A cryptocurrency is a digital currency that can be used to make regular purchases on services or goods. Crypto is secured by a cryptography, which is a coded method of protecting information, enabling secure online transactions without involvement of a third party. This blog post will cover what is cryptocurrency, how to buy cryptocurrency, and how to determine its value.
What is crypto?
Cryptocurrencies are virtual currencies which also take the form of coins or tokens. Crypto uses a technology that is decentralized through blockchain. Since it is decentralized, investors can deal directly with each other rather than operating from within a centralized platform, which is one attractive component about crypto. Blockchain is the technology behind Bitcoin. It is a specific type of decentralized database where data is stored in blocks and then chained together. Although different types of data can be stored in blockchain, the most well-known use case has been to record transactions, making virtual or digital transactions more secure.
Although Bitcoin (BTC) was the first blockchain-based crypto founded January 2009, many companies have their own cryptocurrencies. Bitcoin transactions are recorded and verified by massive amounts of computing power and are not backed by banks or governments. While some of the crypto today have been built off of Bitcoin, others have been built from scratch. Today, there are over 4,000 unique cryptocurrencies, but Bitcoin remains the most valuable and popular crypto.
Why are cryptocurrencies so popular?
Cryptocurrencies are becoming more popular by the day. Bitcoin rose remarkably in 2020 despite the impact of several situations like COVID-19, US-China tensions, and Brexit that would normally keep investors away. In 2017 it was hovering around $1,000 but since 2020 it has reached an all-time high above $60,000 USD, continuing to make headlines and driving up the prices of other cryptocurrencies.
Source: Trading View, May 2021
Apart from its high returns, there are a number of reasons why both institutional and retail investors are attracted to cryptocurrencies like BTC.
Institutional investors driving crypto
According to a 2021 study by Business Insider, institutional investors are becoming more interested in bitcoin and have boosted the value of cryptocurrencies. A few major key players including Morgan Stanley, Mass Mutual, and Tesla, are moving into cryptocurrencies, driving prices higher and adding to their credibility and legitimacy.
As MasterCard and Tesla announced their support for crypto, banks remained on the side. However, Morgan Stanley was one of the latest players and the first major US banks out of the six to announce that it would be offering its wealth management clients access to bitcoin funds. The investment bank announced that it will be launching multiple funds - two run by Galaxy Digital, a crypto firm founded by Mike Novogratz, another by FS Investments, an asset management firm, and the last by New York Digital Investment Group (NYDIG), a bitcoin company.
Additionally, in March, Goldman Sachs and The Wall Street bank joined Morgan Stanley to make Bitcoin funds available to wealthy clients. As more institutions adopt Bitcoin and other cryptocurrencies, many market observers believe that it will stabilize cryptocurrencies and drive up price appreciation in the long-term according to an article by Barron's.
As institutional investors are warming up to Bitcoin, retail investors are also holding crypto for longer periods of time. Cryptocurrencies are not only becoming popular in the U.S., but in global markets such as in Asia as well. For example, with the support of key industry players, China is working towards state-backed cryptocurrencies.
Previously, cryptocurrencies have had a reputation for being volatile. However, with the support of top institutional investors and major tech companies, analysts predict will stabilize the long-term trajectory. Supporters are seeing crypto as the "currency of the future," further driving its value and potential for long-term stability. Goldman Sachs recently published a survey where results revealed 22 percent of its clients expect that bitcoin will reach $100,000 in the next year. Additionally, the results also revealed that 40 percent of investors have exposure to some kind of cryptocurrency.
Decentralized transactions
As we live in the digital era, the global economy is moving more towards a completely digital ecosystem. From transferring money to investing, all transactions are now paperless. Over the last decade, completely digital currencies like crypto have emerged and made its way into top investment platforms. Crypto is created and stored online. It can be thought of as a decentralized version of regular money, where no one has control or regulation over crypto.
Since cryptocurrencies are exchanged through blockchain, which is a decentralized database, buyers and sellers deal directly with each other. This is attractive to investors as they do not have to go through a financial or governmental institution in order to complete a transaction. This also makes the transaction immediate, instead of having to wait a few business days in order for the transaction to go through, like with ACH or wire transfers. This decentralization of crypto enables faster payments and 24/7 access to buying or selling the digital currency.
Since central banks are removed in crypto transactions, the value of digital currencies will remain the same. In regular transactions where central banks are managing the money supply, money becomes inflated as banks tend to reduce the value of cash by printing more money. However, bitcoin has a limited supply at a fixed set of 21 million coins, making it less likely to inflate, which is another attractive quality of investing in crypto. Lastly, crypto enables investors to have more control over their digital currencies. It also provides more secure transactions, reeling in more support from investors.
How artificial intelligence can enhance cryptocurrency investments
Over the last year, the cryptocurrency market has been the most interesting to watch due to its unexpected, yet consistent returns. The rapid growth of Bitcoin saw the emergence of other cryptocurrencies and investment platforms like Coinbase, Gemini, BlockFi, and others. Now that major companies and top institutional investors are onboard with crypto, new strategies for investing in crypto are in the process of implementation.
Financial firms are always looking to adopt new strategies that will help them gain a qualitative and quantitative edge in generating returns, retaining and onboarding clients, and managing risk. However, one of the challenges that financial firms face is sifting through enormous amounts of data created by local and global news, social media posts across various platforms, blogs, reviews, and more. AI is one of the ways in which financial firms can sift through immense amounts of data to gain valuable insights that would otherwise be missed.
With the amount of data generated on various cryptocurrencies, the tweets from key executives like Elon Musk, Bill Gates, Mark Cuban, and others, and the uncertainty of the crypto market, identifying whether crypto is a secure and good investment can be daunting. Financial analysts do not have the time to manually go through each stat or mention of a cryptocurrency and generate insights for their portfolio managers to make an educated and well-informed prediction.
However, financial firms can utilize AI to extract the right information so that analysts can generate the right insights for their portfolio managers. Data can be fed into an AI system in order to generate complex algorithms that can then analyze the overall sentiment of the data. Once AI algorithms are created, high-frequency trading can take place, meaning investors can receive instant buy or sell indicators on cryptocurrencies based on predefined rules from the AI algorithms.
AI tools are a great way to generate efficient and accurate cryptocurrency investments signals at scale. Since AI is able to digest and analyze information quicker than the human brain, investors can make investment decisions faster. Additionally, using AI to invest in crypto can help take emotions out of decisions. One of the common challenges that investors face when it comes to any type of stock investment, is regulating emotions. As the market periodically goes through volatility and each stock can be unpredictable, psychology plays a critical role in modern investing and in the decision-making process. With cryptocurrency investments being fairly recent and without enough historical data on crypto investments, investors may use their emotions to buy and sell. AI can help regulate these emotions through its systematic and mathematical approach.
Stay tuned for the next blog post as we will go through a more in-depth analysis of how AI can be used in cryptocurrency trading. For more information on Accern's ready-made use cases, visit the AI Marketplace or request a demo.
About Accern
Accern is a no-code AI platform that provides an end-to-end data science process that enables data scientists at financial organizations to easily build models that uncover actionable findings from structured and unstructured data. With Accern, you can automate processes, find additional value in your data, and inform better business decisions- faster and more accurately than before. For more information on how we can accelerate artificial intelligence adoption for your organization, visit accern.com