WHEREVER columnist Raoul Ruiz Martinez, of RZ Financial Planning, takes a look.

Today’s traditional financial system comprises a patchwork of databases, each owned and maintained by banks. Most transactions require communication between at least two, sometimes several, of these databases, introducing friction, delays and costs.

Blockchains approach this differently. They provide shared, global records of value, a bit like the internet, and allow real-time communication and real-time value transfers.

Bitcoin was the first blockchain in 2009. Its limited functionality spurred the development of more versatile platforms like Ethereum and Solana. As activity on these blockchains increases, the value of their cryptocurrencies tends to appreciate.

Assessing market behaviour is difficult due to the short period cryptocurrencies have been around; however, patterns could be emerging.

In the early internet era, users created email accounts to exchange messages. Similarly, blockchain users create digital wallets to transfer cryptocurrencies. However, just as the internet evolved to host applications like social media, streaming and e-commerce, blockchains are set to incubate innovative applications that could transform finance and trade.

Real-World Applications of Blockchain Technology

The blockchain ecosystem is nascent but rapidly growing, empowering users to transact peer-to-peer. Here are some examples:

1. Stablecoins:

Stablecoins are cryptocurrencies pegged to the USD. Stablecoins offer a stable store of value for individuals in countries with volatile currencies and enable near-instantaneous transfers at minimal cost.

2. Decentralised Exchanges (DEXs)

Crypto exchanges facilitate the trading of digital assets. While centralised exchanges (CEXs) like Coinbase hold users’ funds, decentralised exchanges (DEXs) like Uniswap don’t, allowing users to trade directly from their wallets.

3. Decentralised Borrowing and Lending

Traditional banks connect depositors and borrowers, but decentralised platforms like Aave automate this process. Users seeking yield deposit cryptocurrencies into Aave’s asset pool, which borrowers can access after meeting collateral requirements encoded in Aave’s software. The platform earns revenue by charging a percentage of borrower interest, distributing earnings to Aave token holders.

4. Gaming: Unlocking Digital Ownership

Over three billion gamers spend on in-game items but lack true ownership. Blockchain gaming changes this dynamic by enabling digital ownership through NFTs (Non-Fungible Tokens). Players can own and sell in-game items using digital wallets. Immutable X, a blockchain gaming infrastructure, is developing over 150 games on this model.. Though blockchain gaming is in its infancy, it holds promise for transforming virtual economies

Your Portfolio

There is a certain cultishness surrounding cryptocurrencies. We should regard them with clear-headedness. Assessing market behaviour is difficult due to the short period cryptocurrencies have been around; however, patterns could be emerging. Cryptocurrency history reveals high volatility. This stems from their high beta; when markets rise, crypto soar higher, when markets fall, they crash harder. Cryptocurrencies present a unique dynamic in investment portfolios.

High volatility makes them a risky addition to long term strategy portfolios. In contrast, safe assets have low beta, providing stability and security during downturns. For investors seeking to add risk, cryptocurrencies may be an attractive and compelling addition. Certainly today, following the US elections and a new crypto-positive president elect. Keep an eye on any new regulations. With new regulatory clarity more institutional participation follows, equalling more money pouring into cryptocurrency. What was once ideologically an alternative, may now be pulled into the mainstream.

Disclaimer

The information provided in this article is for general informational purposes only and does not constitute financial, legal, or investment advice. Before making any financial decisions, consult with a qualified professional to assess your personal circumstances.