These virtual assets, whose value depends on the laws of supply and demand, but above all, on the trust that people have in them, still have various challenges ahead. What makes them attractive to investors? And what should companies that decide to include them in their operations consider? What makes the value of the Bitcoin increased sharply compared to the same parameter 3 years ago?
In 2009, a person or group of people of unknown origin, under the pseudonym “Satoshi Nakamoto”, announced to the world the launch of a revolutionary virtual asset: bitcoin, the first cryptocurrency in history. At that time, a bitcoin did not have any value and no one knew how to earn cryptocurrencies but, twelve years later, on April 13, it reached the record, per unit, of $ 62,700 dollars and its popularity is already so great that it has caused the emergence of different cryptocurrencies competitors – almost 10,000 are currently known, the most popular being ethereum, ripple, litecoin, binance coin, ripple, tether, and dogecoin – which are also gaining the trust of people and increasing their value considerably. If you are looking to find out more popular coins, you should check this top 10 best defi projects in 2023.
However, despite the fact that its use is more and more frequent, many companies still do not know what they are or what the characteristics of these virtual assets are, and this lack of information could cause them not to make the best financial decisions. What are the differences between a cryptocurrency and a traditional currency?
The main difference is that cryptocurrency is a unit of information stored electronically. When a person has cash, such as coins and bills, they can physically store them in a piggy bank or safe; However, when you decide to purchase a cryptocurrency, you exchange a certain amount of cash for data that is stored in an electronic wallet.
Another unique feature of cryptocurrencies, which is very attractive to investors, is that they operate thanks to a technology that guarantees their absolute protection, known as blockchain.
What is the blockchain?
Imagine it as a group of people who form a circle holding hands; They all recognize who makes up the circle, they all have a record of every interaction that has happened between them and all of them can detect if a stranger wants to enter the circle and prevent it.
This is a simple way to understand the blockchain, a closed structure, made up of computers that, due to their constant surveillance and registration, facilitate the secure transaction of digital assets without the need for an intermediary – contrary to what happens in the case of traditional money. -, using highly traceable technology, which allows operations to be identified and fraud avoided.
These attributes, together, have caused both companies and investors to look at cryptocurrencies as the evolution of money that we know, but, before betting on them, it will also be advisable to consider the different challenges that this implies.
The main difference between a cryptocurrency and a traditional currency is that the cryptocurrency is a unit of information stored electronically.
Value at the service of demand
One of the main disadvantages of this type of virtual asset, compared to traditional currencies, is its volatility, which is explained because its value is not determined by an institution, but by the trust generated by the market itself; that is, it is a matter of “faith” on the part of investors.
This means that, unlike a traditional currency, which receives its value thanks to the support of the central bank of a State, the cost of a cryptocurrency is established by the laws of supply and demand: if demand rises, it increases immediately; if the demand goes down, it decreases instantly.
In mid-May alone, due to the Chinese government banning the use of cryptocurrencies, the cryptocurrency market fell more than 30%, its worst performance in 14 months. Shortly before, the main virtual asset, bitcoin, had also been impacted by a series of comments from Elon Musk, director of the car brand Tesla, who hinted on social networks that his firm might prefer, instead of bitcoin, the use of another cryptocurrency: dogecoin.
Taking into account the above, we can point out that some of the factors that can most affect the demand for these virtual assets decreases and, therefore, their value, are:
- The accelerated sale of a large number of cryptocurrencies by investors.
- The public announcement of companies that do not bet on these assets, by not accepting them as payment methods.
- Government regulations that prohibit or limit the use of these types of assets. Some governments have shown their interest in developing their own virtual currencies (govcoins), which, in case of reaching the market, would have a value determined by their issuing State, but not by supply and demand, which would make them more attractive to investors and businesses.
- The rejection that its contribution to global warming can generate, due to the high consumption of electricity of the blockchain computer network.
In short, the cost of these virtual assets is established by the laws of supply and demand.
Being flexible and planning, the key to accepting cryptocurrencies
Today, it is increasingly common for companies to decide to accept cryptocurrencies in their payment methods, or to consider doing so in the future (some examples are Visa, Mastercard, BlackRock, KFC, Microsoft or Overstock); However, if they decide to go down this path, they will have to define a specific management plan for these assets first, in order to protect their profit margins from potential depreciation.
To emphasize the importance of this, let us put, as an example, the following scenario: if a hotel accepts that a client pays with bitcoin to carry out an event, but does not have a clear strategy to manage this resource, it will not know where of the financial balance record it, nor how it is evaluated, how long it should remain in the institution or when it should be sold to protect as much as possible the profits.
In other words, it is essential that organizations seek advice from specialists, to comply, nationally and internationally, with current accounting and tax regulations, which are complex with respect to the use of virtual assets, because they have not determined with clarity how to define and value them.
Likewise, it will be advisable for companies to establish limits on the receipt of cryptocurrencies, determine the most efficient way to manage them and implement procedures for their sale or permanence in their financial balance. But even when all this planning is crucial, should companies assume that virtual currencies are here to stay?