google.com, pub-8950058836158303, DIRECT, f08c47fec0942fa0Coin
#1: Bitcoin (BTC)
In the digital
age, the ideal brand-new currency should have at least these three
characteristics:
It should be free
from the control of any authority so that it cannot be manipulated and printed
at will (and devalued), and nobody can tell anyone what they can and cannot use
it for.
The currency
should be borderless, so that it can be easily exchanged across any location
with anyone.
It should be apolitical, so as to not favor a specific system or group of people. In a nutshell, these (among many others) are the characteristics of bitcoin, which looks like
an appealing alternative to any fiat-based monetary system.Bitcoin is the
world’s first decentralized digital currency. Its value primarily comes from it
being the first digital currency that no single person, organization or
authority has control over. Anyone can buy it, anyone can receive it — and
nobody can tell anyone what they can or cannot do with it.
It is a money
free from dictatorship, oppression and hyperinflation, and a financial safe
haven for anyone living under those circumstances. It has a limited supply of
approximately 21 million total bitcoins that will never be changed, and we know
exactly how many are being released into the world at what rate, as well as
approximately when the last bitcoin will be created.
It is generally
more difficult to understand why a decentralized currency is valuable to people
who live in first-world countries because their society’s money is most likely
very sound, or so it appears to be. In order for people in first-world
countries to understand why bitcoin is valuable, they must recognize why the
fiat money system is unsound.
In reality, any
money controlled by a central bank is not truly sound, when you consider the
big picture. Generally speaking, governments have created monetary systems that
allow them to manipulate the supply of their country’s money, assuring its
value is backed by their word that it will always be worth something. The
problem is that “something” has slowly been worth less and less since fiat
money was taken off of the gold standard.
The reason for
this is simple: Governments like to spend more than they accrue from taxes and
other income streams; so, by their own power, they print enough money for their
needs. When more money is printed and put into an economy, it decreases the
value of each dollar already in circulation.
Bitcoin’s beautifully designed characteristics
mean it is poised to have an impact in people’s lives in the most unstable
economies (like Argentina and Venezuela, for example), where the government
heavily manipulates its money.
As a brief
primer, countries like Venezuela and Argentina have experienced times where
their governments printed so much of their own currency that their citizens
were not able to spend it fast enough before it would lose value. This has
happened multiple times in each country and, as a result, their entire monetary
systems fell apart, and affected citizens had to find an alternative medium of
exchange.
People are entitled
to freedom as a human right, and governments who ruin their own money arguably
take away their people’s economic freedom. Their access to the same economic
opportunities as the rest of the world is virtually non-existent, and thus the
greatest thing they desire is a currency that can’t be controlled by a reckless
central authority.
In 1912, Ludwig
von Mises, a renowned Austrian economist, wrote in The Theory of Money and
Credit that sound money “has two aspects. It is affirmative in approving the market’s
choice of a commonly used medium of exchange. It is negative in obstructing the
government’s propensity to meddle with the currency system.”
He continues, “It
is impossible to grasp the meaning of the idea of sound money if one does not realize
that it was devised as an instrument for the protection of civil liberties
against despotic inroads on the part of governments.”
WHY DO WE USE
FIAT MONEY?
The reason why
most people accept our current monetary system is because it’s what we have and
it’s what we have had for as long as we can remember. Because people alive
today were born into the existing system of government-issued money, most of
society has accepted that the gradual increase in price for everything from
groceries to education is a natural phenomenon.
It is hard to
believe that prices will gradually increase forever, and coffee could very well
be close to $20 per cup in 50 years (compared to the $2 average today and the
$0.15 it cost in 1920). We accept that these increases are the natural result
of inflation, which they correctly are, but the underlying reason why the
inflation occurs in the first place is due to manipulations of a central
authority. Unfortunately, when people are used to something for so long, they
naturally find it hard to believe that a newer way might be better.
WHY BITCOIN IS
VALUABLE
These core flaws
that plague the fiat monetary system do not exist in bitcoin. Bitcoin’s supply
is fixed by code that all participants of the network agree upon. The distribution
rate of new bitcoins into the world is fixed and transparent, as is the
approximate date when the last bitcoin will be created. Bitcoin also has no
public face that can strongly influence the direction of the currency. It’s the
correction of these flaws of our current system that bring value to bitcoin.
Cryptocurrencies
have taken the world by storm. Since 2013, the value of all cryptocurrencies in
circulation has soared from $1.6 billion to more than $1.6 trillion at
Wednesday's prices, and roughly $1.4 trillion of that value was added in the
past year, according to CoinMarketCap.
Bitcoin has been
the leader of the pack, thanks to its first-mover advantage as the original
cryptocurrency. However, in recent months, Ethereum has stolen Bitcoin's
thunder. In the past year, Ethereum has gained roughly 1,600%, while Bitcoin is
up 300%.
Ethereum has
caught fire for a number of reasons, but the most important aspect of the
Ethereum network is its use of smart contracts. These smart contracts built on
the Ethereum network are spurring a couple of innovations that give Ethereum
its value: decentralized finance (DeFi) and non-fungible tokens (NFTs), whose
popularity should be closely followed by investors.
The DeFi movement
can't be ignored
One of the
biggest innovations spurred by the Ethereum network is DeFi. DeFi uses smart
contracts on the Ethereum blockchain to offer traditional financial products,
like insurance or loans, without the need of intermediaries like brokerages or
banks. Two hands, made out of digital networks, form a handshake.
These smart
contracts eliminate the need for a trusted third party to verify the
transaction. Nick Szabo, an early pioneer of digital currencies, likened them
to digital vending machines. Smart contracts are programmable contracts between
two parties that self-execute when specific conditions are satisfied. The third
party is eliminated because the contract is programmable and exists on the
blockchain, a secure and decentralized form of digital ledger technology.
The ultimate goal
of DeFi is to eliminate third parties and make financial products such as
loans, insurance, and trading more accessible to underserved markets. According
to World Bank, 1.7 billion adults across the globe lack access to banking
services. However, two-thirds of those do have access to a mobile phone and
internet connection, and could benefit from DeFi. Given the problem it looks to
solve, DeFi is a very attractive space right now.
A real-world
example:
Munich-based
Etherisc built its first product, flight delay insurance, with smart contracts
on the Ethereum network. It works this way: When a customer purchases flight
delay insurance, it's recorded on the blockchain in smart contract form. If a
flight is delayed by 45 minutes or more, the self-executing contract pays out
customers instantly. The smart contract allows the customer to avoid making
claims with an insurance company, making insurance more efficient.
Etherisc sees insurance as one industry ripe for
disruption by utilizing smart contracts, saying they could make the purchase
and sale of insurance more efficient, lower operational costs, and provide
greater transparency into the industry.
Ethereum leads
the pack when it comes to decentralized contracts, whose popularity has taken
off this year. According to DeFi Pulse, over $63 billion was locked up in smart
contracts as of Wednesday, a 65-fold increase from the $953 million locked up
in smart contracts just one year ago.
Leading the NFT
trend, too
The Ethereum
ecosystem is perfect for another purpose as well: non-fungible tokens.
One of the
problems in the digital age is the ease with which we can duplicate digital
assets like images, videos, and songs. NFTs aim to make digital products more
like physical ones, by giving them scarcity, uniqueness, and proof of
ownership.
NFTs have
exploded in popularity in the past year. According to NonFungible, there were
nearly $67 million in sales related to NFTs in 2020. So far in 2021, sales are
an astounding $840 million, representing over 11 times growth from last year's
total -- and the year isn't over yet. Comparing the full month of April to the
same month last year, NFT sales were up 82-fold. To say NFTs have exploded is an
understatement.
The Ethereum
network plays a key role in NFTs, as most NFTs are priced in Ether -
- the digital token
of the Ethereum blockchain. In fact, the earliest and most popular NFTs, with
names like CryptoKitties and CryptoPunks, are run on the Ethereum blockchain.
Ethereum is my
favorite cryptocurrency
While Bitcoin was
the original cryptocurrency, I think the smart contracts built into the
Ethereum network make it a better cryptocurrency to invest in over the long
haul. After all, there's no denying the popularity of DeFi apps and NFTs --
which are largely hosted on the Ethereum blockchain.
However, when
dealing with cryptocurrencies, investors must be careful of a potential bubble,
especially in the NFT space. According to NonFungible, the average sale price
for crypto art had dropped 60% from its February high through the end of April.
If the NFT bubble does pop, Ethereum and other cryptocurrencies will take a
hit.
As an investor,
it's important to understand the volatility of cryptocurrencies and allocate
your capital accordingly. Despite how much I like Ethereum, I also know the
price could potentially correct 40% to 60% or more due to rampant speculation
in the space.
This doesn't mean it's a bad long-term
investment, though. The best approach as a long-term investor is to allocate a
small percent of your portfolio to the cryptocurrency and dollar-cost average
into that position over time. Dollar-cost averaging will help smooth out the
average price paid for your position, as you should be buying along peaks and
valleys along the way while keeping a long-term investment perspective in mind.