Cryptocurrency: The news from the noise

For many who struggle to wrap their heads around the concept of cryptocurrency, you are not alone. Many people find this subject arcane and evade it. But it should not be that complicated. Cryptocurrency is virtual money that people can use just like real money to buy things and services.

One of the differences between real money and cryptos, or virtual money as is commonly called, is that cryptocurrencies aim to cut out the middlemen, making it cheaper to transfer money from one virtual wallet to another. There is not some Central Bank of sorts to regulate the financial transactions or to offer oversight.

The king of cryptocurrency is Bitcoin. But there are many others cryptos. As of the start of this year, there were more than 4,000 cryptocurrencies in existence. Besides Bitcoin, other leading lights of cryptocurrencies are Ethereum and Litecoin.

Bitcoin leads the field in market capitalisation — estimated at $1 trillion — user base, and popularity. Ethereum is being used to create decentralised financial systems for those without access to traditional financial products. Each crypto has some distinctive features, all of them trying to best Bitcoin.

With major purchases by household names such as Tesla and crypto payments becoming enabled by major payment processors such as PayPal, it is logical to conclude that cryptos are not backstreet financial assets. Big names are betting big on them, especially the big three cryptos.

The entry of institutional investors is significant. When big organisations enter a market, they inject a dose of confidence and sustainability. They validate the idea.

Short supply

Unlike in the stock market, where the stock price moves in tandem with a company's performance, cryptocurrencies are not pegged to a product. The forces of supply and demand mainly drive cryptos.

Currencies like Bitcoin are in short supply. Bitcoin's supply is expected to deplete in 2140. Due to this scarcity and surging demand, one can logically expect price hikes in the future.

Additionally, cryptocurrencies are increasingly seen as investments to hedge against inflation during economic uncertainty, much like gold.

Because gold has a relatively finite supply and has historically been seen as a keeper of value, investors use it as a hedge against inflation and a means of keeping the government out of their bank accounts.

With too much noise and news about cryptos, a new investor may be wondering which one would be a better bet. It is a good idea to start with the larger, more established options, such as Bitcoin and Ethereum. They have been tested, and the results do not disappoint.

Here is my disclaimer: I am no financial advisor, so take my views with a grain of salt. My opinions are hooked on a layman's understanding of how the crypto market is performing and how tech innovations are disrupting the financial markets. Full disclosure: I am also a tiny investor in cryptos.

Wambugu is an informatician. Email: [email protected] Twitter:@samwambugu2