- The cryptocurrency bubble is not about to burst, seeing that they operate in a speculative environment that offers alternative digital currency.
- Cryptocurrencies such as Bitcoin are a product of blockchain technology that seeks to decentralize transactional operations.
- The supply cap on Bitcoin and Litecoin means that these cryptocurrencies may not decrease in prices, except through decryption of their algorithm.
The rise of cryptocurrencies has been positively received in the market. Although these digital currencies are subject to controversies surrounding their history, they are currently in a bubble that will not burst anytime soon. Firstly, cryptocurrencies are unregulated by national governments due to the metaphysical nature of technology. Secondly, they operate on speculation, where investors view them as a hedge against geopolitical/economic uncertainties. Thirdly, the supply of these digital coins is capped to a set quantity, making them lower than demand.
Blockchain is a decentralized technological application that allows the processing of digital transactions devoid of central authorities. The transactions include purchases and payment systems that have traditionally been the preserve of banks, financial systems, and federal authorities. It allows users to view transactions framed in ledger wallets, which are added to the chain. Anonymous approvals are necessary for such transactions to take place.
Bitcoin, the maiden cryptocurrency in its inception in 2009, began using this technological application. It means that any development related to the blockchain would have a direct impact on the digital coin. Due to its encryption benefit, blockchain can be used in political processes such as voting, sharing medical information, and automation. The development of electric cars and driverless vehicles may correlate to the increase in cryptocurrency exchanges. It is a seamless process that operates on reduced costs.
Bitcoin, the most common cryptocurrency, has risen by almost 17,000% since October 2013 to date. At the time, the digital currency traded at $196.02 before growing exponentially to $33,002.54 on January 4, 2021.
Investors utilize cryptocurrencies as alternative virtual currencies. Like money, they can be used to trade products in the online market. However, their explosion in the market shows that they are now used as a store of value by investors. The picture below shows a list of the six most widely traded cryptocurrencies by market capitalization in the first week of 2021.
Even though they are termed precarious investments, their perceived potential in the highly volatile digital world makes them very lucrative. Bitcoin is soon headed for a significant boost, although it hit a high of $34,000 on January 3, 2021. Traditional fund managers are salivating for the surging prices.
Hedge fund managers have now adopted the use of cryptocurrency funds to take advantage of Bitcoin’s winning streak. The premise upon which fund managers view cryptocurrencies as a gem is that Bitcoin has at least a 1% exposure in all gold assets. Eventually, an increase in gold investment would also advance the adoption of more Bitcoins. Such an understanding means that as the world moves towards the digital age, the need to encrypt currency will force digital coins’ adoption.
The Bitcoin blockchain technology has limited the supply of the coins to 21 million. This supply is expected to reach its optimum levels in 2140. Such an adoption means that BTC will continue to grow in price. The only caveat that will disrupt demand is if the alternative currency’s encryption will be cracked by hackers or redesigning the algorithm.
The supply cap on Litecoin is limited to 84 million. In contrast, Ethereum (ETH) is not capped in supply, and additional coins can be created in the future. While Ethereum has a higher market capitalization than Litecoin, the latter’s supply cap means it has tremendous potential to exceed sales shortly. Tether (USDT) may soon reach $1, seeing a total of 21 billion coins are in supply. Fear of shortage may necessitate a price increase among investors.