The Rise of Crypto Currencies & Blockchain
A Little Crypto Currency History
The most well known crypto currency is Bitcoin which was created in 2009. The first “real-world” transaction of Bitcoin (BTC) was on May 22, 2010 when Laszlo Hanyecz bought two pizzas for 10,000 BTC. At that time Bitcoin was trading for about $0.01 each so he paid about $100 for those two pizzas. Seems expensive doesn’t it? At the time of this post, Bitcoin is trading for about $13,000 each. Those 10,000 Bitcoins are now worth approximately $130 million dollars, just short of eight years later. Now that’s some expensive pizza.
I think I first heard of Bitcoin during the Summer of 2013 when some co-workers were talking about mining it. I didn’t understand what Bitcoin was or what “mining it” meant so they explained. Bitcoin is a digital currency more commonly known as a crypto currency. Like the U.S. dollar, it is a store of value that people can use to conduct financial transactions. However, Bitcoin is digital and not physical. To create Bitcoins and track the transactions, computers have to perform complex mathematical calculations, also known as mining. When a computer completes the calculations a reward of a fraction of Bitcoin is issued as a sort of transaction fee. Think of mining for a digital gold on the Internet. This all sounded odd to me at the time. Since Bitcoin wasn’t really accepted as a common form of money at the time I disregarded it. My bad!
A couple of months ago I started researching crypto currencies again. I now understand the technology and believe that it is here to stay. I think crypto currencies are a huge improvement over physically minted currencies backed by governments (fiat currencies) like the U.S. dollar. There are economic, social, and technical reasons which I will get into in future posts. However, for now it is sufficient to see the trend of money going digital. Through the international banking system financial transactions between governments and large organizations has long been digital. Online banking and credit/debit cards has also made the use of fiat currencies less common among individual consumers. Like many other people I rarely have actual U.S. dollars in my wallet. Crypto currencies are the next phase of money going digital and it will be highly disruptive to almost all industries globally.
Bitcoin vs Crypto Currency
Bitcoin was the first crypto currency and is based on a cryptographic software technology called blockchain. Blockchain technology is a secure way to conduct transactions with unknown and often un-trusted parties without the use of an intermediary such as a bank. It’s all done over the Internet between the parties involved in the transaction. The ledger of transactions is decentralized and distributed across the Internet and therefore highly secure. The blockchain technology was created by an individual or group that went by the name of Satoshi Nakamoto. The idea was to create a way to transfer value between two parties that cut out intermediaries and governments. The story behind the creation of Bitcoin is worthy of a book so I won’t go into that in this post. However, if you want to know more about that check out Satoshi Nakamoto on Wikipedia as a start.
Today there are over 900 different types of crypto currencies called coins and more than 450 more types of blockchain projects called tokens. Note that some are scams and/or pyramid schemes so beware. All coins and tokens that aren’t Bitcoin are called Alt Coins. Most differ in various ways and are being marketed for different uses.
There are many different crypto currencies in competition to become the globally chosen coin or currency. Each have different strengths and weaknesses which I’ll cover in a future post. As a side note, many crypto currencies are designed to only allow a certain number of coins to ever exist. This will theoretically eliminate inflation caused by governments just printing more fiat. Think of it as similar to gold. Just as there is a finite amount of gold on Earth, there will be a finite number of Bitcoins for example. Note that crypto currencies can be bought and exchanged in fractions. For some time there will be many currencies competing for global adoption. Eventually the world will start to consolidate to just a few and maybe someday just one.
Additionally, there are blockchain projects that are competing to be the chosen software platforms in various industries. Most are based on the concept of decentralized and distributed application platforms that will increase the reliability of systems on the Internet. Some are even considered to be the future of what the Internet will become. Some are focused on specific industries such as the music industry. Today, music artists get only a small fraction of the money that you pay for their songs. By the time Apple, various music labels, and managers take their cut very little is left for the artists. I believe that with blockchain technology music artists will eventually sell their songs online and the money will go direct to the artists. There are already blockchain projects and musicians doing this. I don’t think that all record labels will go out of business, but their relationship and value to the artists will certainly change. This is just one example of how crypto currencies and blockchain projects will disrupt global industries.
The art or science of picking the correct coin or token to invest in is based on how successful they will be.
- Which crypto currencies will be adopted globally?
- Which blockchain projects will deliver the best working software platforms and be able to sell them into their respective industries?
- Which currencies or blockchain projects have technical flaws or weak marketing plans that will doom them to failure?
There in lies the challenge.
Crypto Currency Exchanges
Bitcoin and Alt Coins trade via online exchanges very similar to the stock market. People invest U.S. dollars (or other fiat currencies) into different coins or tokens. Today, the crypto currency and blockchain market has a market capitalization (amount of money invested) equivalent to $500 to $600 billion U.S. dollars. This seems like a lot, but in comparison to the global financial markets is just a drop in the bucket. Check out this page for a visual representation of crypto currency investments as compared to other global financial markets. Note that this graphic was posted in October 2017 and is already outdated. Crypto currency market cap has now exceed the estimated value of the largest corporations in the world. It has exceeded the value of Amazon and Facebook and is approaching that of Microsoft.
Based on this and some other data about the number of crypto currency accounts opened, I estimate that less than 1% of the worlds population are currently investing in crypto currencies. It is still really early in the life of crypto currencies and most coins and tokens are very speculative. However, more retailers are starting to accept crypto currencies and more large corporations are investing in blockchain projects. I recently read an article about a company that has installed 20 Bitcoin ATMs in the Atlanta area and I saw an IBM commercial, during prime time TV, talking about their blockchain technology. I don’t think crypto currencies or blockchain projects are going away so there is still a lot of money to be made (or lost) in this new market.
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