Day 7 – October 8th
For just about a year, I’ve been very interested in the world of cryptocurrency. In that time, I’ve been very observant of the market side movements, the underlying technology, and the ideology that the crypto movement is based on. Before I start writing my thoughts on very specific crypto topics, I figured I should give a general overview of the space for any readers who may be unfamiliar. Here is a quick history lesson, and introduction to the world of cryptos.
Disclaimer: I will not be giving investment advice. This post is more of an overview of the world of cryptocurrency from my perspective. Any and all investment on your end is on you – don’t be dumb about it and if you do invest, only invest how much you can afford to lose. Remember, this is a highly speculative market.
Cryptocurrencies (cryptos for short) are assets that are used as a medium for exchange. As opposed to the physical fiat currencies you are probably used to such as USD, cryptos are digital currencies that exist only in networks and are completely decentralized – meaning that no central body controls the supply of the currency.
Cryptocurrency’s technical foundations date back as early as the 1980’s, when the concept of “blinding” – creating secure, unalterable information – became a common tool used in encryption. For much of the 80’s, 90’s, and early 2000’s, there were several experimental variants on virtual currency architectures such as DigiCash, b-money, Bit Gold, and the notable e-gold. However, for a variety of economic, technical, and legal compliance reasons none of these first forays into digital currency operates to this day.
Bitcoin is widely thought of as the first modern cryptocurrency. This was the first iteration of digital currency that used a means of exchange to package decentralized control, user anonymity, blockchain record keeping, and pre-defined scarcity into a single currency model. It was first outlined in a 2008 white paper published by the pseudonymous person or group by the name of Satoshi Nakamoto. By 2009, Bitcoin was released to public and since then, many other cryptocurrencies have developed.
The basic technology behind most cryptos is the blockchain. The blockchain lets people who do not know each other or trust each other build a dependable, immutable ledger of records – a way of making and preserving the absolute truth of any transaction. A distributed ledger’s capability, therefore, can be applied to any industry that has an interaction with at least 2 actors. Looking at blockchain from this macro lens, it is clear that the impact of this kind of technology can be staggering. Any sale, purchase, or contract of any kind can be recorded and verified – all without needing a third-party to do so. This distributed ledger lives on thousands and thousands of computers worldwide, which are called the “nodes” of the blockchain. The information on the nodes is publicly available but at the same time ridiculously secure because since the information lives simultaneously on this large network of computers, all information is easily verifiable and incorruptible. Blockchain, by virtue of those traits, cannot be controlled by any single entity and has no single point of failure. Through various network processes, the nodes agree on, confirm, and update the blockchain in light of new information, such as a new sale. And you guessed it, this is exactly how Bitcoin and other cryptos work. The below diagram walks through a high level blockchain flow.
The Market & The Problem
Unless you have no exposure to financial information on the day-to-day, there are chances that you have heard of the astronomical market run that cryptos have had in 2017.
From the above, you can see that the total market capitalization of cryptos is over 100 billion USD, up from around 15 billion at the end of 2016. Just look at the percentage gains the top 10 market cap cryptos have had over the past 6 months.
- Bitcoin: 262.35%
- Ethereum: 579.38%
- Ripple: 548.35%
- Bitcoin Cash: -35.79%
- Litecoin: 439.37%
- Dash: 347.37%
- NEM: 1,191.78%
- Neo: 15,911.22%
- IOTA: -15.92%
- Monero: 367.68%
All information is from coincap.com taken at the time of this post.
Besides Bitcoin Cash and IOTA, you can see that the gains have been ridiculous. Returns like this are almost impossible for non-institutional investors in most markets. I can almost hear the comments section now:
Reader: “Holy S#*t Sagar – you have to tell me how to get in on this.”
It is easy to see the gains that the top 10 cryptos have had and start investing based on FOMO. However, you have to realize that as of September of this year, there are 1100 digital currencies in existence – so while there have been steady winners, many of the 1100 coins have had negative returns. Though it is true that a lot of the market has seen positive growth in 2017 so far, it is just as plausible that we are in a bubble akin to the 2000’s internet bubble or the 2008 housing bubble and this market value will disappear very fast. This brings me to my 2 biggest issues with cryptos: volatility due to market immaturity and ICOs.
The crypto market is very young. Certain elements that the equity markets are much more researched on are still being figured out and plaguing the crypto space, causing uncertainty and therefore volatility in the market. Investors are still trying to create methodologies on which fundamentals and metrics are important while evaluating cryptos, many big players ( “whales”) have a lot of control over the general market, exchanges are facing a lot of technical and regulatory issues that cause mistrust from investors, transferring coins and utilizing them as currency has a lot of latency and fees making it very hard to act fast, the list goes on and on. As I believe that cryptos are here to stay, I am sure that some of these issue will be rectified with the maturity of the market. However, as of now, the market can bull up or bear down at the drop of a hat it seems.
The second problem is ICOs. ICOs are initial coin offerings; similar to initial public offerings that happen when a company goes public on the stock market and their shares are available to purchase, ICOs mark the start of trading of a new cryptocurrency. The issue with the crypto space right now is that this initial sale is completely unregulated. A lot of the philosophy behind a decentralized blockchain surrounds the idea of full deregulation of the market. I, however, disagree with that ideology. Though the SEC and some other regulatory bodies around the world are starting to take a look into regulations concerning ICOs, many ICOs are still going live based on a vague idea, a lacking white paper, a limited team, and poor technology. Because of the sexy nature of cryptos right now, those ICOs are still getting funded and naive/new investors are finding themselves on the wrong end of a “pump and dump”. This boom in ICOs is the reason for the 1100+ cryptos on the market and the huge growth in market cap of the entire crypto space in 2017. I fully believe that there will be a retraction in the entire space as more regulation happens, and even though this will hurt in the short-term, it will hopefully make investment safer in the long-term.
Alright – that’s it. At a high level, this is an overview on the crypto space and an insight into my current take on the market. There are a lot of resources out there for people who want to get more educated on cryptos, but I hope you enjoyed this brief introduction. I will no doubt be diving into more specific elements of this space in the future, so keep your eyes peeled if this kind of stuff geeks you out as much as it does for me.