As global investors continuously fine-tune their portfolios, they consider investments’ performance and economic conditions before making trading decisions. Equipped with this information, an investor often purchases traditional investments such as stocks, bonds, and mutual funds.
However, investors willing to tolerate more risk may consider adding cryptocurrencies to their portfolios. Private equity principal Mark Hauser presents a historical overview of the cryptocurrency markets. He also explains why this non-traditional investment holds considerable market appeal.
Finally, Mark Hauser highlights the real possibility that regulatory bodies may soon begin oversight of this so-far unmanaged digital marketplace. Although the U.S. Securities and Exchange Commission is the highest-profile regulatory entity, similar discussions are occurring in other countries.
The term “cryptocurrency” refers to a virtual or digital currency made secure via the application of cryptographic techniques. Stated another way, the currency has a very low counterfeiting or double-spending risk.
Collectively, cryptocurrencies exist on decentralized networks using blockchain technology. This distributed ledger runs on a computer network. Because cryptocurrency networks aren’t governed by a central authority, they are (currently) less prone to government regulation and interference.
Evolution of Digital Currency
Although cryptocurrency is a relatively recent addition to the financial markets, the history of digital currency stretches back to 1983. During that year, American computer professional David Schaum introduced the concept of e-cash (or encrypted electronic tender). His introduction of DigiCash drew Microsoft’s attention, spurring the PC behemoth to offer to buy the company. After Schaum declined the offer, his company went bankrupt.
In 1998, however, PayPal debuted its email-based payment platform, proving the viability of Schaum’s electronic money concept. PayPal’s partnership with eCommerce leader eBay led to global acceptance of this promising consumer and business payment mechanism.
Cryptocurrency Enters the Picture
Fast forward to October 2008, when “Satoshi Nakamoto” (a fictitious entity) introduced Bitcoin, the globe’s first-ever cryptocurrency. He presented an accompanying white paper and blockchain database. The latter construct was designed as a decentralized network that “timestamps transactions by hashing them into an ongoing chain of hash-proofed work.”
In early 2009, Nakamoto launched the first cryptocurrency Bitcoin mining operation. Two years later, Bitcoin appeared on several cryptocurrency exchanges. Also, in 2011, altcoins (or alternative cryptocurrencies riding on Bitcoin’s blockchain) entered the market.
In July 2015, the Ethereum decentralized software platform debuted on the market. Ethereum’s blockchain-driven programming language enables decentralized applications and smart contracts. Users accomplish these tasks without third-party interference or fraud risks.
Cryptocurrencies Receive Global Attention
In 2017, the cryptocurrency markets began to scale up, with Bitcoin and Ethereum reaching impressive valuations. Multinational corporations also became involved, beginning with manufactured chips for cryptocurrency mining. In 2019, several large financial institutions announced their intention to enter cryptocurrency markets.
In 2023, cryptocurrencies can provide consumers with multiple benefits. Besides investing and trading, this asset class can help facilitate cash management and income generation. Foreign exchange and global payments are also within the cryptocurrency realm. Looking at the bigger picture, cryptocurrencies, and the blockchain could eventually lead to the transformation of global financial services.
Primary Types of Cryptocurrencies in 2023
The global cryptocurrency market contains a dizzying array of potential investments. To simplify the discussion, private equity expert Mark Hauser profiles the three primary cryptocurrencies available globally in 2023.
Bitcoin, the first (and most valuable) digital currency, runs on a decentralized blockchain. Bitcoin can serve as a value repository while also driving peer-to-peer trades. Bitcoin’s secure, transparent trading platform appeals to all users and investors.
Ethereum is a multipurpose blockchain platform that easily facilitates smart contracts and decentralized applications. Inside the Ethereum network, Ether functions as the native cryptocurrency.
Tether functions as a stablecoin, providing a sense of stability in the unpredictable cryptocurrency marketplace. Every Tether is backed by a single U.S. dollar, catering to users and investors who seek to manage their risk. Concurrently, Tether provides cryptocurrency advantages, including speedy and borderless trades.
What’s Behind the Cryptocurrency Market’s Appeal
Unlike other longtime financial instruments such as stocks and bonds, cryptocurrency is a relatively new financial vehicle. Experienced private equity investor Mark Hauser details four reasons for cryptocurrency’s widespread appeal. Retail and professional investors alike have taken notice.
Intriguing New Asset Class With Several Advantages
Investors searching for new asset classes often gravitate to cryptocurrency. Although this often volatile investment is risky, Mark Hauser states that the potential returns can be impressive. That said, cryptocurrency’s wild fluctuations mean investors must often move with split-second timing.
In addition, uncertain economic conditions and/or depressed interest rates can lead investors to turn to cryptocurrencies. This newer asset class can enable portfolio diversification while eliminating traditional financial product risks.
Financial Options for Underbanked or Unbanked Individuals
Billions of individuals across the globe remain underbanked or completely unbanked. Some people don’t participate in conventional banking due to their geographical distance from financial institutions. Others cannot provide the documentation needed to set up conventional bank accounts.
In contrast, cryptocurrency transactions are available to anyone. Individuals can save, execute transactions, and even access credit. Cryptocurrencies also feature lower transaction fees compared to conventional banking institutions. Individuals and businesses often take advantage of these cost savings.
Innovation and Low-Barrier Entry and Exit
Investors of all levels will find it easy to jump into the cryptocurrency markets. Once aboard, they can enjoy the benefits of decentralized finance. Specifically, smart contracts and digital assets could potentially create a widespread alternative to existing contractual and financial networks.
Looking at the big picture, Mark Hauser notes that cryptocurrency markets enable more efficient, transparent, and automated transactions. If investors choose to exit the cryptocurrency markets, that’s also a relatively easy proposition.
Lack of Centralized Control and Regulation
Investors weary of government and central bank control often choose the cryptocurrency markets’ decentralized digital assets and transactions. Cryptocurrencies exist on blockchain technology-based networks, which theoretically exhibit less control and regulation than traditional financial networks. Ideally, this will create a more equitable financial trading environment.
In addition, blockchain technology’s transparency and stability help encourage trust among investors and other stakeholders. External enforcement, such as that needed with fiat currencies, does not appear necessary with blockchain-based transactions.
The Cryptocurrency Markets: Looking Ahead to 2024
As cryptocurrency market investors gear up for another unpredictable year, three notable factors will affect the industry’s evolution. Private equity expert Mark Hauser provides a snapshot of each market influence.
Increased Global Cryptocurrency Regulation
During 2023, the U.S. Securities and Exchange Commission (or SEC) and other regulators took action to ensure cryptocurrency exchanges engaged in ethical operations. These efforts included intensive scrutiny of some exchanges’ executives.
The Fed’s Interest Rate Holding Pattern
As November 2023 began, the Federal Open Markets Committee (or the Fed) decided to maintain its current “target fed funds” interest rate of 5.25% to 5.5%. For reference, climbing interest rates generally decreases investors’ desire for risky asset classes. In turn, this puts pressure on cryptocurrency prices.
More Late-2023 Interest in Cryptocurrencies
In mid-to-late 2023, investors continued to monitor the U.S. Securities and Exchange Commission’s activities. The SEC may be poised to confirm the first spot cryptocurrency exchange-traded fund (or ETF) listed on a premier U.S. exchange. While investors awaited the SEC’s decision, they ramped up their cryptocurrency trades.
SEC Regulations Will Drive Cryptocurrency Market Changes
The U.S. Securities and Exchange Commission’s proposed cryptocurrency regulations result from an intensive analysis of market conditions and concerns. The SEC has four clear objectives in adopting stringent cryptocurrency regulations. Private equity expert Mark Hauser summarizes each area of focus.
Assurance of Market Integrity
Since their inception, the cryptocurrency markets have featured a lack of regulation plus investor anonymity. However, these seemingly positive attributes could also be channeled into questionable practices such as market and price manipulation. The SEC is considering oversight that would greatly reduce the chances of these problems.
Regulatory Definition and Documentation
The SEC’s regulation can help distinguish cryptocurrency assets from traditional securities. This knowledge should help educate potential cryptocurrency investors. In addition, unified compliance standards can decrease cryptocurrency businesses’ legal “gray areas.” Easier compliance may also facilitate easier cross-border collaborations.
Protection for Market Investors
By applying securities laws to cryptocurrency markets, the SEC can confirm that investors receive more thorough (and accurate) information. In turn, this enables investors to make better-informed decisions. The SEC oversight could also shut down fraudulent activities and prevent investors from becoming scam victims.
Increased Legitimacy and Competition
The SEC believes that traditional investors will be increasingly attracted to these investments by legitimizing cryptocurrency businesses. The SEC’s oversight could also foster competition and innovation, both essential for the markets’ longer-term viability. Finally, the SEC’s enforcement of counterterrorism financing and anti-money laundering regulations may ease public concerns about cryptocurrency markets’ links to these practices.
Cryptocurrency Investors Should Augment Regulations with Due Diligence
As the cryptocurrency marketplace continues to evolve, the U.S. Securities and Exchange Commission will likely implement regulations protecting the markets and investors. With this as a backdrop, private equity executive Mark Hauser recommends that cryptocurrency investors always perform their due diligence before purchasing any type of investment.
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