Cryptocurrencies have emerged as an attractive investment option in recent years, capturing the imagination of investors despite their high volatility.
That makes many of us wonder what lies ahead. Will crypto replace fiat currencies such as the rupee and dollar, or will the two coexist? Analyzing the rise of crypto could be the first step toward understanding how the future of cryptocurrencies will evolve. So let’s start with that.
Cryptocurrencies: A brief look at their rise
Long before Bitcoin, there had been several attempts to create online currencies. As early as the 1980s, American cryptographer David Chaum introduced eCash, a precursor of Bitcoin that relied on cryptography to secure and verify transactions. But, it didn’t take off because of limited protocols and software.
In 2008, a mysterious person (or group of persons) known as Satoshi Nakamoto—possibly a pseudonym—laid out a blueprint for a digital currency that could operate without any third parties. Shortly after, in 2009, Bitcoin was launched as open-source software. The first Bitcoin transaction, between developer Hal Finney and Nakamoto, ushered in a new era for cryptocurrency.
The crypto market expanded over the next decade, and crypto graduated to a more mature phase. Around the same period, many new cryptos began to enter the market to challenge Bitcoin. Only a few could survive the extreme volatility in prices.
The introduction of cryptocurrency exchanges gradually cemented the status of crypto as one could finally learn to trade and exchange fiat currencies for crypto coins.
Cryptocurrencies and regulations
Globally, the crypto sector has largely remained unregulated. What does that mean for crypto investors? Freedom from regulation means no central authority, such as a government or bank, can interfere with the investments made.
But governments everywhere are currently considering introducing (or have already introduced) rules and regulations to create a safe environment for crypto investors.
Currently, cryptocurrencies are unregulated in India.
Factors that could impact the future of cryptocurrencies
Cryptocurrencies have become an integral part of the global financial and monetary system. The future of cryptocurrencies depends on policymakers’ decisions. From a policymaking perspective, cryptos must be managed or at least defined to establish how it fits into the entire ecosystem.
Across the globe, makers of state or federal policies are seeking to create guidelines to determine the course of action for cryptocurrencies. Policy decisions can affect supply, demand, and market value. Thus, keeping track of these policies can help investors make the right investment choices.
For example, stringent policies might drive down the value of cryptos as it is likely to render them less attractive. On the plus side, accommodative policies might legitimize cryptocurrencies, making them more socially acceptable and boosting their adoption.
Investing in crypto requires careful planning and an in-depth understanding of the market. Crypto investors know that crypto investing is risky and speculative due to the price volatility of this type of asset. In the last decade alone, the prices of Bitcoin (BTC) and Ethereum (ETH) shot up and plummeted countless times.
And since the crypto market is fairly new and unpredictable, there’s no guarantee that any investment will be profitable. But there are some things that do determine the extent of volatility. Factors that lead to volatility in the crypto market include demand and supply, user sentiments, media hype, and government regulation.
In the future, volatility is very likely to continue to determine the profitability of coins, and it may drive weaker altcoins out of the market.
3. Demand and supply
The forces of demand and supply have dictated the prices of various coins whose values have peaked in recent years in the cryptocurrency market. For example, the hype around BTC drove the demand for the coin, and with limited supply, its value shot through the roof. (Because, by design, only 21 million bitcoins can exist in the market, supply is controlled.) Another crypto that has a high demand is ETH—now second in value only to BTC.
The demand and supply forces will affect crypto in the future too, leading to a tightening of options for investors. With multinationals and governments purchasing crypto assets en masse, there’s no doubt that the demand created by such big players will dictate market conditions.
Crypto is powered by blockchain technology, a decentralized and digitally distributed public ledger. Participants in a blockchain network must rely on powerful Graphics Processing Units (GPUs) and Application-Specific Integrated Circuit (ASIC) computers for mining—the process of verifying transactions and generating new coins. Only miners with the most advanced computers are successful.
With new technology entering the market, miners will be able to verify transactions faster and mint coins more quickly. Companies like Intel are set to launch new crypto mining chips that will significantly reduce mining labor. These technological advancements have the potential to transform crypto, making it more accessible to the public.
5. Energy consumption
Despite its tremendous investment potential, crypto is not sustainable as it is right now. This has to do with the fact that crypto mining involves huge amounts of energy. Analysts estimate that Bitcoin uses 91 terawatt-hours of electricity annually, more than the total energy consumption of some countries.
Things weren’t always this way, though. When they first hit the market, cryptocurrencies such as Bitcoin didn’t consume much electricity. As cryptos became popular, the not-so-eco-friendly proof-of-work mining mechanism came to be the essential tool for the verification of blocks. Participants were thus compelled to invest in more advanced computers to succeed in crypto mining, leading to higher fossil fuel consumption.
The good part is that things may be changing now. There are other, more sustainable options like proof of stake at the moment, and many altcoins have already opted for them. Additionally, new data shows that close to 60% of the electricity used to power Bitcoin mining machines comes from sustainable sources. So we can hope it is only a matter of time before Bitcoin goes fully eco-friendly soon.