July 5, 2017    4 minute read

Cryptocurrency Trading Is Mounting an Offense against Traditional Investing

Are Cryptos Kryptonite to Banking?    July 5, 2017    4 minute read

Cryptocurrency Trading Is Mounting an Offense against Traditional Investing

A cryptocurrency (colloquially referred to as ‘cryptos’) is a digital asset designed to work as a medium of exchange and uses cryptography to secure the transactions and control the creation of additional units of the currency.

Cryptocurrencies are a subset of digital currencies, but unlike digital currencies, they do not have an underlying physical asset which they can be withdrawn in. As such if you are looking to withdraw your cryptos then you’ll need to convert to a fiat currency first – although the company Casacius proposed an interesting physical version of BTC for gift purposes.

Bitcoin was the first cryptocurrency, proposed in the infamous 2008 whitepaper by pseudonymous creator Santoshi Nakamoto and now has a market cap of $41.8bn. It’s worth noting that just eight months ago, the market cap of bitcoin was just over $9bn.

The Crypto Marketplace

There are now 947 different cryptocurrencies which display a range of features and are created either to facilitate transactions within a single application or for wider cross-platform benefit. It is notable that 83.3% of cryptocurrencies hold a market cap under $10m and only eight are above a $1bn market cap. As such Bitcoin (BTC), Ether (ETH) – the Ethereum platform’s coin and Ripple (XRP) – the global settlement network are the top 3 coins by market cap and represent over 50% of the total share.

Buying, Holding and Trading Cryptocurrencies

The most common method of purchasing cryptos is through an exchange – such as BitStamp, BitPanda, Poloneix, CoinCase, etc. Here users must exchange fiat currency for their desired cryptocurrency- in a similar method to a foreign exchange purchase.

Once bought, the cryptos can be held in the exchange account or transferred to a wallet for storage. While many exchanges also provide wallet capabilities, it is common for users to transfer their cryptos to a more secure online wallet or to offline cold storage.

Cold storage is the most secure method of storing cryptos as it involves writing down the private key associated with the cryptocoin and ensures that it cannot be lost/stolen in an exchange hack (such as the 2014 Mt Gox hack)  or exchange seizure (such as Bitifinex’s ‘redistribution’ of coins after it’s security breach in Aug 2016).

The current number of unique active users of cryptocurrency wallets is estimated to be between 2.9 million and 5.8 million. However with a large number of exchanges and wallets (including cold storage) across the globe, defining a more precise number is exceptionally difficult.

It’s also clear to see that the number of people participating in crypto use is increasing. For bitcoin alone, the estimated transactional value in 2014 was approximately 90,000 per day but has risen to around 200,000 in 2016. This reflects three primary uses of Bitcoin (and other cryptos):

Hodlers

A term coined (pun intended) in 2014 due to a mis-spelling of ‘hold’ during a price crash. The poster was looking to communicate that he was a long-term investor and therefore didn’t intend to join in with the wave of sellers. As such, those who see bitcoin’s price going ‘to the moon’ tend to be long-term investors and will hodl.

And it’s easy to see why- for those who bought in just 8 months ago ROI for bitcoin stands over 50% and for ether at over 200%. Compared to standard investment portfolios which could look to return 4-7%, the high risk, high return nature of cryptos is paying off.

Traders

As with any asset/currency, there are those on Wall Street, Canary Wharf and bedrooms around the globe, who look to profit from price arbitrage across exchanges and volatile movements.

Bitcoin’s chequered history has, until recently, left financial institutions wary. However recent public support from big banks like Barclays means that we may see bank traders buy, buy, buying and sell, sell, selling cryptos too.

Transactional Spenders

Earlier this year Japan made the move to define bitcoin as legal tender. As such, the price of bitcoin jumped, transactional volumes spiked and throughout June, Japanese Yen-to-BTC transactions accounted for 52% of the market volume.

In India talks have begun with regulators to explore how bitcoin, or a similar cryptocurrency, could help move India to a cashless economy. With these moves, and increasing corporate support of bitcoin payments, it’s clear to see that bitcoin is moving away from the hodlers and towards a day-to-day payment method.

Conclusion

Whilst bitcoin remains subordinate to cash and card for now, the concept of mobile enabled cryptocurrency payments is no longer a futuristic thought; and whilst banks and governments begin to ponder where the opportunities and risks lie, early adopters are seeing their returns grow.

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