You would be familiar with the latest craze in tech and if you are yet to get acquainted with it don’t fret as we hope this brief explanation should get you basic knowledge, enough to buy your first bitcoin or “satoshi*”. Now, depending on your level of previous knowledge you would have to forgive us for a back to basics approach.
So what is all the fuss about? Have we come to the end of commerce as we know it? There have been different opinions from various thought leaders. Richard Branson, famed founder of the Virgin Group said ‘Bitcoin is one of the most important innovations of our time – it will transform the way we do business’. While Goldman Sachs, a global investment bank recently backtracked on their ‘no to bitcoin’ stance by conceding to their investors that indeed, bitcoin is money. Almost similarly, Jamie Dimon, CEO, JP Morgan shamefacedly admitted that he regretted calling bitcoin a fraud. Now, there are of course other less enthusiastic commentators who are careful to differentiate between cryptocurrencies and the underlying blockchain technology. Senior Analyst, Ron Insana of US TV broadcaster CNBC is convinced that bitcoin will crash, calling bitcoin a bubble. He said ‘when excessive optimism far outweighs normal rational expectations, crashes occur — and this will be the case with bitcoin.’ With such diverse opinions, it’s no surprise that very few really know what all this is about.
A brief history of the entire subject, first what are cryptocurrencies? In order to make this a simple and understandable exercise, we would say cryptocurrencies are money (only they are electronic, an entirely different class). They are built as an offshoot of blockchain technology (more on that later). The first cryptocurrency that was ever created was bitcoin (akin to saying the first kind of money was the sterling or any other currency). On 03 January 2009, the first 50 bitcoins are mined by Satoshi Nakamoto, the pseudonymous inventor of bitcoin. Bitcoin is really just a kind of cryptocurrency, there are over 1,500 of them but maybe 10 or 15 major ones. Why so many you may ask? Just like cash, there are several local currencies and even bespoke ones used within certain communities.
Some useful statistics: bitcoin’s price rose over 2,000% from January 2017 to December 2017, from $953 to $20,089. While Ripple holds the record for best performing cryptocurrency by percentage increase of 36,018% over the course of 2017. The table below shows the top ten list of cryptocurrencies and their market shares
Following on from that, we would describe the blockchain technology. Put simply, blockchain is a an encrypted decentralized record keeping system. It is built on virtual ‘blocks’ with a finite number of entries. What exactly is being entered? Well, all the information used in a traditional book keeping record and more. Its unique quality is there is no one place where the record is kept, every ‘point’ in the network generates a record. Likewise, once a block is full, a new block is created hence the chain of blocks or blockchain. Every time something new is recorded or an existing one moves from one place to another: it is time-stamped and publicly recorded on the blockchain. Why is this so fascinating? The blockchain’s main feature is that it relies on a large network of computers that verify each other’s data. This eliminates the use of third parties such as lawyers and intermediaries such as banks. Now things begin to get interesting, and as we are still in the early stages of the technology, the future looks very promising.
After this brief introduction, you must now understand why cryptocurrencies are being used for raising investment finance by startups. The means of doing this is called an Initial Coin Offering (or ICO) similar to an Initial Public Offering (IPO). There are lots of differences between ICOs and IPOs. However, there is a point of similarity, which is that some ICOs provide quasi-equity to shareholders. They do this by selling tokens (some sort of virtual share that is tradeable) or actual coins (new cryptocurrencies). Although cryptocurrency volumes are still very small when compared to the actual population, there is no doubt that as an arena, it is ripe for growth. According to Finder.com, the cryptocurrency statistics platform, over 97% of Brits are yet to buy any cryptocurrency.
* The satoshi is the smallest unit of the Bitcoin cryptocurrency