Catching Up on Cryptocurrencies
[a primer on Bitcoin, Ethereum, & Blockchain]
Cryptocurrencies are hot right now, and if you haven’t read up on this new technology/investing/startup fad you might be feeling like you’re late to the party. Fear not, the Blockchain world is still in its early days. Here’s a quick starter kit to get you caught up!
Quick history
Bitcoin was released as an open-source digital currency in early 2009. It’s mainly used for digital payments like sending money overseas with fewer transaction costs. In its early years, some seedy characters used Bitcoin to hide illegal transactions (like selling drugs — you may recall the Silk Road), giving it a bad rep, but today it’s emerging from the clouds into a coveted currency (current market cap is ~$45B).
The technology behind Bitcoin is called blockchain, and since Bitcoin was introduced, people have realized that blockchain can do a lot more than just power digital payments. In essence, the big breakthrough with blockchain is the ability to digitally send something from A to B in entirety. Meaning person A does not keep a copy — the file/coin/thing gets completely transferred to person B. Remember when Napster and Kazaa came around and made it super easy to share music because everyone could keep a copy of the same song for free? This is the opposite — we now have a system that ensures that MP3 can only be played/stored in one place at one time.
So with this breakthrough (and several more years of development), in 2014 a second generation digital currency called Ethereum was born. Ethereum capitalizes on the inherent value in the blockchain by enabling “smart contracts,” such as embedding loans, bonds, and other agreements into the blockchain. Ethereum has been making headlines lately partly because of its skyrocketing price, and partly because of the new token phenomenon.
Tokens are predominantly a new fundraising method, similar to crowdfunding. A founder can raise funds to develop a new idea/company by conducting an Initial Coin Offering (ICO) where he/she sells off “tokens” in a new venture. Tokens represent an investment in the company, and act like stocks in that they gain value as the price of the company’s tokens appreciates (through increased demand). Therefore you could hold or trade your tokens the way you hold/trade stocks. Tokens can also be used to purchase goods/services in the new company, which means an ICO achieves two aligned purposes: gaining investors and gaining customers.
An example:
Brave is a new web browser company who recently (May 2017) raised $35M from its ICO — the highest grossing ICO to-date. Brave issued one billion of its own, newly created tokens called The Basic Attention Token (BAT). The company held onto a further 500M BAT for future use. BAT owners can use their tokens to pay for advertising on Brave’s new browser and potentially different types of digital goods/services later on. As Brave will only accept BAT, anyone wishing to advertise on its browser will need to first buy Ether, and then use that Ether to buy BAT, thereby driving up the value of both Ether and BAT.
More and more companies are now using ICO’s to raise funds, and while many of them are quality ventures, there are also a large number of fluff companies using tokens to raise money, typically companies who couldn’t raise from VCs or angels and are turning to the foolishness of crowds and Ethereum newbies for funding. Do your research before investing.
The Future
So now we’re caught up on events leading to today’s bullish cryptocurrency market (which by the way have all happened in less than 10 years), but what’s in store for the future?
It’s still early, but there are a lot of potential use cases for blockchain being thrown around, and many of them are outside the world of finance. In the short term I think we can expect to see more token-based fundraising, more companies providing alternatives to traditional banks, and also several more cycles of hype and gripe in the cryptocurrency market. In the longer term, we’ll see blockchain seep into everything, from connected autonomous car and drone systems, to verified online dating, to supply chain efficiencies, to clean energy. The infinite applications are a topic for another post, so for now I’ll leave you with this thought from Blockchain thinker Vinay Gupta of re.silience.com:
“Predictors usually overestimate how fast things will happen and underestimate the long-term impacts.”
Want to get involved?
I’m no investment advisor but if you’re interested in blockchain and cryptocurrencies, it’s not a bad idea to make a small investment in one/some of them (you can do this on Coinbase) so that you’re incentivized to follow the market. If you have a startup idea, consider whether you would benefit from raising money (and customers) through an ICO. And for further reading, check out @Blockchainwkly, https://etherreview.info/, and the blockchain tag on Medium.
I’m keen to hear about startups using cryptocurrencies, and from women in the blockchain space. Please get in touch!
Terminology Recap
Blockchain: A blockchain is a digital ledger of every transaction performed in a network. Transactions are grouped and stored in “blocks” which is why it’s called a blockchain. Rather than being processed and stored in a central server (like one owned by Google, your credit card company, or the government), a blockchain ledger is distributed across a network, giving it a huge level of inherent trust because no one entity controls the system.
Cryptocurrencies: Cryptocurrencies, like Bitcoin, are digital/virtual currencies. They rely on cryptography (the science of protecting information by transforming it into a secure format) to secure transactions and control creation of new coins. There are currently hundreds of traded cryptocurrencies (often called Altcoins), but only a few are well-known.
Bitcoin: The most famous of cryptocurrencies, Bitcoin was created by a person or group of people using the pseudonym Satoshi Nakamoto in 2009. The key thing to understand about Bitcoin and other cryptocurrencies is that they are decentralized. Many people put great value in this because it means a large bank or government can’t control their money. Recently the cryptocurrency market has soared, and at the time of writing, Bitcoin (BTC) is currently trading at $2,860, (up 365% in a year)
Check out this explanation from Coinbase for more info.
Ethereum: In 2014 a guy named Vitalik and his team founded a new cryptocurrency called Ethereum. Ethereum can do more technologically than Bitcoin (like facilitating more complex transactions), and is the currency upon which tokens are being created and built. Ethereum’s price has also skyrocketed recently, jumping from around $10 in March 2017 to something around $400 at the time of writing (with huge daily fluctuations).
Tokens: Digital tokens are fairly new. They are transferable assets, built on the Ethereum blockchain (and thereby purchased with Ether), and redeemable for future goods/services from the company offering them. Their main use case at the moment is very similar to crowdfunding: raising funds to build a business. If you invest in a company’s tokens (through an ICO — Initial Coin Offering), you will own a piece of that company, and you can either keep, sell, or use your company-specific tokens to purchase goods from that company once it’s up and running.
