Sunday, March 28, 2021 / 08:00PM / By Davidson Oturu, Partner, Aelex /
Header Image Credit: Aelex
has been the subject of many discussions and is presently taking the world by
storm. It is a digital or virtual currency designed to operate
as a medium of exchange. It is secured by cryptography1, which makes it nearly
impossible to counterfeit or double-spend. It is built on
the blockchain, a decentralised
technology spread across many computers that manages and records transactions.
Peculiar traits about cryptocurrency includes the fact that it is
virtual and is not issued by a central authority or central banking
system. It is therefore not subjected to government interference as it typical
with fiat currency.
The first cryptocurrency, Bitcoin, was designed by the mysterious
Satoshi Nakamoto in January 2009. It is built on a cryptography-based
blockchain network that supports a peer-to-peer electronic payments system.
As with other types of cryptocurrency, it is not under the control of any person,
company or government and is run on a decentralised system.
The Rise of Cryptocurrency
Cryptocurrency has been on the rise over the last few months. Bitcoin in
particular has seen an astronomical rise in its fortunes. As at March 2021, one
Bitcoin was valued at over $50,000. The astronomic heights attained by Bitcoin
has been attributed to a number of factors, including the coronavirus that
ravaged the world in 2020 and still continues to spread in 2021.
Some identifiable factors contributing to the fluctuations seen in the
price of Bitcoin and other cryptocurrencies include the following:
Bitcoin has a limited number
the underlying blockchain network for Bitcoin is a
limitation on the number of Bitcoins that can be created. Thus,
fiat currencies that are issued by the Central Banks of different countries
without limits, only 21 million Bitcoins can ever be created.
This means its price would be driven to a large extent by the laws of demand
and supply. Since it is a “scarce” commodity, its price would be driven upward
by the continuous demand of investors and speculators.
Another factor that
drives up the prices of cryptocurrency is speculation. Because majority of Bitcoin transactions are still
investment based, investors transact with Bitcoins
like they would any other investment. This buy-sell cycle usually makes the price of Bitcoin volatile.
Uncertainty about the technology
Unlike some other
technological developments that have been embraced for many decades,
cryptocurrency and the underlying blockchain technology only gained mainstream
recognition about 12 years ago in Sakamoto’s Bitcoin whitepaper. Thus, a lot of people still do not understand the concepts
behind cryptocurrency. As a result of this, there has been some negative
publicity about how cryptocurrencies are created with some even describing it
as a “ponzi scheme”.
Furthermore, because the workings
behind digital currency requires a bit of
technical knowledge to grasp, many
investors and financiers who own Bitcoin remain
unsure of how it gets its intrinsic value.
most users of Bitcoin do not know that the design of
its protocol has limited coin production to a fixed number of 21
million or that cryptocurrency mining technically builds a stronger
and more trustworthy network.
This lack of
understanding around cryptocurrencies and their operation leads to the continued
volatility of the assets.
Most cryptocurrencies are digital
and not backed by any assets or currency
cryptocurrencies are purely digital and are not backed by physical assets or any fiat currency and its usage is simply based on trust. This means that as indicated earlier,
their prices are set entirely
by the laws of supply and demand.
Consequently, if investors believe that the
value of cryptocurrency will rise or fall due to factors such as Elon Musk’s recent purchase of Bitcoin,
they may sell their investment to make a profit. Such actions could affect the
price and take it upwards. Conversely, actions can happen that could plunge the
Government policies and regulations
Governments’ acceptance or rejection
of cryptocurrency can be a factor in the stability of cryptocurrency. Where governments legitimise and…