Okay it’s not really a club, but the learning curve and potential consequences – ie. losing money – make the world of crypto-currency a “there-be-dragons” part of the map for many. But, as more and more “adventurers” brave this new frontier it becomes harder for the rest to deny that there is a new player in town – blockchain technology. It’s easy to trace the origin, it all began with Bitcoin. The world’s first crypto-currency has been around for almost ten years, however it has only very recently reached mainstream attention. Let’s take a closer look at the world of crypto and see what it might mean for you.
Where it all began
While it’s unlikely you will find someone who doesn’t know that Bitcoin is a potent alternative currency, many might not know there is a powerful piece of underlying technology called blockchain. Whether this tech is the start of the revolution or the beginning of the end, one thing is clear, blockchain is a disruptor and the world will never be the same.
Bitcoin and blockchain arrived together, on October 31, 2008, when information first appeared about the creation of an electronic currency protocol, independent of any extraneous structures. The appearance of the electronic crypto-currency, and the blockchain that allows the currency to function, are both associated with a single name, Satoshi Nakamoto. Whether this is a specific person or a collective image is still unknown, either way the “creator” of Bitcoin wished to remain anonymous, not uncommon and totally doable in the digital domain.
Attempts to reveal the identity of this Nakamoto character were undertaken more than once, provoking a considerable stir, but all of them proved to be in vain. While the mystery of its creator remains shrouded, Bitcoin has grown up to become a financial force to be reckoned with. Bitcoin likely owes its success to enthusiastic early adopters with a tremendous amount of faith in the technology and has seen a sizeable increase in value since its inception.
In early 2010 one coin (BTC) was worth around 0.008 USD; five days later the price per Bitcoin went up to 0.08 USD (that’s a 1000 per cent increase). In 2017 the price of BTC reached 3,018 USD before dipping to 1,938 USD about a month later, with a high of 8,232 USD. As you can see the price is extremely dynamic. Fortunes were made and lost in the formative years but this crypto currency has enjoyed overall growth precisely because there are still people who believed in it, counted the principles on which it is based worthwhile and therefore stuck with it.
After world fame came to crypto-currency and the cost of Bitcoins topped a thousand dollars, some experts began to suspect that something was wrong and a few went so far as to accuse Bitcoin of being involved in a financial pyramid. There is always the possibility that such material was released in order to draw attention to the publication but here’s what we know for sure.
By definition, a financial pyramid is a structure that exists through the constant attraction and injection of funds for a product that has or creates no value. Each subsequent participant invests money in the pyramid which then settles in the wallets of earlier participants as long as you have new investors the pyramid keeps growing and the earlier investors get rich when they pull the money out, the later investors are ultimately cheated out of their investment; the money is gone and there is no product. Check out the likes of Bernie Madoff who (pun intended) “made off” with $65 billion over two decades with perhaps one of the largest ponzi schemes in American history. Scary stuff to be sure. So caution in any investment is warranted, even more so for new systems like crypto that don’t always fit nicely within contemporary laws.
In any product or system the reaches the mainstream the early adopters stand to profit greatly so just saying a few investors made a lot of money doesn’t quite cut it. For a pyramid to work, control needs to be centralised so the con operator can pull out and run off to some non-extradition island. Crypto-currency, by definition, is decentralised, meaning it’s impossible for a select few to collapse the market even if they would want to.
One other thing to consider is that even if initial investors cut and ran, the crypto continues to function and can be used to buy goods. There is still value in the crypto because everyone agrees there is value. Finally, crypto can often be mined, it usually requires technological labor rather than traditional labor. This labor is used to perform calculations or witness/verify the blockchain, basically perform the basic functions to run the system. This too is shared, distributed among many so that no one entity can take advantage.
So, many cryptocurrencies like bitcoin are not pyramids; but that doesn’t eliminate risk or the potential for predators lurking around the ecosystem. Onecoin, is one of the largest examples and a prime example of why investors need to vet potential ICOs. Other common scams in crypto-land include the Pump&Dump, KnockoffCoins, Phishing with fake sites designed to get you to login with your credentials.
Is cryptocurrency legal?
Each country has it’s own legislation regarding crypto, be sure you understand your local laws before you get involved. In most countries, transactions are recognised as legal, even if the coins themselves are not considered legal tender. The bottom line usually comes down to the definition of cryptocurrency. In some countries they are considered electronic money so purchases can be taxed, in others – Bitcoin is treated as a financial asset. In the US, earnings from crypto trading must be reported as capital gains and is taxed accordingly. Governments and financial institutions all seem to advise investing money in crypto-currency very carefully. That said, most countries appear to understand the importance of blockchain and admit that they are studying the question.
While the other nations of the world wrestle with definitions, Japan has decided to act, taking a bold step, as of April 1, 2017, crypto-currency can be used as an official means of payment. Japan might be the first but it won’t be the last. Just as bitcoin was the first, others will follow.
Bitcoin and beyond
Bitcoin was the first, but since its inception over a thousand alt-currencies and crypto-tokens have sprung up. Investors are eager to get in on hot new coins in the hopes they match Bitcoin’s rise and take them “to the moon.” Early message boards for these new crypto-currency startups are littered with “when moon?” gifs posted by folks dreaming of a Ferrari and Lamborghini. It’s extremely easy to get caught up in the hype. “You have to be very careful…I have not suggested, to anyone, to go invest in Bitcoin, because I don’t think that’s a good idea if you don’t understand it.” says well recognised bitcoin investor, Andreas Antonopolus. Far from forbidding investment, in short he recommends treating ICOs like any other investment. Look at the product, market, plan, team and timing.
Understand the risks
It’s important to understand the risks so check the crypto-waters before you go take a dive. One of the risks is the lack of recognition or adoption. This is a huge obstacle for new cryptos where the technology only starts to work well when a critical number of participants are active. This is called the network effect. For example, any messenger app becomes more useful the more people use it. So make sure your chosen crypto has something solid before investing.
Another potential foible is the rampant fluctuation of exchange rates. This makes investing in crypto high risk but also potentially high reward. The price for Bitcoin, as well as for other tokens, varies. Sometimes changes can be abrupt. This introduces an element of surprise into the life of the money invested in it, one you MUST be prepared for. The market fluctuates because it is still young and has fewer users making transactions (lower trade volume). The higher the trade volume the more stable a currency, or the less each individual transaction can impact the market.
Finally cryptocurrencies are still developing. All the time new and already existing tools and services are created and improved. Therefore, not all tools are ready for use. In a word, the cryptocurrency, like the technology itself, is actively developing. Maybe it’s time to see what crypto can do for you.
What can I buy for with crypto-currency?
A pepperoni pizza for a $1 million? The first deal with Bitcoin took place unexpectedly. Since Bitcoin wasn’t so popular, it occurred on the basis of an arrangement. On May 18, 2010, a user on Bitcointalk forum with the nickname Laszlo, announced that he was ready to buy two pizzas for 10,000 Bitcoins:
“I’ll pay 10,000 Bitcoins for a couple of pizzas. Probably two large ones, so that I could have the next day some food. You can make pizza yourself and bring it to my house or order it for me, but my goal is to get ordered food in exchange for Bitcoins, so that I do not have to order or prepare myself, something like ordering breakfast at the hotel… ”
The guy just found it would be funny to boast about buying pizza with Bitcoins. But, the deal did not take place right away as users were not too quick to give real money for the then “ephemeral” Bitcoins. The pizzas were inevitably purchased, however and delivered to Laszlo four days later. And so, May 22, was henceforth known as Pizza Day, which the community celebrates every year. When the deal was crowned with success, the guy decided to make his proposal a standing offer.
“This is, by the way, an open proposal … I will trade 10,000 BTC for two pizzas at any time until I have the means (and usually I have enough). If someone is interested, let me know … If you order an extra large pizza, let me know, I’ll pay some more… ”
At that time 10,000BTC was worth about 25 dollars, so the deal was quite acceptable for all parties. As the price of Bitcoin went up so too did the number of volunteers who desired to buy pizza for Laszlo. In early August, about three months after his first pizzas, Laszlo’s pizzas cost around 600 dollars. So Laszlo was forced to abandon the idea. Put another way, Laszlo ate a pizza that, based on the current price of BTC, would cost him 20 million US dollars. Then again, what if he hadn’t offered to buy pizzas in the first place…
Today, with the acquisition of fame for cryptocurrencies, more and more goods can be bought using them. Firstly, you can buy various goods from around the world using cryptocurrencies. There are even some “offline” agents accepting crypto-payment. For example, you can rent a room with Howard Johnson and pay with Bitcoin. Also, there are a number of intermediaries like Expedia who will take your cryptocurrency, and then will pay for services with “real” money. BTCTrip.com calls itself the travel agency for the crypto-community. Even some universities are ready to accept tuition fees in Bitcoins. The first to do so was the Cyprus University of Nicosia, but they have already been joined by other institutions of higher education.
Crypto seems ready-made for content distribution and digital services. For example, the Swiss company DECENT has created a platform on which it will be possible to buy any type of digital content for their custom purposed crypto-token, DCT. The platform uses a custom network based on blockchain technology that allows authors to publish their work directly, without paying huge fees to intermediaries. The company promises to change the world of digital content distribution.
It might still be early for blockchain technology but, when it comes – in five years or in twenty – depends entirely on us. Any innovations are perceived by society with caution, but this has not stopped scientific and technological progress. We are not at the source of new technologies, but at the time of their formation, and therefore can directly decide which way to move. Blockchain technology can significantly change the work of government agencies, insurance companies or banks, make it more open and cheaper for the client. A number of governments and private companies are already pondering the introduction of blockchain technologies into widespread use.
In the meantime, investing or not investing into crypto-currency remains an open question. One thing is clear: it is worth taking into account possible risks and carefully selecting promising coins from many others? Three years ago there were about two hundred such coins, today their numbers are approaching thousands. It’s a bad idea to invest all the money you have into a crypto-currency, invest as much as you are willing to lose. The main thing to remember is that no one knows exactly where the market will enter the cryptocurrency tomorrow, so you should not trust your capitals to dubious persons and imaginary traders-professionals.
But, how does it work?
The idea of a crypto-currency might not make a lot of sense as first glance. It’s all just made up right? Fake money? Well it is the same with other legal tenders or FIAT currency. Currencies backed by governments all maintain value by a collective consensus that they DO have value. Large centralised financial institutions decide what the value of our world currencies are and regulate them in the name of stability.
Bitcoin came along and upset all that. But, how do we agree on the value of one BTC? First you have to understand that there are a finite number of Bitcoins (or any other cryptocurrency) this makes it a deflationary currency. Second, there has to be a way to verify that a transaction has taken place – it has to be immutable, set in stone, if you will. Enter the blockchain. Nakamoto developed a distributed ledger that was dubbed a blockchain. This public ledger, shared with everyone, serves as a record of each and every transaction.
Blockchain technologies have far reaching and a seemingly infinite number of use cases. Companies like Etherium are using it for smart contracts that automatically transfer payment based on conditions set in the contract. Publiq wants to use blockchain to take power away from centralised distribution channels that heavily censor content. Ripple uses blockchain to create a free flowing global financial market.
Established banking institutions such as Goldman Sachs and JP Morgan are exploring blockchain applications for their own systems. Mainly with the goal of streamlining transactions and cutting administrative costs.
Check out coinmarketcap.com for a wealth of information on current and upcoming blockchain projects as well as crypto-currency trading charts.