2017 was a break-out year for cryptocurrencies. The mainstream media began to consistently discuss the value of cryptocurrencies as bitcoin hit a fresh all-time high. Cryptocurrencies are digital currencies that have a finite number of coins that can be created. The most popular cryptocurrency is bitcoin, whose rise from $1,000 to $19,000 per coin in late 2017 took the world by storm. However, there are several other cryptocurrencies that are actively traded including Ethereum, Litecoin and Ripple.
A cryptocurrency differs from sovereign currency as it does not have a central bank that is the official regulator of the product. Instead, the product is regulated by coin miners who are individuals or companies that create blocks of transaction data that can track all the activity a specific coin has experienced throughout its lifecycle. This helps prevent fraud as a miner and can track the path of their coin.
Pros and Cons of No Central Bank
Without a central bank as the regulator of the coin, policy cannot be created to keep the coin in a specific range. There are no authorities that are buying and selling the coin to help increase or decrease exports or imports. Central banks consistently alter their short-term interest rates for many reasons including changing the value of their currencies.
Where do You Hold Cryptocurrencies?
While most of the world’s cryptocurrencies are traded through wallets, futures contracts in specific cryptocurrencies have recently entered the scene. A wallet is a software program that describes your cryptocurrency and allows you to exchange it for other cryptocurrencies or standard currencies such as the dollar, euro and pound.
There are dozens of wallet companies but the only one regulated in the U.S. is Coinbase. The requirements to open a wallet are robust. The company requests information such as your social security number, a photo id, as well as, information about where you live and proof of this residency. This is standard protocol for many wallets, but there are some with more lenient processes. Forex brokers are also active in crypto trading, and will provide you a platform to track and trade cryptocurrency movements.
Regulators are Stepping In
In December, both the Chicago Board of Options Exchange and the Chicago Mercantile Exchange introduced futures trading in bitcoin. These types of futures and options exchanges are regulated by the Commodity Futures Trading Commission which is part of the Securities and Exchange Commission. By introducing bitcoin to the futures market, the CME and CBOE gave the markets the ability to short a cryptocurrency. Prior to this period, it was nearly impossible for a U.S. based customer to short a digital currency.
The cryptocurrency with the largest market capitalization is bitcoin, but there are other cryptocurrencies that are gaining in value. Ripple and Ethereum are in second place. Ripple is the only popular cryptocurrency that is not traded on the U.S. wallet Coinbase. In fact, to purchase Ripple, many wallets require that you exchange it for another digital currency. Cryptocurrency pairs are listed like currency pairs but instead of EUR/USD you would see something like: XRP/BTC.