A Brief Introduction into Cryptocurrency Investments
Updated: Feb 12
Benjamin Chai (Board Member of USC Trojan Cryptocurrency Investment Club)
| July 31st | Editor: Koki Mashita
Technology is changing our world. With every passing day, nearly every aspect of
society is accepting a digital format. Increasingly, people are turning to the internet and other novel technologies for instantaneous information, connection, and computing. In a modern twist, the recent coronavirus epidemic quarantine proved that digital interactions can replace even the most essential widespread educational and business communications. Unfortunately, while society continues to progress, the present monetary system remains outdated and inefficient.Trade is unnecessarily complicated by intricate currency exchanges and centralized powers have immense amounts of power to distribute and manipulate money supplies. In order to meet the monetary demands brought on by technological innovations, cryptocurrencies have emerged as an improved form of currency. As a decentralized digital currency, Cryptocurrency allows anonymous and secure monetary transactions. While Cryptocurrency may have some legitimate application as a form of money, Cryptocurrencies have also become a popular investment as the price of bitcoin and Ethereum have shown the ability to rise at unprecedented rates: Bitcoin was first created in 2009 with initial exchange rates less than 1 cent per coin; today it is worth well above ten thousand dollars per coin. However, in order to make informed decisions regarding cryptocurrency investments, a basic understanding of blockchain and cryptocurrency is necessary.
Cryptocurrency is often misunderstood. Many have negative perceptions of crypto, often
associating it with get rich quick scams, dark web criminals, and hackers. Of course, these
limited assumptions do not provide an adequate understanding of cryptocurrency. In reality,
Cryptocurrency is digital coins or virtual money stored in personal digital wallets utilizing
blockchain protocol networks for transactions. What is money? According to most economists, money has 3 uses: It is a medium of exchange [for goods and services], a unit of account, and a store of value. Cryptocurrency fulfills most of these roles as Cryptocurrency is often traded for goods and services and several cryptocurrencies have a store of value well above the us dollar. Cryptocurrency is somewhat volatile as a unit of accounts given its novelty, but will likely stabilize as cryptocurrencies gain establishment. Cryptocurrencies are able to fulfill all of the functions as money using blockchain technology. Blockchain is a digital ledger used for crypto transactions. Blockchain is a secure decentralized peer to peer network where different nodes authenticate and permanently record transactions of digital coins in batches that make a block. In order to add a block to the existing immutable chain, most protocols require some type of verification, often through mining. Miners receive block rewards for adding blocks to the chain. In order to make a transaction using blockchain, a user is required to have a public key (destination where coins can be sent) and a private signing key (used to authenticate transactions). Public keys and private keys can always be generated, thus providing anonymity. There is much more to say about blockchain regarding its phenomenal security, structure, and applications beyond crypto, but this information is largely unrelated to cryptocurrency investments. Fundamentally, blockchain technology allows individuals with a decent internet connection to securely receive and send cryptocurrencies from any location and time anonymously. At this point, you may be questioning the relevance of this information, especially if you are interested in holding cryptocurrency as an asset rather than participating or using the blockchain. However, cryptocurrency’s use of blockchain is precisely what gave cryptocurrency value in the first place. When Bitcoin was introduced in 2009, no one considered it a lucrative asset. Instead, largely through private use, Bitcoin’s value initially grew due to the increasing demands for an anonymous and digital currency. Now that we have established a basic understanding of decentralized cryptocurrencies and blockchain, we can now look to the investment side of cryptocurrency.
There are a number of ways one can choose to invest in cryptocurrency. There are a
variety of exchange services in which you may deposit fiat currencies for cryptocurrency. In
many cases, you can choose to either hold the cryptocurrency within an account under the
exchange service, or you can choose to send your purchased cryptocurrency to your own
independent wallet. In addition, one can sell goods or services and receive cryptocurrency as payment. Companies like Coinbase, Gemini, and Binance are all popular exchanges that are relatively well established and reliable. There are several cryptocurrencies that are available for purchase in most exchanges with Bitcoin and Ethereum being the two highest valued coins. Unlike stock investments, where individuals buy a share of a company which may rise or fall depending on the profitability and growth of said company, Cryptocurrency markets and prices are driven entirely by supply and demand. Demand for cryptocurrency largely comes from investments and its use as money in transactions and digital applications. The supply of cryptocurrencies are somewhat more difficult to navigate. Most coins are generated through block rewards when miners are paid coin by rates for processing a block. This rate may be subject to change. Bitcoin has a fixed supply at 21 million coins. As such, Bitcoin’s block rewards rate diminishes over time. Thus, Bitcoin is often considered a favorable asset as many believe demand for Bitcoin will continue to increase with a fixed supply, thus leading to ambitious price estimates (some predict a million usd exchange rates in the future). The reality is that no one is sure what the future of crypto looks like, or what coins will be used. Nonetheless, Bitcoin is without a doubt one of the most established crypto coins, and it is the father of the decentralized crypto movement. Unlike Bitcoin, Ethereum does not have a fixed supply. Ethereum is exciting because it allows individuals open source access to the blockchain and facilitates smart contracts (automatic digital protocols that essentially function as contracts). Thus a wide variety of decentralized applications (Dapps) have been built on the Ethereum blockchain: personally I've seen Dapps ranging from gambling to digital kitty collecting. Recently,
Many defi (decentralized finance) Dapps are also beginning to utilize Ethereum. Ethereum will soon be introducing a proof of stake model rather than the mining proof of work model that will essentially allow users to lock down coins and process blocks in order to receive rewards. Ethereum seems to have greater investment potential considering the new proof of work concept (limiting supply based on stake-holding) and expanding Ethereum use with Dapps (increased demand). However, as stated before, Cryptocurrency prices are based entirely on supply and demand, and the volatility of cryptocurrency investment demand must be addressed. During Bitcoin's initial meteoric rise in 2017 and subsequent drop, the extreme volatility can be attributed to a bubble of sudden investing interest when bitcoin went mainstream and massive sell offs. Indeed, navigating the cryptocurrency investment market is complex because there are a variety of factors ranging from technical, financial, and societal that influence prices, but they are more secure than many stocks and governments in different ways. Consider the American banking system of fractional reserves in which massive liquid pull outs and failure to pay loans have many times screwed people over. Consider the ever increasing inflation and debt inherently involved with the US Dollar, especially considering the recent shut down of the economy and crises revolving stimulus packages, low GDP, unemployment, social security, and likely decreases in trade due to trade wars. Cryptocurrency is not inherently attached to any government, economy, or location, and instead allows for a global network of transactions with no central authority governing the flows of money supply. Given these properties, what do we see of cryptocurrency in the real world?
Cryptocurrency is still in infancy, facing many barriers in commercial adoption,
scalability, and social acceptance. At the moment, there are dozens of different cryptocurrencies with unique properties in terms of supply and usage, posing different economic implications. In addition, no one knows how cryptocurrency will be used, especially if governments were to step in with cryptocurrency limitations. In spite of these uncertainties, cryptocurrencies refuse to be pushed aside. Courts in the United States and Chinese government have ruled that cryptocurrency are legitimate assets. JP Morgan has stated interest and involvement with cryptocurrency going so far as attempting to implement their own JPM coin. Visa, a company that used to ban crypto use, recently put out a press release in which they stated they were working with Coinbase and had interest in blockchain. Venmo and Paypal are both expected to roll out cryptocurrency services according to employees. Facebook stated an interest to introduce their own Libra cryptocurrency. China’s Xi Jinping called for increased blockchain research. Increasing numbers of people are beginning to obtain wallets, with adoption rates not unlike that of the internet in its earlier days. Cryptocurrencies have only existed for less than 15 years, with the first decentralized cryptocurrency of Bitcoin being introduced in 2008. In that extremely short time period, the global cryptocurrency market worth has gone from nearly worthless to hundreds of billions of dollars. Cryptocurrencies, particularly Bitcoin and Ethereum, continue to gain traction around the world as more and more business and individuals begin to utilize crypto. Indeed, while cryptocurrency's future is unknown, there is no doubt that cryptocurrency certainly has the potential for epic economic impacts.
Written For Lallic Partners