Internet and technology enabled the existence of something that should not even exist. Cryptocurrencies are invented virtual money that is not backed and its value is determined solely by present events. It has no physical form and is completely decentralized which distinguishes it significantly from any other means of payment ever used. Its value is literally and really determined only by how many people are interested in it right now. Same goes for shares, but shares, too, only reflect real activities of companies. Compared to real legal tender it is not possible to produce more currency units. For example, there are 21 million units reserved for Bitcoin and it is not possible to add, print or otherwise create more.
Right now, cryptocurrencies are mentioned most often in connection with Bitcoin which started in 2009 as the first one. In recent years and months, however, many others were created, as practically anyone can register a cryptocurrency and use it as they see fit. In January 2018 there were 1,400 cryptocurrencies registered. Many of them are experiments and complete failures, others are used as payment for products and services, as loyalty points, etc. Problems for this new phenomenon seem to be the so-called mining and the currency supply that depends on publicity. Dogecoin is a curiosity here. It was introduced as a ‘joke currency’ based on an internet meme, and surprised by a huge rise of its value: by 300% in 72 hours. Dogecoin capitalization was at 60 mil. USD in January 2014, today it is staggering 2bn. Owners of the original Dogecoin emission are billionaires today.
What is also curious that Venezuela has its own cryptocurrency, called Petro. Another form is also being considered, so-called Petro Gold. President Nicolás Madur himself supported its creation. This currency, however, is backed by Venezuelan oil reserves, in case of Petro Gold by gold reserves.
Bitcoin can only expand if it is not possible to steal it. Blockchain ensures this safety. It is a special kind of distributed database that stores the ever expanding number of records protected from unauthorized intervention from the outside and the inside. Blockchain technology is most commonly used as a cryptocurrency accounting book that records all the transactions made by currency users. It is this technology that ensures that individual Bitcoins and their fractions cannot be stolen. A hacker would have to reach to every single computer in the world that contains this blockchain. Blockchain is a universal way how to ensure higher safety in the electronic world – even Google is considering its own blockchain today. Not every cryptocurrency is decentralized, but those using blockchain fulfill the decentralization essence in not having any central issuing office.
There is a limited number of Bitcoins which increases the demand. Its value is in direct proportion to demand and there is no way to predict changes in demand from a long-term perspective. We can see this best in the development of the price of Bitcoin which inspired creation of other cryptocurrencies. Its price rose staggeringly since 2009; owners (mostly modern technology enthusiasts) of a couple of Bitcoins immediately turned into millionaires. Nine years ago a pizza could easily cost 10,000 Bitcoins which would be 10 mil. USD today. The reason for this huge growth is not inflation, but growing social value of Bitcoin. Those who were following Bitcoin’s rise in recent months and wanted to participate in ‘the opportunity to get rich for everyone’ were also unlucky: cryptocurrencies’ value fluctuated fatally and thousands suffered exceptional financial losses. Investments into Bitcoin are extremely risky, but this does not prevent other people and companies to pour money in it.
There are several reasons why people still trust Bitcoin and keep buying it despite the fact that it seemingly reached its maximum price possible. There are two magical words you cannot overlook in the cryptocurrency world: FOMO and HODL. They are the reason why new cryptocurrencies appear and why investors fight for them. FOMO is an acronym for ‘fear of missing out’. FOMO, in short, means psychological pressure on investors who fear missing an opportunity and losing the chance to make huge sums. HODL is a typo of ‘hold’. In the context of investing into cryptocurrencies it means buying and waiting until the currency reaches the desired growth.
Illegal profits are extremely difficult thanks to distributed accounting book that ensures high level of safety and absolute decentralization. Bitcoin theft is technologically extremely demanding and other fraudulent activities are very complicated. There are companies, however, not manipulating Bitcoin accounting books or a cryptocurrency itself, but money of their clients – investors into Bitcoin. International police is currently investigating one of the biggest fraud, demonstrably orchestrated by German Optioment. Optioment collected 12,000 Bitcoins from Austrian investors which represent staggering 115 mil. euro and in February 2018 went silent and formally ceased to exist.
Another US company is not crossing the legal line but their business model is highly questionable. They offer a possibility of creating your own cryptocurrency and its marketing on social media to significantly up its value. Clients would pay for the service that will make them rich but at the expense of other investors who will end up not having any use for the currency.
Bitcoin, the first cryptocurrency, was created in 2009, but for seven years it stayed outside of public interest; it was merely pointing to a distant future. Today, in 2018 we see that public is literally fighting for Bitcoins although this is a bubble that is bound to break. Cryptocurrencies future cannot be marked by extreme fluctuations in their value, it would make them unreliable. Firstly, the world will have to accept the concept of decentralized and very little regulated currency and then the new era can begin. Current events related to Bitcoin will inevitably leave distrust in people and it will take years till other cryptocurrencies show their advantages again and turn into universal means of payment.