When, in 2009, bitcoin appeared in the cyber-world and became the first cryptocurrency in the world, no one imagined that it would be possible to officially buy citizenship of a tax paradise with this currency. The growth pace is also astonishing. The price of one bitcoin has just exceeded the 5k USD boundary.
In fact, bitcoin (BTC) did not open the route for other cryptocurrencies, but it has gained and probably maintained a dominant position in its segment. And the number of competitors is enormous. Today, there are already over 1100 cryptocurrencies, which is six times more than traditional monetary units, often with centuries-old tradition.
Nowadays, everyone can become a cryptocurrency owner and can trade with it or invest capital. The Warsaw School of Economics has launched a post-graduate course in cryptocurrency technology. A few weeks ago, the world was informed that Vanuatu, a small island state in Oceania and a well-known tax haven in the world, offers citizenship for bitcoins. The price of citizenship is calculated in dollars - 200k. Only a year ago, it would have been about 320 bitcoins. Today, it's only about 36 units of the most popular cryptocurrency. This means, that the BTC course is going upward, and at a tremendous pace. On October 12th, for the first time it broke the barrier of 5k USD. Barely two years ago, bitcoin was valued at 260 USD and four years ago at about 100 USD.
The quick increase in the value of one bitcoin by over 5.2k USD lead to, according to the valuation from October 12th, the most famous cryptocurrency costing four times more than an ounce of gold. However, one bitcoin a year ago was equivalent to just half an ounce (expressed in dollars).
What is it and where does it come from?
Cryptocurrency, in other words, is virtual money not connected with any country or any central bank.
The encyclopaedic description is slightly more complicated, “a digital asset designed to work using cryptography to secure the transactions and to store the information on the possessed assets in contractual units. Ownership is related to individual system nodes ("portfolios") in such a way that the control over a given portfolio is solely held by the holder of the corresponding private key and it is impossible to release the same unit twice," informs Wikipedia.
Encryption techniques of the online data are used to verify transactions made by cryptocurrencies and to create new units of them.
"Cryptocurrency can be purchased in at least two ways: 1. buy in the traditional way on the existing private stock markets; 2."extract" or "dig" (so-called mining). However, the second way requires skills, special equipment and time. Moreover, you have to take into account the high consumption of electricity. Mining, in this case, is based on solving mathematical problems," explains Bartosz Grejner, an analyst at Conotoxia, currency exchange service.
Purchased or "mined" cryptocurrency is stored, for example, in files that are protected by keys - randomly generated strings of characters and digits. Companies have also been established that store private collections of cryptocurrencies, keys or offline wallets - printed on paper. An important matter for potential virtual currency holders - two types of keys are used to secure the capital, while the other one is provided to the transfer's sender.
Digital currencies are not based on the same technologies, therefore the methods of their storage and turnover differ.
Most frequently, transactions are carried out directly between the seller and the buyer - a peer-to-peer (p2p) model. An example of the technology used to carry out this type of transaction is blockchain. It is not so easy to explain how blockchain functions. This is a type of distributed database that can be used to credit an ever-increasing number of records called blocks. The individual blocks are linked and each block contains a complete record register. The complete register is made available to each transaction user but without the use of the central database. On the one hand, this makes it very difficult to carry out a cyber attack. There is no single place in the network where such a database is stored. On the other hand, the technology enables verification of transactions,” says the Conotoxia Analyst.
Unique characteristics
Cryptocurrency quickly became more and more popular, because they fill a niche in the market place of traditional currencies.
One of the main distinguishing features is anonymity. Transactions are not assigned to a person's name, but to a randomly generated sequence of numbers and digits. Only a few cryptocurrencies have the public transaction's nature which makes it possible to see the scale of purchases and sales, but it is still impossible to associate them to the people or companies on both sides of the transaction.
The security level is also remarkable because according to the individual project's creators, only the owner of a private key can send a digital currency.
No centralization - another feature of 21st-century money. There is no single entity standing over the flow and quotations of cryptanalysts, nor is there a single place that could become, for example, the target of a hacker attack, virtual currencies data is scattered across the network.
Contrary to traditional currency transfers, which depend on various banking systems and, e.g. incoming and outgoing sessions in banks and recipient's countries, cryptocurrency transfer is independent of the physical location of users, and the flow is almost immediate.
Transactions ordered in cryptocurrencies are becoming irreversible and cannot be withdrawn by anyone. This is probably a disadvantage and advantage at the same time. The advantage is that the funds are surely reaching the goal defined by us. However, when a mistake occurs in defining the recipient, there is no unit that could help us to withdraw from an incorrect operation.
One of the most outstanding features is the rapid development of tools and services related to cryptocurrency. Today, they facilitate, for example, direct payments with cards, which are supplied by possessing the virtual currencies, in stationery shops or on the Internet. "This is due to the fact that there are companies which calculate and exchange cryptocurrencies to, for example, the dollar or euro," explains the analyst at Conotoxia.
Enormous number of dynamic changes in the market
In theory, anyone can create their own cryptocurrency, since it does not require any permits. In practice, many new projects are being created, but a lot of them are falling apart. According to Coinmarketcap, which examines, for example, capitalization and trading in the market, in mid-October 2017, nearly 1200 virtual currencies, including those established in Poland, Polcoin, dominated over 180 traditional currencies used by citizens of 195 countries in the world.
The movement in digital currency was a success story for bitcoin, which debuted in 2009 on the basis of the blockchain, a distributed database. Since then, a lot of new virtual currencies have been created, yet bitcoin remained the leader of the whole domain.
According to Coinmarketcap and statistical coin.dance services, bitcoin capitalization (i.e. the number of units traded multiplied by the price) reached on October 19th, 2017, 94.5 billion USD, which also accounts for slightly more than half of the market share of cryptocurrencies. At the end of 2013, however, the dominance of bitcoin was much clearer - it exceeded 95%.
In terms of market share - with one-fifth of the market share and capitalisation of approx. 29 billion USD, second place belongs to ethereum. The origins of this cryptocurrency date back to mid-2015 (although the concept was proposed already in 2013) and, like bitcoin, it uses blockchain technology.
"Ethereum has a few more possibilities than bitcoin - apart from the cryptocurrency's transmission itself, it also enables the creation of, Smart Contracts, i.e. algorithms programmed to perform specific actions, such as sharing funds among shareholders when collecting funds for a given project in a process called Initial Coin Offering. Ethereum can, therefore, promote investment or crowdfunding," says Bartosz Grejner.
In third place, in terms of capitalization, is occupied by ripple, with a total market value of approx. 8 billion USD and with cryptocurrency market share of approx. 5%.
Ripple, which has created every single unit of this virtual currency and is its only distributor, relies on a different technology than blockchain and wants to work in cooperation with banks and financial institutions. In the case of bitcoin and ethereum, they are "extracted" (by mining) - a process that can be carried out by both companies and individual users. Meanwhile, the full ripple stock was set at 100 billion units in advance. Ripple's company keeps most of the cryptocurrency created by them - in October 2017 there were around 38 billion units in trade.
Ripple, unlike bitcoin and ethereum, adopted some of the world's leading banks. Moreover, in official circulation, the virtual currency can be exchanged for traditional currencies, and the use of it and the transmission system developed by ripple could make the exchange and the transfer of traditional currency faster and cheaper.
Which factors influence trading?
The cryptocurrency's value is often compared with the dollar, but it can also be priced in each of the traditional world currencies or measured directly with each other.
The market's valuation and capitalization are generally given on a specific day, as the virtual currency's value changes at a unique pace for the traditional currency market. From early April to early October 2017, bitcoin's value in relation to the dollar increased fivefold, the ethereum almost sevenfold and the ripple thirteenfold. With such huge jumps in daily price fluctuations, bitcoin's rate can exceed even 20%.
What influences cryptocurrency quotations? The price of any commodity is significantly influenced by demand and supply factors. Large exposure of virtual currencies in the media can increase demand, leading to a rapid price increase. If we want to replace it with traditional money, e.g. when making payments, we are dealing with currency cross. And then the macroeconomic factors attributed to the so-called ordinary currencies come into power.
Decentralisation and lesser sensitivity to macroeconomic factors affecting traditional currencies mean that cryptocurrencies can also be seen as an alternative investment. When there is an increase in uncertainty and outflow of capital on the global market, then some of the money, shares or bonds may be invested in the virtual currency market. Sometimes their value is increased in this way.
All digital cryptocurrencies operate within specific systems and standard changes of these systems may affect their valuation. "A similar impact also seems to be exerted by information about the fact that e.g. a country or a large institution implements and uses a given cryptocurrency or the technology on which it is based," points out Bartosz Grejner. Such information may appear unexpectedly, causing large value fluctuations, which puts high risk on investments in cryptocurrencies.