Twenty-Seventeen (2017), particularly the 2nd half of 2017, saw a cryptocurrency (crypto currency) craze akin to the stock and penny stock crazy of 1999 – 2001. The similarities are numerous. The hype and resulting frenzy have been so huge that I see it daily on TV, on the Internet, and with coworkers. I even get non-computer relatives and bredren (friends) asking me about “bitcoin”. Unfortunately, I don’t know a lot. I know the basics (the 10,000 foot level) and will I’ll attempt to articulate that, supported by a bit of research, here.
At the risk of losing meaning due to oversimplification, I’ll first summarize what the so-called “cryptocurrency” is. A cryptocurrency (crypto currency), sometimes referred to as a cryptocoin :
- is ‘digital asset (currency) so there is no physical “money” or “coin” even when that’s part of the nomenclature (e.g. bitcoin).
- is “monetary” exchange
- uses cryptography (see cryptography in the computer era) to secure transactions, control creation of additional “coins”, and verify transfer of assets between parties
- were originally “mined” (using a computer or “rig” of computer video cards to perform complicated algorithms that get more and more difficult and less cost-effective to the miner as more coins are mined) but can be offered pre-mined these days, This is the bullet point that makes this entire cryptocurrency thing complicated and I am not helping much here. I recommend further reading on this as that’s a whole topic and would require me to do further research to understand and break it down properly.
Cryptography or cryptology is a practice used for secure communication, preventing peeking eyes and computers/programs from sniffing the private messages.
Cryptography prior to the modern age was effectively synonymous with encryption, the conversion of information from a readable state to apparent nonsense. The originator of an encrypted message shared the decoding technique needed to recover the original information only with intended recipients, thereby precluding others from doing the same.
Enters BitCoin and AltCoins
The first decentralized cryptocurrency was Bitcoin. Some now call it Bitcoin core since there is another recently-created cryptocurrency called Bitcoin Cash. Bitcoin, created in 2009, was the first decentralized cryptocurrency. Subsequent cryptocurrencies are called altcoins (alternative coin). Popular altcoins include Etherium, Ripple, LiteCoin, and Bitcoin Cash but there are hundreds (thousands even) of altcoins. I would not be surprised if the majority of these become worthless, and the frequency at which new ones are created drop drastically, within a year or two as the hype subsides and regulations are put in place… at which point only a handful will reign supreme.
Bitcoin and other cryptocurrencies are decentralized unlike centralized electronic money and central banking systems. The decentralized control is related to the use of bitcoin’s blockchain (block chain) transaction database.
The Intial Coin Offering ICO is kinda similar to the stock Initial Public Offering (IPO) in that it can be a source of capital. However, it has some differences in that it’s more like kickstarter (crowdfunding) campaigns in the form of cryptocurrencies. The cryptocurrency from the ICO is pre-allocated to the “investor” in the form of [digital] tokens… The investor does not own part of the company if there is a company behind the ICO, just the digital currency.
A software developer, group of developers, or a company comes up with a new cryptocoin and pre-sells an amount to investors prior to launch. They may swap these digital tokens for money (often USD) or another established cryptocurrency like pioneer bitcoin. This early investment may fund development and help kick-start the coin’s circulation. After all, no currency is very useful if it just sits in the wallets of a few people.
Similar to Penny Stocks
1. Many uneducated investors see it as a low-investment, high-return mechanism. Put in $100 – $1000 into at a low-value venture, follow the wave of hype (or create some themselves – illegal), and hope the hype will see the price go up by astronomical multiples. That has happened, especially in 2017.
2. Most are unregulated because the “industry” is complex. Not many people (including me) understand it enough, outside some serious computer scientists and a few others. Many investors do not understand ICOs and cryptocurrencies in general, even less than I do. This is similar to penny stocks and the various exchanges, especially before brokerage firms / online brokerages were forced to allow investors to put limit orders on penny stocks.
3. investors in ICOs salivate at the prospect of the ICO project or company becoming a hit, thus making the coin it uses a sought-after commodity and making them rich.
4. Like Penny Stocks, if enough above-ground (but often underground) hype is created around the future prospects of the venture, or its coin, others may want to buy in, bidding up the price and allowing earlier investors to exit at a profit.
5. Like with Penny Stocks, if nobody buys, then the project fails and the coin becomes worthless.
6. These cryptocurrencies are very volatile like Penny Stocks. The earlier investors often buy just before or at the beginning of the hype, then make out like villains when the price shoots upwards.
6. They are decentralized
What Should You Do
- I am not even 1% qualified to give anyone financial advice but even less so in terms of cryptocurrencies. I have not invested in cryptocurrencies and have no immediate plans or near-term plans to do so. If I was an investor looking to get in on these ICOs or any other security, I would have to
- read up on the business, the industry, the cryptocurrency/ies I might be interested in. Then I’d read again.
- speak to an investment adviser, especially one who understands ICOs and cryptocurrencies.
- invest ONLY in legal ventures. Many of these are legal in the USA but not in some other countries where they are partially or totally banned.
- ONLY invest money I don’t need, money that I can afford to lose completely without affecting my bills and the ability to feed my family.
Here’s a satirical youtube video about the largest and most popular cryptocurrency, Bitcoin. This was shared by a bredren of mine who actually invests in the altcoins.