To misquote the infamous lines,
A spectre is haunting the world — the spectre of crypto currencies. All the powers of old money have entered into a holy alliance to exorcise this spectre: Central Banks, Swift, governments and police-spies.
Today a new generation of day traders are making millions trading these opaque digital currencies from their laptops as both the number and price of these ‘coins’ explodes. As of writing, Bitcoin (BTC) – the largest crypto currency – is trading at a record $2820/coin. With 16,381,100 BTCs in circulation that gives BTC a whopping market capitalisation of $46 billion. The inventor of BTC remains an elusive figure only known to the world by his pseudonym ‘Satoshi Nakamoto’. What we know of the enigmatic creator is little, gleaned from occasional leaked correspondence between him and BTC developers. He is known to own 1.1 million BTCs giving him a fortune of $3.1 billion.
What is a crypto Currency?
Economics 101 teaches that ‘money’ is a medium of exchange, a unit of accounting, and a store of value. We could use cans of beer as our currency but it wouldn’t be terribly effective due to the cost of creating each unit and the ease at which new units could be created (forged?). Anyone with a home brewing kit could churn out new units of this currency leading to inflation and a rapid decline in its value.
Crypto currencies mimic their fiat counterparts and there are a fixed number of ‘coins’ available. BTC, for example, has a maximum supply of 21,000,000 BTCs. There are currently 16,381,100 BTCs in circulation. How are new coins released? By a process called mining. BTC is a decentralized peer-to-peer network. Without entering into technicalities, essentially intensive computational power is needed to verify transactions. Anyone can set up a node. As a reward for making your processing power available to the network, the node is rewarded with a small fraction of a coin. The maximum supply of BTCs is estimated to be reached around the year 2150.
There are currently over 750 crypto currencies in circulation, although the average traded volume of the majority of them is sparse. BTC dominates the market capitalisation with a 45% market share. Ethereum and Ripple (more on Ripple later) are the other two big daddy coins.
Why crypto and not fiat?
Anonymity and privacy. Due to the distributed network, peer-to-peer network, there is no central authority (no central banks, or even banks). Each user has a digital “wallet” (think of this as an email address with its password) which the other user sends his payment to from his wallet. As simple as that. No payment system, no central processor, just a private transaction between two individuals. The ledger is public and each and every BTC transaction is stored in the public ledger. The website https://blockchain.info allows you to query a wallet id.
In the above picture, we queried wallet address: 1933phfhK3ZgFQNLGSDXvqCn32k2buXY8a. The above result reveals this wallet contains 111,114 BTCs. In the last transaction wallet: 16UbpGkh1ddgGfUKKnzGMSfC5m3hbKrEuK paid in 0.00050913 BTCs. This occurred on 19/5/2017 at 22:49:48 hours.
The Financier is considering opening a BTC wallet and presenting the ID on our website as a means of accepting payment. Of course, by associating our wallet ID to our website, we forfeit our anonymity. But in other circumstances, there is no need for individuals to know each other’s identity. Imagine two individuals with anonymous (encrypted email such as Protonmail.com) email each other. The seller can provide his wallet ID for payment and then post the goods to the desired location.
The dark web Silk Road operated in this manner with delivery guaranteed via an Amazon style review and rating system to establish a seller’s credibility.
At the heart of the crypto currency revolution is the ideal of a fee-less anonymous means of payment born of libertarian notions of freedom and anonymity.
While there are a few crypto currencies with genuine real life use cases (Ripple being the prime example), the majority exist as vehicles for speculation. They have been labelled shitcoins. They are the speculator’s dream exhibiting 600% rises in weeks. Hundreds of crypto currency “exchanges” have opened up adopting the maker/taker fee structure to cream off a fraction of each trade. The top exchanges (measured by total volume in BTCs) are Poloniex, Kraken and Bittrex. Opening an account takes minutes and funding is usually by transferring your BTCs into your exchange wallet/account. Currently a BTC to BTC transfer takes in the region of 20-30 minutes to clear.
The Ripple Revolution
Ripple (XRP) is one coin that The Financier believes is here to stay. It acts as an international payments system between institutions and has heavy buy-in from large banks. It looks set to crush the SWIFT payments system due to banishing the requirement for nostro and vostro accounts in each currency, lower fees and almost instant real time settlement as opposed to 3-5 days.
Crypto currencies are here to stay. The shitcoins will fizzle out but those with real life application (such as Ripple) will persist and likely explode in value. XRP’s price is hovering around $0.30 having already risen from $0.03 earlier this year. As with BTC, early adopters who have the patience to buy and hold, ignoring daily volatility have the potential to be sitting of sitting on tens of millions in 5 years’ time. Consider that BTC was trading at $450 in May 2016, a year later it is at $2800 – a 522% increase in one year. Go back a littler further to May 2013 and BTC was trading at $115 – a 2300% increase in four years.
Thus a $50,000 investment in BTC four years ago would now be worth $1.2 million. But we like my ballsy bets and salute those who have the nerve to plough in $150,000+. (If you do, please do contact us as we’d love to follow up with you)
We at The Financier will be monitoring crypto currencies and interviewing major players including Ripple, the exchanges, traders, software developers and regulators.
Watch the space!
*This article is presented for information purposes only and does not constitute a recommendation to trade.
Photo credit to Vitalij Fleganov on Flickr (CC by 2.0)