You may love them, you may hate them, but you can’t ignore them. Digital currencies are starting to get significant traction worldwide, and even traditionally conservative nations, like Russia and China, are developing technology that will eventually create a national cryptocurrency.
The pioneer in this field is Satoshi Nakamoto, a purported Japanese national who published his invention on 31 October 2008, in a research paper called “Bitcoin: A Peer-to-Peer Electronic Cash System”.
Nakamoto described Bitcoin as an electronic payment system, based on mathematical proof. His idea was to produce a currency independent of any central authority, transferable electronically, more or less instantly, with very low transaction fees. He definitely achieved this, but the solution is a far cry from the money we use today in terms of simplicity.
A Bitcoin transaction is a transfer of value between Bitcoin wallets. These transactions get included in a ‘blockchain’. This is a transaction database shared by all users participating in the system, based on the Bitcoin protocol. Bitcoin wallets keep a secret piece of data called a private key or seed, which is used to sign transactions, providing mathematical proof that they have come from the owner of the wallet. A full version of a currency’s blockchain contains every single transaction in the currency. With this information, you can determine how much value belonged to each address at any point in time.
Blockchain provides a ‘digital ledger’ of transactions that everyone on the network can see. This network consists of a chain of computers that must all approve an exchange before it can be verified and recorded. In theory, if blockchain goes mainstream, anyone with access to the internet would be able to use it to make transactions.
What’s more, this technology could work for almost every type of transaction involving value, including money, goods and property. It has become popular because its potential uses could address some of the limitations that our current money system cannot, and the security advantages of blockchain could significantly reduce fraud, which costs economies hundreds of billions of dollars annually.
Cryptocurrencies in Nigeria
There is however a stumbling block in Nigeria when it comes to cryptocurrencies, due to the confusion about their regulatory environment. While Dr. Uche Olowo, First Vice President in the Central Bank of Nigeria (CBN) was quoted as saying “We can’t stop Bitcoin”, there has been some confusion over Bitcoin’s and other digital currencies’ legal status in the country. He stated that, “on the one hand, interested parties view it as the highest performing and the most valuable currency in the world”. On the other hand, “it is seen by most traditional financial players as unstable and complicated, and with doubts of its inherent value”. However, he has acknowledged that Bitcoin (and other cryptocurrencies) have the power to greatly affect the more traditional means of payments and settlement systems, globally.
There were some stern warnings about cryptocurrencies in the past. On January 12, 2017 the CBN issued a circular to banks and other financial institutions on virtual currency operations in Nigeria. It stated that virtual currencies and similar products are not legal tenders in Nigeria, and consequently any bank or institution that transacts in such businesses does so at its own risk. Then, on the same day, the Securities and Exchange Commission (SEC) issued a statement cautioning citizens from investing in Bitcoin, Onecoin, and Swisscoin, saying that “the public should exercise extreme caution with regard to cryptocurrencies as investments”.
Despite all the warnings, the Deputy Director of the CBN’s Banking and Payments System, Musa Itopa-Jimoh, is on record as saying that the CBN has no intention of stopping bitcoin usage. “We are not the issuing authority for bitcoin. It’s not our currency. We do not control it. We don’t issue it, we don’t control it,” he said. “We are just issuing caution to Nigerians since digital currencies are not under the control of the central bank”.
In 2017, cryptocurrencies have experienced an astounding rise in value, and there have been hints that they are now being considered as safe haven assets. However, recent events that saw Bitcoin lose 40% of its value then bounce back to reclaim most of its losses are making investors more cautious. Even still, enthusiasm for the currency has not dampened.
The cryptocurrency phenomenon has expanded to such an extent that forex brokers across the world have jumped on board, and introduced digital coins into their list of trading instruments. Jameel Ahmad, the VP of Corporate Development and Market Research at FXTM, states that “constant technological advances in the financial industry continue to grow in line with traders’ demands. We have been keeping a very close eye on cryptocurrencies and have always maintained a commitment to provide our traders with tailored solutions to fit their investment needs. As such, we are now pleased to offer cryptocurrency CFDs trading to all our clients across the world.”
The rising tide
Back in 2012, one Bitcoin wasn’t even worth $20. This year, Bitcoin’s value peaked to around $4500 in the summer. The currency experienced a near-400% price increase from January to August, and Ethereum increased by almost 4000%. What’s behind this exponential increase in the value of cryptocurrencies?
Last year’s political shocks in the United Kingdom and the United States, and the continuing geopolitical tensions in the U.K., North Korea, the U.S., and the Middle East have all made currency traders wary. This has significantly increased demand for alternative options like cryptocurrencies, and fuelled interest in both consumers and institutions.
As things stand, other brokers will most likely join FXTM in offering cryptocurrencies as an investment solution, but it will be up to the informed traders to decide how safe or volatile the future of cryptocurrencies will be.
For more information about cryptocurrency trading, please visit FXTM atwww.forextime.com. Note: Cryptocurrency CFDs are available to clients under FT Global Limited only.