You’ve likely overheard your friends or colleagues discussing cryptocurrencies. And while you might have an idea what Bitcoin is, you might be less familiar with what a stablecoin or an NFT is. To get you up to speed, in this article we’ll look at some of the key things you need to know about the crypto market in 2023.
In this article you’ll discover: - What a cryptocurrency is - How big the crypto market really is - How cryptos work - What the Blockchain is - The importance of a digital wallet - What an NFT is
What is a Cryptocurrency?
Cryptocurrencies are digital tokens that share a number of characteristics with real currencies, but don’t physically exist like coins or banknotes. Like real currencies, these digital tokens can be exchanged for goods and services.
One iconic example from 2010 involves the exchange of 10,000 Bitcoins for a single pizza. Yes, a single pizza! At today’s prices, those 10,000 Bitcoins would be worth hundreds of millions of dollars.
Of course, while Bitcoin and other cryptocurrencies can be used to purchase goods and services, they rarely are. Across the board, Bitcoin and other cryptos like Litecoin and Dogecoin have not seen mass adoption as a medium of exchange. Rather, a better way to think about crypto in the current environment is as a store of value – like a digital gold or an asset, like a stock.
How big is the crypto market?
The total value of the entire cryptocurrency market was valued at a little over US$1 trillion, as of 16 March 2023. That was made up of over 22,000 cryptocurrencies, spread across 570 exchanges.
The largest and most well-known cryptocurrency remains Bitcoin – which last traded around US$24,000 per coin, with an implied total market value of US$470 billion. To give you a sense of comparison, the total market value of gold stands at US$12.7 trillion, as of March 2023.
How does a cryptocurrency work?
Cryptocurrencies get their name from the fact that they use cryptography or secure communications techniques to store the record of transactions and ownership on a digital ledger. This ledger is distributed and synchronised across a wide range of computers so there is no single party or person that operates the system.
The idea of not relying on a single party or person is a core idea within the entire crypto movement and speaks to another important and interrelated idea – decentralised finance or DeFi for short.
According to Rafael Cosman, Chief Executive Officer of Trust Token: ‘Decentralised finance is an unbundling of traditional finance’ that ‘takes the key elements of the work done by banks, exchanges and insurers today—like lending, borrowing and trading—and puts it in the hands of regular people.’
The opposite of DeFi is traditional finance, often referred to as ‘trad-finance’, which includes entities such as banks (think the Commonwealth Bank of Australia) or a central bank (like the Reserve Bank of Australia), which are centrally controlled businesses or entities.
Is cryptocurrency actually money?
The Reserve Bank of Australia (RBA), which is in charge of issuing the Australian dollar (A$) and setting the country’s monetary policy, clearly states that cryptocurrencies are not money. The RBA argues that cryptocurrencies ‘use as a means of payment is limited and they do not display the key characteristics of money’.
Crypto can be used for some buying and selling transactions where retailers or individuals agree to accept them – as with the pizza example we discussed – but this often involves converting the crypto back into a regular currency like Australian dollars, through a third party. Progress has been made to simplify this process, with many DeFi products popping up that accept payment with cryptocurrencies.
Moreover, despite the technological leaps made by DeFi, research conducted by S&P Global Market Intelligence suggests that crypto is predominantly viewed as an investment, not as a medium of exchange appropriate for regular transactions.
In fact, as part of that research conducted by S&P, it was found that 36% of those surveyed viewed crypto as ‘a general investment to grow [their] wealth’. While this doesn’t preclude crypto from one day being adopted as a form of payment, right now, the market simply isn’t there.
What is the Blockchain?
Blockchain technology is the underlying technology that powers the world of cryptocurrencies. More specifically, the blockchain refers to a shared, permanent ledger that makes the process of recording transactions and tracking digital assets in a network, a reality.
A blockchain network tracks orders, payments, accounts, and production details, but theoretically, anything could be tracked and traded on a blockchain network.
All of this is represented by a cryptographically secure ledger of transactions that other members in the network can view and trust. This is also why cryptocurrencies are often referred to as ‘trustless’.
Those who strongly believe in cryptocurrency argue that blockchain technology can increase efficiency, cut costs, and reduce risks.
What is a stablecoin?
Stablecoins, in practice and as the name suggests, are meant to be a more stable version of a cryptocurrency. But how does that work? Theoretically, a stablecoin is supposed to have its value anchored or linked to a real asset like US dollars or gold.
This means they can be traded and used in the DeFi ecosystem like other cryptocurrencies; but given that these coins are linked to real world assets or centrally built around a ‘stable algorithm’, the assumption is that they should trade or behave in a stable way.
When theory meets reality however, outcomes can be highly unpredictable. The recent US$60 billion collapse of Terra – one of the crypto market’s largest and most prominent stablecoins – highlights that unpredictability.
What is a digital wallet?
When you buy or sell crypto on a crypto trading platform, those crypto have to be stored in your own unique digital wallet. When you own a digital wallet, you have a set of private keys or unique codes that can be used to authorise outgoing transactions.
A wallet may be a software wallet, also called a hot wallet, that you access through an online account. On the flipside, it could be a hardware wallet, also known as a cold wallet, that you access via a secure device not connected to the internet.
There are limitations to both of these approaches. For example, cold wallets are not the most flexible should an investor want to quickly sell their crypto; and hot wallets, stored on certain exchanges, might not be considered the most secure.
What is central bank digital currency?
A Central Bank Digital Currency (CBDC) is best described as a digital form of cash. It would be issued by a central bank, like the Reserve Bank of Australia (RBA), and could be used by you to settle ordinary transactions like buying a coffee or groceries.
Many central banks are in the process of developing these CBDCs, but none of them are widely used – yet. When they do come into play it’s likely they will be exchanged at a rate of one-for-one with other forms of money such as banknotes and coins. A CBDC would be considered legal tender, making it widely accepted as a means of payment.
The RBA is currently involved in a number of projects related to the development of digital currencies, including Project Atom, Project Dunbar, and is also participating in the Digital Finance Cooperative Research Centre. You can learn more about how the RBA is approaching digital currencies here.
What is an NFT?
NFT – or Non-Fungible Token – represents a uniquely identifiable type of digital asset that is stored on the blockchain. Each of these assets, which can be as simple as a cartoon representation of a monkey or as potentially complex as the deed to a house on Sydney’s Northern Beaches, is linked to a unique blockchain ledger entry.
Fungible here simply means replaceable by another identical item. For example, the twenty dollar note in your wallet is fungible: it has the identical value to any other twenty dollar note in your wallet or bank account.
NFTs by comparison are considered by those in the crypto community to be non-fungible, as they point to unique assets on the blockchain. They can’t be easily swapped or traded for another similar asset like the twenty dollars in your wallet. Many have debated this fact.
Of course, while NFTs may sound like just a bit of fun, they are serious business. In 2022 NFTs generated US$24.7 billion in trading volume. Maybe more shockingly, an NFT, titled Everydays: The First 5000 Days and created by Mike Winkelmann, sold for a staggering US$69 million in February 2021.
This article/webinar is brought to you by Syfe Australia Pty Ltd., CAR number 1295306 of Sanlam Private Wealth Pty Ltd (AFSL 337927). Disclaimer: Investing involves risk including the risk of losing your invested amount. We do not provide personalised advice or recommendations. Any information we provide is general advice and current at the time written. Please speak to your Financial or Tax adviser for personal advice. Any reference to an investment’s past or potential performance is not an indication of any specific outcome or profit. Crypto investments are not currently regulated as financial products in Australia and consumer protections are minimal. Data in article correct as of July 12, 2022.
Cryptocurrency investments available through the cryptocurrency trading services provided by Syfe are not currently regulated as financial products under the Corporations Act 2001 (Cth) or under Australian law. Unlike other trading services offered by Syfe such as that in relation to stocks, the cryptocurrency trading services are not covered under the corporate authorised representative arrangement with Sanlam Private Wealth Pty Ltd (AFSL 337927). This means consumer protections are minimal and you may not be protected if any cryptocurrency which you have invested in fails or any service provider involved in providing you with cryptocurrency fails.INVESTING IN AND TRADING CRYPTOCURRENCIES INVOLVES RISK. READ OUR CRYPTOCURRENCY RISK DISCLOSURE STATEMENT.
