The cryptocurrency craze

As cryptocurrencies become more popular in Silicon Valley and the world, experts and governments are beginning to worry about whether the bubble around this phenomenon will break.

Background

Cryptocurrency is a digital asset (in other words a form of digital money) that is designed to stay secure. It uses cryptography to secure its exchanges making it nearly impossible to counterfeit. Cryptocurrency in particular is classified as a subset of digital currencies.

Bitcoin was the first decentralized cryptocurrency. It was first created in 2008 by either an anonymous programmer or a group of programmers under a pseudonym, Satoshi Nakamoto. “Nakamoto” released Bitcoin in 2009 as an open source software. It is not controlled by any government and is one of the most popular cryptocurrencies in the world. Litecoin, Peercoin, Namecoin and Ripple are among the other cryptocurrencies available.

Initial coin offering (ICO) is means of crowdfunding through the use of cryptocurrency. This form of crowdfunding is not regulated as cryptocurrency is unregulated. ICO is a method employed by companies to raise money. They sell investors digital tokens in exchange for cryptocurrencies like Bitcoins. As the field is unregulated, there is also an increased risk of investor scams.

Analysis

Despite the inherent risks, ICOs have become increasingly popular, especially with companies in Silicon Valley. According to a report from Financial Times, software developers have been able to raise about $1.8 billion through the sale of new currencies. Some of these currencies that were used are Atoms, Basic Attention Tokens and Tezzies.

These digital tokens are traded only in unofficial online markets. Due to Bitcoin’s bullish performance in the market, the value of all Bitcoins in the world is now more than $56 billion. The value of Ripple has also exponentially increased. Earlier it was valued at $500 million but in the span of less than a year, it’s value soared up to $35 billion at one point.

US regulators such as the Securities and Exchange Commission have tried to deflate the so-called bubble around this boom. US has said that digital tokens should comply with the country’s securities laws. Most recently, China has called a freeze on fundraising through initial coin offerings. According to media reports, the country is seeking to completely shut down the usage of cryptocurrencies. UK government has also said that those who are willing to invest in such schemes should be aware of the risks of losing it all. Most recently, James Dimon, the Chairman, President and Chief Executive Officer of JPMorgan Chase came out strongly criticizing cryptocurrencies, especially Bitcoin.

Assessment

Our assessment is that cryptocurrencies are here to stay. In a networked world, an electronic cash system will significantly reduce transaction costs. In the next few years we are going to see national governments take the step towards cashless societies where people transact using decentralized digital currencies. We believe that cryptocurrencies, viewed as hard money, will find increased users from all sectors.  

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