- Cryptocurrencies (CC) are digital currencies that utilize blockchain technology to provide improved security, anonymity and decentralization. There is no central authority to manage it and no third parties are needed to facilitate transactions.
- The most popular currencies on the market are bitcoin and ethereum, which have market caps of $44.86 B and $6.7 B respectively. Bitcoin was released as open-source software in 2009, and has nearly tripled from a price of under $1,000 a coin to nearly $2,800 since Jan 2017 while ethereum has jumped from $8 to $220 in the same timeframe.
Recent News and Events
- The Chicago Board Options Exchange said they will launch bitcoin derivatives by end 2017 pending regulatory approval.
- On Tuesday, the blockchain supporting Bitcoin split into two creating two competing versions of the virtual currency with the new version being BitcoinCash. With the rapid rise in Bitcoin usage over the last few months, its blockchain technology was slow in processing transactions and developers and miners disagreed with how to expand resulting in a new version being created. BitcoinCash will be able to process 56 transactions per sec. compared to 7tps.
- In July, digital currency trading platform BTC-e, was suspended by Dept. of Justice for involvement in criminal activities of money laundering, identity theft, and drug trafficking transactions.
- Start-up CC firms are using Initial Coin Offerings (ICOs) in favor of VC funding. ICOs are crowdfunding events where firms release their own CC tokens. These differ from IPOs as there is no govt. regulation or required documentation for the sale. In 2017, ICOs raised $1.3B for start-up CCfirms with only $358M in traditional VC funding.
- The large run-up in price of CCs over the last few months has fuelled a bubble in the blockchain world through ICOs. The lack of regulation here has enabled start-ups to gain access to funding from unsophisticated individual investors than they would normally be able to receive through venture capital.
- Bitcoin is gaining acceptance as many e-commerce websites and producers of repute are allowing online payments.
- The arrest of Alexander Vinnik of BTC-e,seems to indicate that blockchain analysis can connect identities to users.
Opinion and Outlook
- The growth in transactions and value of CC seems to be driven more by traders and speculators looking to profit off the massive volatility than the fundamental use of exchanging currency for goods and services. Also due to the anonymity in transactions, criminals are attracted to them as a mechanism for money laundering.
- While blockchain technology is an exciting innovation, we feel it has much better applications than currency in banking - to facilitate international trade and streamline processes and healthcare - to store records securely.
- In its current form and usage, CCs may continue to grow as unregulatable digital currency in much of the free world.
- As investors, we feel the CC market is overheated with the introduction of ICOs, and the high volatility does not meet our standard for conservation of capital. It is not a safe asset class for the masses.
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About Punit Jain
The author is a SEBI-registed Research Analyst (SEBI Registration No. INH200002747), and has a firm called JainMatrix Investments (www.jainmatrix.com) which offers an Investment Advisory Service. He can be contacted at email@example.com
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