Four thousand dollars.
That was the selling price of a single bitcoin at the close of business on Sept. 19, 2017.
From a laughable, mysterious, and wholly discredited phenomenon, Bitcoin has now taken its place as a major player in financial service transactions.
And Bitcoin is not alone.
Cryptocurrencies, as they are called, are launching daily. For those who have only heard terms such as cryptocurrencies, blockchain, and ICO, here is a basic explanation.
Just What is a Cryptocurrency?
First and foremost, a cryptocurrency is not a physical coin or paper money.
It is a digital currency that has value, however, and can be used to make purchases, can be traded, as Bitcoin is on the stock market, and can be “redeemed” for physical money, based upon what someone else is willing to pay for it.
A couple of days ago, a Bitcoin could be sold to someone for $4,000.
The concept is that any transaction made with a cryptocurrency is far more secure than one with traditional money and traditional financial institutions, because of “Blockchain.”
How Blockchain Works
Think of your monthly bank statement for your checking account. Every transaction – use of your debit card for purchases, checks you have written, and deposits you have made are all listed, and you are provided a beginning and an ending balance. But your transactions and those of everyone else are subject to error and fraud. Most of us have experienced charges to our debit/credit accounts that we did not make – a product of identity theft of some sort. And as cyber-criminals become more and more sophisticated, the potential for them to wipe out records of financial institutions, or to at least hold them hostage, is real.
Blockchain is rather like a bank account, in that every transaction involving a cryptocurrency is recorded. The difference is that each transaction is a part of a block of transactions, let’s say every 10 minutes, and that block is then verified by professional “miners” and linked to the block before it. The next block will be linked, as it is also verified and inserted into the chain.
Transactions that are part of a block are permanent and can never be altered in any way. When someone purchases a television set with a cryptocurrency, for example, that transaction is part of an unalterable block of transactions, that no one can hack and change.
Now think in bigger terms. Large financial transactions between corporations and investors, etc., cannot be altered or hacked, because such an event would never be verified and no one can get into a block and alter a transaction.
The concept of blockchain has actually begun to go beyond just financial transactions. Contracts, health histories, and educational records are all prime candidates for blockchain technology, and already organizations are experimenting with its use as a more secure environment. Think, for example, of the recent Equifax hacking crisis. Had all of this information been recorded in a blockchain environment, the crisis would not exist.
Every time a new crypto currency is created, there must also be a blockchain for recording transactions.
It was only a matter of time until startup entrepreneurs saw the possibilities of creating currencies and using them to garner investment capital. And that is exactly what an ICO is all about.
ICOs Simply Explained
Most of us remember when Facebook went “public.” It offered a certain amount of its stock to the public through an IPO – initial public offering. When companies are ready to scale and they want big infusions of cash, they often go public with a stock offering.
When small companies and startups need capital, they look to family, friends, crowdfunding sources and individual or small groups of investors who see potential in their company.
In both the IPO and capital investment situations, those who buy stock or who put up cash are provided something in return – usually an equity position in the company. If you have ever watched the TV show “Shark Tank,” you have the idea.
Enter a new method of raising capital – digital currencies. They’re called ICO’s (initial coin offerings), and they have become quite a craze, especially among technology startups. The concept is not all that different from IPO’s. A young company creates a digital currency and either uses an existing blockchain or designs its own. It then sells “tokens” to investors, who take the risk that the currency will increase in value as the company grows and succeeds. The key to ICO’s is that investors do not get an equity position in the company, nor do they receive interest or dividends as they might in traditional investments – they simply own the currency tokens and are speculating that those tokens will increase in value for a future sale.
Of course, there is risk – but probably no more or less than the risk involved in investing real dollars into startups and small businesses. Traditional investing involves a piece of the company – a company that will either succeed or fail. ICO investing is essentially the same. The cryptocurrency tokens will either increase or decrease in value based upon the health and growth of the company that has offered them. And there are other risks.
The Bad Guys Getting in on the Act
There are fraudsters in every industry and sector and ICO’s are no exception. Bad guys have gotten into the act by offering ICO’s that are worthless. Obviously, this is probably no worse than companies such as Enron or scam artists like Bernie Madoff, but buyer beware is the word of the day in terms of ICO’s.
Laws and Regulations
Right now, government regulatory agencies are now quite certain how to deal with cryptocurrencies and ICO’s. And creators of such currencies have become quite creative in their wording – calling the sale of tokens as “crowdsales” or “donations.” Many are touted as “advance access” to something like a new game.
But the lack of regulation also adds more risk to naïve investors. And more conservative investors may shy away from ICO’s as a result, making this a tough way to raise capital.
Right now, cryptocurrency concepts and activity are hot. And, given the rather phenomenal ability of ICO’s to raise investment capital right now, there are no signs of slowing.
While naysayers claim that this is only the latest “fad” that will eventually burn out, we need to consider the following:
- Since 2008, trust in large financial institutions and their transaction reliability has been seriously harmed. They are ready for alternatives and are embracing them.
- Newer generations are digitally savvy and have faith in digital solutions for everything – from online purchases, to online banking and borrowing, and, most recently, cryptocurrencies. They “get it” and they are ready to move onto to the next financial services platforms that free them from traditional institutions.
- The new generation of entrepreneurs are risk-takers, are ready to embrace new technologies, including cryptocurrencies, and will be those in charge as we move forward in this digital age.
- Younger investors do not see buying into ICO’s as any riskier than buying stock (think Enron and some of the major financial enterprises that crashed in 2008). And with blockchain technology, they see transactions as far more secure from hacking.
Should you consider investing in an ICO? The best advice is this: if you have money to risk; if you are willing to do the research; and if you believe that cryptocurrencies are here to stay, then go for it.