A financial world turning point
What we are currently witnessing is truly a watershed moment for the world of finance, and it may well turn out to be one of the major drivers for global economic growth over the coming years.
The creators of digital assets have laid the groundwork for simplifying and ‘democratising’ the way we conduct financial transactions. ‘Digital assets’ is often used as an umbrella term for a number of developments in the field of digital transactions, such as crypto coins or tokens, which all trace back to the blockchain technology.
What is blockchain?
To understand blockchain’s origins, it’s important to look at how Bitcoin, the ‘original digital asset’, came to be. Its story began in 2008, the year the world faced a financial crisis of unprecedented proportions. Confidence in the global economy and in the banking sector sank to an all-time low.
Meanwhile, under the pseudonym of Satoshi Nakamoto, the Bitcoin blockchain White Paper was published in October 2008, introducing a system that could make the entire existing financial system obsolete, according to its author. In the White Paper, Nakamoto proposed a decentralised approach to transactions, effectively cancelling the need for a trusted third party (like a bank) and culminating in the creation of blockchains. This helped the blockchain concept, which had already existed for years at that point, to achieve a breakthrough.
In slightly more technical terms: in a blockchain, timestamps for a transaction are added to the end of previous timestamps, (typically) based on proof-of-work, creating a historical record that cannot be changed.
In January 2009, shortly after the white paper’s publication, the software was released, the very first Bitcoin was minted, and the Bitcoin network was born.
Crypto coins – an explanation
To explain how crypto coins work, let us take as an example a Bitcoin trade. In principle, the mechanism is the same regardless of which crypto coin one uses. To transact Bitcoins directly, both you and the person to whom you wish to transfer the coin need to have a Bitcoin wallet address. This is a randomly generated unique set of numbers and letters. By sharing your public address with others, they can send digital money to it.
Then you need your public key, which is comparable to an account number. This can be freely shared with everyone, and anyone can potentially send transactions to it. Your Bitcoin wallet address is a hashed version of your public key. To spend Bitcoin, though, you need a private key, which is essentially a password or verification code that, together with the corresponding public key, allows you to access your funds on the blockchain. A wallet is like an encrypted virtual keychain that contains all the information needed to access your funds on the Bitcoin blockchain.
Insights from our experts:
The rise of distributed ledgers and storage on blockchain allows for safe and transparent data decentralisation, enabling the digitalisation of trust and allowing for some disintermediation as a consequence. As a matter of fact, individuals will become the rightful owners of their data again. And I think that is the main argument for Web 3.0 – it enables individual users to be the ‘sovereigns’ by giving them the power to determine which data they wish to share and with whom.
If an investor is considering trying their hand at digital coins or wishes to get exposure to the blockchain space, they should be able to live with the volatility, which is not likely to subside very soon. The path to Web 3.0 will not be smooth, and we will likely see many incumbents in the space disappear before the true leadership emerges. That said, the addition of a nominal allocation to crypto may actually improve a portfolio’s risk-adjusted performance, according to our simulations.
Six points to consider:
- Use cases: Blockchains have the potential to revolutionise entire industries
- Sustainability: In time, blockchain technology holds the potential to have a positive environmental impact. Today, however, the industry has a negative ecological footprint.
- Staking: In the world of crypto finance, staking a coin is the way to earn interest for those wishing to lend – comparable to the traditional (fixed) income business.
- Privacy: Digital wallets are represented through a unique string of random letters and numbers linked to and displayed in every transaction involved on the blockchain ledger. Therefore, information encoded on the blockchain is immutable and accessible by everyone. Although this provides complete transparency, it could also threaten users’ privacy.
- Keys: Once your digital keys to your crypto wallet are lost, you cannot unlock your asset – it is gone forever. Approximately 20% of all Bitcoins have been permanently lost because their owners have lost their keys.
- Regulations: The world of digital assets and DeFi remains largely unregulated. We expect that regulators will eventually seek to create a level playing field. For people in countries with limited financial infrastructure, weak currencies and high levels of inflation, a functioning crypto infrastructure could well have the greatest appeal.
Conclusion
Although it is impossible to tell how big digital assets will eventually become, we do see the asset class growing over time as the market becomes more appreciative of the potentially disruptive power of blockchain technology. However, we do not expect crypto coins to grow so much that they become currencies which are regularly used by private individuals.
Finally, no matter what you may think about digital assets, they will continue to influence our lives – probably more than we can imagine today.
Please note: In view of the rapid evolution of digital assets, this article does not describe every risk involved. Please consult your respective jurisdiction tax, legal, or financial advisors for further information on digital assets.