be thought of as a list or spreadsheet of all the transactions ever made, like a checking book for the whole community. Every individual user gets a copy, and in order to keep yourself in the system, you’re required to cross-check your ledger with your peers’ every so often. Thus, every user in this peer-to-peer transaction network is held accountable by the rest of the community; in this way, every inkling of value is accounted for, and all transactions are legitimate and fair.
So what’s the cause of this recent surge in Bitcoin, along with its exponential growth in the last couple years? According to most sources, including Forbes Magazine and the Economist, cryptocurrencies like Bitcoin, Blackcoin, Dash, Dogecoin, Litecoin, Namecoin, and more are safe havens for investors; in other words, it is a stable store of value. Unlike currencies of certain less developed countries, Bitcoin does not fluctuate as sporadically with market trends. As a result, investors regard it as a safer investment—and recent political chaos has caused many to buy it as a safe hedge.
Should we, as individual consumers, put our money into cryptocurrencies? Will they hold their ground as stable investments as our country forges into the ever-chaotic political and shifting world? I am personally a strong believer in currency, as I mentioned earlier. But in the case of this financial realm, my advice to every young investor out there is to play it cautious. Many experts, including those from The Economist, agree that cryptocurrencies collectively share in some serious downfalls: despite Bitcoin’s growth, its status as a “safe haven” is disputed by its great volatility (ie. a tendency to change value quickly in unexpected ways). Even if now it grows well, its value may suffer blows in the future. As The Economist says, “the question is not if, but when the market will turn.” For an unregulated system, any number of unforeseen problems can pop into question: political influences, global instability, lack of liquidity, and even cyberattacks may present future upsets to this currency.
Jeffrey Dorfman of the Forbes Magazine summed the whole situation up quite nicely: “Bitcoin Is An Asset, Not A Currency.” It should thus be treated as an asset: something in which we invest for its value, its momentum, or for the general diversity of our financial portfolios. We should hold it in respect to current events and politics, and take its value with a grain of salt when we plan to buy or sell. Finally, like always, we should all proceed with the mindset of careful, informed, and active investors.