Cryptocurrency - A becoming of new asset class

Cryptocurrency has emerged as a new class of asset having the potential of improving the existing practices in financial transactions and challenging the roles of well-established fiat currencies and the central banks. This is evident from the rising popularity of cryptocurrencies, especially among retail investors, and the support from well-respected financial institutions. The phenomenal returns in major cryptocurrencies has acted as a major impetus for the rising popularity and has put the heightened volatility in cryptocurrencies since inception in the backburner. The rising popularity has not only led to the introduction of a big number of cryptocurrencies, with varying underlying technology and purposes, but also introduced a much needed digital infrastructure (exchanges, mining) for trading cryptocurrency in an attempt to increase its acceptability among mainstream investors. From a humble beginning in 2009, cryptocurrencies have risen to account for USD 2.2 trillion market capitalization in April 2021 (or ~10% of total GDP and 11% of total money supply in the U.S). COVID-19 pandemic has proved to be a big boon for cryptocurrencies. At the start of 2020, total market cap of all cryptocurrencies was at USD 195 billion, which has increased to more than 10 folds to the current level.

 

The inception of cryptocurrency

The efforts to come up with a digital currency based on encryption technology had been afloat since early 1980’s. However, the issue of double spend (using the same digital currency multiple times), infrastructure limitation and not-so-widespread enabling technology hindered the development and use of such currencies. The current form of cryptocurrency, based on the concept of decentralized ledger and peer-to-peer transfer, owed its inception to a publication of an online article by Mr. Satoshi Nakamoto in 2009. However, many believe that Satoshi Nakamoto is not the real name of the author and the original name of the author is still unknown. The original article argues that the development of electronic currency that is free from centralized regulation, as in the case of fiat, provides time and cost efficiency in 0.1 0.9 2.7 10.7 21.5 25.0 43.9 68.8 71.0 0 10 20 30 40 50 60 70 80 2013 2014 2015 2016 2017 May-18 Nov-19 1-Feb Apr-21 No. of Users (mn) Cryptocurrencies – A Brief Overview 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 18-Jan-19 18-Apr-19 18-Jul-19 18-Oct-19 18-Jan-20 18-Apr-20 18-Jul-20 18-Oct-20 18-Jan-21 18-Apr-21 Bitcoin price trend (USD) The phenomenal returns in major cryptocurrencies has acted as a major impetus for the rising of their popularity Source: coindesk.com 2 | P a g e PSU-Center for Financial Studies (CFS) Cryptocurrencies – A Brief Overview April 17, 2021 financial transactions, increased protection from identity theft and more importantly anonymity of buyers and sellers. Leveraging the concept presented in the article, the first cryptocurrency was created in 2009 by the name of Bitcoin. Specifically, Decryptionary.com defines cryptocurrency as "an electronic money created with technology controlling its creation and protecting transactions, while hiding the identities of its users."