The name exudes mystery: Cryptocurrency.  Presently, even the lay are being inundated with talk of Bitcoin and Cryptocurrencies as global markets explode.  Recent headlines compare Bitcoin to gold as an attractive, non-stock asset for portfolio diversification. Speculation as to whether or not Bitcoin is a bubble, or just the beginning of a potential trillion dollar asset, remains up for debate.  Regardless of position, the history is fascinating.

 

Birth of Bitcoin

Bitcoin, the world’s first and most valuable cryptocurrency, is initially introduction to the cryptography community in 2008. Introduction came via Bitcoin.org by a “person” named Satoshi Nakamoto in the essay Bitcoin: A Peer-to-Peer Electronic Cash System. The true identity “Satoshi” remains a secret, though some say he is a triad operating under the fake name. The “individual” Satoshi Nakamoto no longer exists on earth as far as records can prove. Nonetheless, the legacy left by the mystery “man” completely changed the global economy in less than a decade.

Designed to allow individuals to exchange cash for goods electronically without lengthy wait times of wire transfers or high fees of credit card transactions, Bitcoin is now a welcomed alternative to the formers.  Decentralized by nature, the original essay offered the idea of the distributed ledger technology.  D.L.T. allows the public see, and therefore referee, all transactions to keep them honest, reducing fraud potential.  Effectively changing many views of true financial transparency, analysts speculate DLT is will put many accountants out of work by 2022. 

In the beginning, initial Bitcoins were worth mere pennies and were given as rewards to miners.  Miners are individuals who provide the required security code, by use of complex math problems, for a block of transactions.  The phase is a unique ID or nonce (Number Only Used Once) that contains all information before it.  Once a miner assembles a perfect combination of data, the data joins the long chain of public records.  This method of adding secure blocks of data is known as blockchain and is the cornerstone to Bitcoin’s security and appeal. The first year, 2.5M bitcoins were mined into circulation and initial coins have grown in value an astronomical 300,000%.  The finite supply is capped at 21M coins whose value is a function of global market share, which some believe will increase into the trillions.  However, the fact that the coins are considered property by the IRS, value is as much as an individual assigns it and can barter the coin(s) for.

Presently, only around 600K/year coins are entering the market, with projected decrease by 50% in the next coming years as the limit of 21M coins approaches.  Approximately 17M coins are in existence as of publication date, leaving about 4M coins left to be mined.  Current market rate for a single Bitcoin has recently leveled out at around $15K/coin; of which’s growth came almost entirely exponentially in the final month of 2017.

A visual timeline of the cryptocurrency universe.

The Alternative Cryptocurrencies aka Altcoins

Shortly after the advent of Bitcoin and P2P electronic fund exchange technology, the financial and cryptography community welcomed alternative cryptocurrencies, or altcoins.  The first derivative currency, or fork, came in 2011 with the introduction of Litecoin.  Touting faster computing times and therefore more reward potential for miners, Litecoin currently is the third largest cryptocurrency with a $16B market cap at time of publication.

Smaller, less widely known coins continued to pop up as time and technology progressed.  It was not until 2015 that Ethereum was introduced, soon becoming the second largest cyber-commodity with a market cap of $79B, compared to Bitcoin’s $267B (at time of publication).  Ethereum is different than competing coins, as it not a currency, but rather a platform for developers and special contract generation.  The investment lays in the power source of the platform Ether, the actual “mineable” commodity.

Today there are over 100 altcoins for purchase and trade.  Exchange rates are a function of how much Bitcoin each altcoin is worth.  Individual institutions creating are incentivizing bullish investors to buy into their propriety coins.  These Initial Coin Offerings, or ICOs, have generated over $6T, leaving Bitcoin with only a 40% share of the coin market.  Even well established mining companies with large stakes in Bitcoin have turned their focus to the mining of the altcoins yet offer payout in bitcoin to remain attractive to newcomers.

Welcome to Wallstreet

Ironically, what began as a way to circumvent traditional financial institutions, Bitcoin and Altcoins have now come full circle. Cryptocurrency has a  glaring presence in a variety of mainstream financial markets.  As of just weeks ago, investors are now able to buy Bitcoin futures which, at times, outperformed Bitcoin itself. Investors now have the ability to buy stock of public companies that invest and hold cryptocurrencies who, even after taking huge hits at publication date, still trade at a value 50% higher than Amazon, 10x higher than Apple.

Major tech players like Microsoft, Virgin, even Subway allow the coin as payment.  Retail cannabis is looking to use coins as a way to convert from all cash to digital holdings, as they are still unable to bank with the federally insured banks.  Even Bank of America Merrill Lynch is opening its gates to coins and DLT/Blockchain technology.  This is seen as a necessity for remaining relevant with a new age of investors reaching maturity.

Of course, one can always just set up a Bitcoin wallet and begin buying and selling the commodity directly.  Numerous sites and apps are continually popping up creating an easier and less cryptic (pun intended) UI for newcomers hoping to buy in.  With every revolution in history, naysayers who gain by maintaining the status quo abound.  To the naysayers: keep your paper money, it only means more coins for the rest of us.