Lesson 1. Introduction to cryptocurrencies. The digital era of financial markets

Welcome to the course on cryptocurrencies 👋

During our lessons, I will discuss the concept of cryptocurrencies and their use in the modern world. Let’s start our acquaintance with general information about the matter of financial markets and their main types.

Further, we will talk in more detail about the financial markets. But now, I will briefly tell you what happened before the appearance of money and the financial market. How was it earlier with barter and the exchange of services for goods? We’ll have to look at history. What did a person do before the appearance of money?

 In general, people had practically the same needs as now. They obtained food, clothing, shelter, etc. Human progress would be impossible without the emergence of money to stimulate the distribution of labor. Because of their appearance, the urgent need for everyone to extract vital resources has disappeared. As a result of labor distribution, some people were able to engage in new activities that were useful for society. Thus, the first specializations of labor appeared. Some industries, such as construction and engineering, began to develop; people left their caves and moved into built houses. Animal and vegetable farms’ appearance was a life-changer. People didn’t need to have their farm in order not to die of starvation.

In essence, money is the equivalent of the value of a good or service produced by a person. Previously, money appeared as minted gold or silver coins. Before that, the most popular commodity in a particular area, such as spices, fur, wheat, coffee, and so on, served as an exchange medium. In countries where there were deposits of gold or silver ore, they served as the principal “value” and a means of payment/exchange. With the growth of the population, the demand for resources grew. Over time, gold and silver mining ceased to keep up with the population’s growth rate. At some point, the growing trade level exceeded precious metals’ extraction, which led to the transformation of the payment system and the advent of banks. They replaced gold with BANKnotes, which could be printed (issued) equivalent to the bank’s actual balance of gold. Following the creation of the first banks, the so-called “central bank” appeared in each country. Gradually, the emission functions were transferred exclusively to this instrument. Thus, the government can control the issue of money. Next, a Federal Reserve System was created; it began to control all central banks.

Before the reform in 1971, money was equal to the value of gold stored in a bank safe. This peg was canceled, which caused uncontrolled emission, and inflation of the financial bubble began.

We’ve looked after the “history.” So, I propose to continue and talk about finance and financial markets in general. We will focus on the consideration of “digital money,” namely cryptocurrencies.

On its basis, the financial market is not very different from others. There are also various goods and products are bought and sold. But financial markets don’t exchange food, clothing, and equipment for the local or national currency. They exist to buy, sell, and hold financial securities. Securities are the main products of this market. Over the past few decades, the financial market has developed into a whole industry. Today it offers many different instruments.

There are some basic types:

First, let’s examine the Forex market. There are trading fiat currency pairs such as USD/EUR, EUR/RUB, and others. Over the past decades, this market has gained considerable popularity. The following figures evidence it.

Approximate Forex market turnover in different years:

Forex market volume has increased 2,000 times over the past 40 years, which is an incredibly great score! For example, in the period from 2001 to 2020, it grew by 297% and 40% from 2010 to 2017. Such indicators show how important the foreign exchange market has become.

Let’s take a closer look at the Stock Market:

The stock market is a market system in which securities are traded between buyers and sellers. According to Wikipedia, it’s a set of economic relations in terms of securities exchange between its participants.

The essence of this market is that companies can attract investment by issuing securities. Following that, investors can profit from owning shares. The stock market is also an integral part of any country’s economy. IT enables to develop infrastructure and the welfare of citizens.

What is the derivative market?

Derivatives are market entities related to an underlying asset; they are sometimes used as a hedge against price surges. Options, Futures, and CFDs are examples of derivatives. Speculators can use these instruments to hedge against risk or to take on risk to obtain financial gain potentially.

Let’s refer to Wikipedia for an explanation of terms:

Futures (or futures contracts) are a derivative financial instrument on the exchange for the purchase and sale of the underlying asset (commodity, security, etc.). The parties (the seller and the buyer) agree only on the price level and term delivery.

A contract for difference (CFD) is an agreement between two parties – the seller and the buyer. They agree on the transfer of the difference between an asset value. This agreement covers a time gap between opening the contract and the end of the position.

Commodity market

The commodity market represents the turnover of commodities such as gold, oil, and agricultural products with livestock. Investors and traders can indirectly participate in the market turnover by buying stocks or options, futures, or CFDs.

Insurance and mortgage markets

Mortgage markets revolve around long-term loans that are provided for the purchase of the real estate. These loans can be sold in secondary mortgage markets. Insurance markets involve the insurer and the insured, where risk is transferred for a fee. Insurance companies have significant cash reserves, which they invest in the stock, bond, and derivatives markets.

Money market

The money market is focused on very short-term debt and includes local and central banks. Banks lend to each other for short-term liquidity purposes. The central bank often acts as the lender of last resort.

And finally, we come to the analysis of the cryptocurrency market.

It’s a relatively new market, but unlike all of the above, it operates 24/7, which is a huge advantage for traders. Although the concept of “cryptocurrencies” appeared much earlier, they peaked in popularity when they hit the headlines at the end of 2017. The high volatility has triggered a spike in prices and, therefore, intense interest. 

Blockchain technology* and mining system** have generated increased attention to the cryptocurrency market.

*Blockchain is a continuous sequential chain of blocks containing information built according to specific rules. Bitcoin became the first application of blockchain technology in October 2008.

**Mining is the activity of creating new structures (usually, we are talking about new blocks in the blockchain) to ensure the functioning of cryptocurrency platforms. For the creation of the next structural unit, a reward is provided at the expense of new (issued) cryptocurrency units and/or commission fees.

Today, cryptocurrencies have more and more followers. How this market will develop and shape financial markets will be determined in the next few years.

The next stage in developing this market will be an increase in capitalization and value. Moreover, there would be the creation of new projects using cryptocurrencies, as well as new mechanisms for investing and earning. Already, blockchain technology, on which cryptocurrency funds are based, is gaining great popularity in industries such as transport, education, trade, and so on.