Cryptocurrency Craze: Fad or New Paradigm?

I’m the first to admit that when I first heard about Bitcoin, I dismissed it immediately. A digital currency? A currency not tied to any hard assets, and not overseen my any government financial agency? One of my son’s teen friends invested in Bitcoin when it was at one dollar- and I thought at the time he was crazy. Well, you can only imagine how this young man is feeling when he checks his Bitcoin account today!

A cryptocurrency is a digital asset that works as a medium of exchange. Cryptography is used to secure the transactions and control creation of new units of the currency. Cryptocurrencies are consider a subset of digital currencies, and are considered alternative currencies and virtual currencies. Decentralized cryptocurrency is produced by the entire cryptocurrency system collectively. With most cryptocurrencies, new units, or “blocks”, are created when a mathematical algorithm is solved, which huge blocks of industrial CPU’s and GPU’s are employed for.

The primary difference between cryptocurrency and other currencies is that they are completely decentralized. With traditional centralized banking and economic systems, such as our own Federal Reserve System in the U.S., there are corporate boards or governments that tightly control the supply of currency by printing units, known as fiat currency. This requires additions to digital banking ledgers. With decentralized cryptocurrency, no one entity can produce more units, which protects the currency from the dangers of runaway inflation. Unlike traditional currency, cryptocurrency is not tied to a hard asset, such as gold or even the U.S. dollar, as all other traditional currencies are. The technical system utilized by cryptocurrencies was created by a mysterious individual or group known as Satoshi Nakamoto. Satoshi Nakamoto created Bitcoin in 2011, and all other altcoins are based on similar technologies. The security of cryptocurrency ledgers is based on the assumption that the majority of miners are honestly trying to maintain the ledger, as they have financial incentive to do. That being said, there is no governing body to ensure that occurs. However, as with Bitcoin having a cap of $21M units available to ever be mined, and demand being so high, it is highly unlikely a cryptocurrency miner would exclude blocks from their ledger. That being said, there are “missing” blocks

As Bitcoin hit an all time high this summer of over $4,000, I decided to finally do my homework, and take this phenomenon seriously. Despite cryptocurrency not having any of the hallmarks of a “good investment” in the world of finance, the bottom line with every investment is supply & demand. Is it a bubble? That is certainly possible. However, as i’ve dug deeper into the emerging asset class of cryptocurrency, I’ve come to the conclusion that this asset class is here to stay. That means it’s time for all of us “late to the party” investors to take it seriously, and look at various investment vehicles to capitalize on it.

Bitcoin is only one of the major cryptocurrencies. Bitcoin has been a trendsetter, which has ushered in a wave of new cryptocurrencies, all built on decentralized peer-to-peer netowrks. Bitcoin remains the “gold standard” of cryptocurrency, but it’s no longer the only game in town. The currencies inspired by Bitcoin are collectively called “altcoins”, and have positioned themselves as modified or improved versions of Bitcoin. While some of these are easier to mine than Bitcoin (more on mining in a separate post), they do carry significant risk with lesser liquidity, acceptance and value fluctuations. Major players in the “altcoin” space include Litecoin, Ethereum, Zcash, Dash, Ripple and Monero.

Litecoin (LTC):
Litecoin was launched in 2011, one of the first “altcoin” currencies to follow Bitcoin into the global marketplace. Many refer to Litecoin as “silver to Bitcoin’s gold”. Litecoin was created by Charlie Lee, an MIT graduate and former Google engineer. He engineered Litecoin to be based on an open source global payment network that is not controlled by any central authority. Litecoin uses “scrypt” as a proof of work, which can be decoded with consumer grade CPU’s. Litecoin is similar to Bitcoin in many ways, though it has a fast block generation rate and hence offers a faster transaction confirmation. The number of merchants accepting Litecoin is expanding rapidly, making it increasingly practical as an actual currency.

Ethereum (ETH)
Ethereum was launched in 2015. Also a decentralized software platform, Ethereum utilizes a technology called Smart Contracts and Distributed Applications (DApps) to be built and run without any downtime, fraud or control by a third party. Ethereum launched a pre-sale in 2014, which was met with an overwhelming response. Ethereum runs on its own platform specific cryptographic token, “ether”. Imagine ether as the vehicle you use to navigate the roads of the Ethereum platform. In 2016, Ethereum split into Ethereum (ETH) and EthereumClassic (ETC). Today (9/1/17) Ethereum has a market capitalization of $4.46 billion, second only to Bitcoin. Ethereum has even launched it’s own IRA product.

Zcash (ZEC):
Again, operating on a decentralized and open source platform, Zcash launched in the latter part of 2016. Zcash offers exceptional levels of privacy. Zcash claims to provide an extra layer of security and privacy, stating that all transactions are recorded and published on a blockchain, but details such as sender, recipient, and amount remain private.

The dark horse of cryptocurrency (literally referred to as Darkcoin originally) is essentially a more secretive version of Bitcoin. Offering complete anonymity, it works on a decentralized mastercode network that makes transactions almost untraceable. Created and developed by Evan Duffield, Dash can be mined using either a CPU or GPU. In 2015, “Darkcoin” was rebranded as Dash, which is the acronym for Digital Cash. It trades under a ticker using its name, DASH.

Ripple (XRP):
This cryptocurrency is a real time global network that offers instant and low cost international payments. First released in 2012, Ripple now has a market cap of $1.26 billion. Using a “consensus ledger”, Ripple is unique from other cryptocurrencies in that it doesn’t need mining. Because Ripple does not require mining, that feature reduces the usage of computer power, which saves in utility cost built into each currency. Ripple is focused on distributed XRP through business development deals, incentives to liquidity providers offering tighter spreads and selling to institutional buyers.

Monero(XMR) is an extremely secure and private cryptocurrency. It is an open source cryptocurrency that was launched in 2014. XMR quickly spiked great interest among the cryptography community. Interestingly, this cryptocurrency was developed solely through donation. Other unique features of XMR include “ring signatures”, which enables complete privacy. This technology utilizes a group of cryptographic signatures including at least one real investor. However, because they all appear valid, the “real” one cannot be isolated.

Among these cryptocurrencies, Bitcoin continues to lead the pack.  It dominates in terms of market capitalization, user base and popularity. As the altcoin space continues to expand, virtual currencies are being used both for enterprise solutions and individual purchases. If the current trend trend is any indication, cryptocurrencies are here to stay. How many of them will emerge leaders, and continue to garner market share and capitalization remains to be seen.