Despite widespread claims of high returns from investing in crypto assets, the road to wealth via cryptocurrency is rarely smooth or effortless.
By Nigel Bowen
Despite continued fears that international as well as national regulators could crack down hard on cryptocurrencies, thus generating a “cryptocalypse”, it appears at least some cryptocurrencies are here to stay. Here’s what you need to know.
The 800-pound gorilla: Bitcoin
Bitcoin was created in 2008/2009 after the global financial crisis. Like all of the 4000-odd cryptocurrencies that have subsequently emerged, Bitcoin is enabled by its underlying blockchain technology.
Bitcoin’s pioneering status is both its strength and weakness.
First-mover advantage means Bitcoin was embraced sooner than any other cryptocurrency, and it continues to be the default option for investors, as well as those governments, financial institutions and businesses that have been willing to embrace cryptocurrencies and blockchain technology.
Reassuringly, Bitcoin’s creator only issued 21 million Bitcoins. Ultimately, the number of Bitcoin in circulation will never exceed 21 million, as per its protocol. So, when the demand for Bitcoin increases, there is only one variable that can change to ensure the demand and supply of Bitcoin are in equilibrium, and that’s price.
Bitcoin’s dominance is such that all other cryptocurrencies are collectively referred to as “altcoins”.
However, Bitcoin has two major downsides. First, as might be expected of a prototype, it is technologically primitive when compared to subsequently developed cryptos.
More significantly for aspiring crypto millionaires, Bitcoin has already, to use the crypto-trader lingo, gone to the moon.
While it will continue to be volatile and thus provide opportunities for those with good timing and nerves of steel, it is hard to see its value continuing to skyrocket the way it has over the past five years.
The challenger: Ether
“Ether” is the cryptocurrency generated by Ethereum, a blockchain that performs a range of functions.
What’s unique about Ethereum is that users can build applications that “run” on the blockchain like software “runs” on a computer. These applications can store and transfer personal data or handle complex financial transactions.
Rather than hosting software on a server owned and operated by Big Techs, where the one company controls the data, people can host applications on the Ethereum blockchain.
This gives users control over their data and they have open use of the app as there is no central authority managing everything.
Ethers, which have been available since 2015, currently retail for about US$2200 (A$3000).
“Technical types” like Ether for its variety of functions.
Crypto investors like Ether because it has the potential to challenge, and possibly even displace, Bitcoin as the world’s go-to cryptocurrency. Should that happen, Ethers would also go off the charts.
Crypto fiats: Stablecoins
In a digital age, one advantage of cryptocurrencies is that they remove the friction from online transactions, especially international transactions. This hasn’t gone unnoticed by central banks, some of which are considering issuing central bank digital currencies (CBDCs).
CBDCs are yet to take off in a big way, but it’s long been possible to get the next best thing – stablecoins pegged to a fiat currency. For instance, the stablecoins Tether and USD coin are worth US$1 and always will be.
Stablecoins aren’t particularly volatile, so they don’t attract interest from those aspiring to get rich quick.
However, they can be popular within the finance industry, because moving money around the globe is cheaper and more efficient with stablecoins than old-school dollars, yen or euros.
No joke: Meme coins
Creating a new cryptocurrency isn’t onerous, and thousands of them have now been issued, often for humorous or charitable or publicity generating purposes.
These types of cryptos, often described as “meme coins”, include the likes of Whoppercoin (named in honour of Burger King), the short-lived Coinye West (named in honour of Kanye West) and Tiger King Coin (issued by Joe Exotic himself).
No one paid much attention to meme coins, which typically have negligible valuations, until the likes of Elon Musk, Mark Cuban and Snoop Dog talked up Doge coin, aka Doge, in early 2021.
This caused its price to spike by 20,000 per cent to US$0.50, resulting in it reaching a market capitalisation of almost $50 billion. (As quickly as it rose, Dogecoin’s price collapsed, though not all the way down to its one-time value of US$0.00026.)