So cryptocurrencies, what are they? How long have they been around? What can you do with them? Are they a viable investment? So many questions that I will be reviewing over a series of articles on this topic, but let’s start from the genesis, Bitcoin (a.k.a. Digital Gold). By now if you haven’t heard of Bitcoin you must be living in a mud hut with a Nokia 3310, okay that’s a little extreme, but maybe not so as Bitcoin is now infiltrating the most developing of emerging market communities.
Let’s take a trip in the time machine back to 2009, where an individual (or individuals) with the pseudonym “Satoshi Nakamoto” released a paper called Bitcoin: A Peer-to-Peer Electronic Cash System. This led to the creation of Bitcoin in January 2009, where the software was open source so that the code was freely available and open to modification and redistribution from developers. The genesis block, which is the first block of coins that are mined, was mined by Satoshi yielding 50 coins, and the first transaction happened on the same day where programmer Hal Finney received 10 coins after downloading the software. Mystically, Satoshi seemed to vanish into nothing but passed the baton unto Gavin Andresen who became the principal developer at the Bitcoin Foundation.
In 2010, the price of one bitcoin was $0.39, whilst at the time this article was written it was $3,919.91. This means that $100 worth on bitcoin in 2010 would be worth $1,004,920 now, not bad eh! On the 17th August 2017, the price of bitcoin was at a record high of $4,500 yielding a market cap of $74 billion placing it at 72nd position on the S&P500; this is higher than constituents such as Netflix, Adobe, Paypal, BlackRock etc. The price chart below shows the price evolution of Bitcoin since 2010:
As for the entire cryptocurrency market, there are currently 856 currencies and 215 assets according to coinmarketcap.com. The difference being that the currencies are native to a particular blockchain and its status is derived as a new form of money that can be used in transactions, whereas the assets are tokens that are issued on the platform of a currency. Tokens are commonly issued in InitialCoin Offerings (ICOs) which I will cover in another article. The total market capitalisation for the cryptocurrency space is currently over $140 billion and has been flirting with the £150 billion resistance level recently.
Blockchain – This was previously mentioned above. Essentially, cryptocurrencies use distributed ledger technology which is essentially a digital ledger that records every transaction in chronological order and is open to the public. Therefore, the records are easily verifiable and immune from corruption from a hacker as it is decentralised. Anyone on the internet can access it.
Mining – Cryptocurrencies are essentially ‘mined’ into existence. This is where computer software adds transactions to the blockchain but also releases new bitcoins into the market. Miners are rewarded in bitcoin in form of the transaction fee and the newly released coins. This is a decentralised activity, therefore anyone with internet connection and appropriate hardware can get involved, though, it is no longer so simple. Initially, CPUs from standard desktop computers were used for this activity, however today GPUs are now king. GPUs are now in short supply and the stock price of graphics processor manufacturer Nvidia has risen 60% year to date due to this phenomenon. One caveat of mining today is the colossal electricity costs required to complete this activity.
Source: Inside a Bitcoin mining farm in Tibet, China
Understandably as humans we sometimes get ahead of ourselves and there are plenty of stories of people using their university or work place stations to mine cryptocurrencies only to face the legal consequences. In2013, a Welsh IT worker lost 7,500 bitcoins as he threw out an old hard disk with his private key on it, painstakingly worth $29,393,925 today! There are also other stories of miners sadly losing their coins so security is another important aspect of this trade. Essentially, it is unlikely profitable for a private investor to do this but this does not mean other cryptocurrencies are not viable to mine. I will cover this in more detail in the near future.
There are many topics of discussions on cryptocurrencies and these will be covered over time. There are also several myths to dispel. Nonetheless, the whole essence of these coins is that they use cryptography to govern its creation and management, hence the decentralized structure. This has removed the need for financial intermediaries such as banks in financial transactions. The fact remains that they are definitely here to stay. 2017 has been a special year for Bitcoin, with returns of over 350% since January. Japan made it legal tender in April; there are also growing numbers of countries and businesses supporting its use and big institutions and investors making U-turns on their initial judgments. Yes, there are many sceptics but there are also just as many enthusiasts with some interesting price trajectories. For example, John McAfee believes bitcoin will be worth $500,000 in 3 years. Even so, there is another currency’s price growth which puts Bitcoins to shame, Ethereum. This coin’s price has grown by 4000% so far this year. However, I will be covering that bad boy in the near future. Stay Tuned!