From its inception Bitcoin has led the rise of crypto culture worldwide, creating quite a roller-coaster economy in the digital currency sphere. Below Founder and CEO of Chaineum, Laurent Leloup talks Finance Monthly through the yesterday, today and tomorrow of cryptocurrencies.
Founded in 2009, Bitcoin was born from the notion of creating a currency that was independent of any other authority, is transferable electronically instantaneously and has low transaction fees. In its early days, the cryptocurrency was somewhat of an unknown entity to mainstream audiences; attracting a small, but dedicated, following of techies and leading to the creation of similar currencies.
The Bitcoin evolution
Since its inception, Bitcoin has increased in value exponentially throughout the past few years, particularly in 2016 and 2017 as more and more people began accepting cryptocurrency as a credible form of currency and not just a buzzword for tech insiders.
2017 saw a record year for Bitcoin. Starting out at a value of $1,000 in January, the currency hit an all time high of $17,000, a 70% increase, in the first two weeks of December 2017.
Bitcoin’s growth can be down to a number of factors. Firstly, the cryptocurrency model itself enables project developers to bypass banks in order to gather funds. For merchants, there is the benefit of being able to expand to new markets where fraud rates are unacceptably high, or credit cards are simply not available. This creates net results of lower fees, fewer administrative costs and a wider reach across previously inaccessible markets.
The Bitcoin following: from a niche community to the mainstream stage
Bitcoin has always attracted somewhat of a dedicated following. However, this fanbase was often restricted to the crypto community which, although passionate about Bitcoin, was quite an exclusive, niche community largely misunderstood by mainstream audiences.
Social media has played a significant role in the growth of Bitcoin by giving the cryptocurrency community a platform to come together and share their thoughts on the marketplace. For instance, Twitter has a ‘Crypto Group’ where Bitcoin and cryptocurrency enthusiasts can interact and tweet; making it much more accessible for everyday users to become part of the cryptocurrency movement.
Rise of ICOs and cryptocurrencies
As Bitcoin’s presence within the mainstream increased, awareness around blockchain technology and cryptocurrency has grown. With this, the marketplace has seen more and more cryptocurrencies launch through the ICO (Initial Coin Offering) mechanism. Currently the industry is seeing at least three new ICOs launching every week as more investors and developers look to this new fundraising system as a viable way to fund their blockchain projects.
There are many benefits to ICOs which is perhaps why they have become the fastest growing fundraising mechanism in 2017 alone. For organisations who are looking to invest in a project , it is considered a much faster and easier fundraising method, as anyone can start one and is free from geographical restrictions.
Additionally, many people also take interest in the cryptocurrencies because of their liquidity. Rather than investing huge amounts of money in a startup which is locked up in equity of the company, they can offer the opportunity to see gains quicker and take profits out easily.
Nevertheless, whilst cryptocurrencies do offer opportunities to see considerably higher ROI than traditional investments, prices of tokens can be extremely volatile and can be a risky investment. Therefore, investing in these kind of projects should be sought after consulting an expert.
The future of cryptocurrencies
With more and more cryptocurrencies launching, commentators are weighing in on how this will impact the wider industry. Due to the rapid growth of the currency over such a short space of time some are comparing Bitcoin to the ‘dotcom bubble’ in the 90s and early 2000s in that it isn’t sustainable in the long term.
However, in 2017 alone, ICO projects were able to collectively raise over $3billion clearly demonstrating that their significance is only increasing. With more projects expected to launch in 2018 further increasing mainstream awareness around cryptocurrencies, it seems we can expect this trend to remain consistent for the foreseeable future.
What's more, as regulation continues to evolve, ICOs could become very different and we could see them serving many different purposes.
Some commentators have even stated there is a chance they could even replace IPOs and make a fairer and more equally distributed economy, where anyone could become an investor with little risk as a consequence. Tokenisation of capital which provides new levels of liquidity and transparency could become the future as we may end up seeing all kinds of organisations, including larger enterprises, begin to explore the ICO space.
One might assume that Kodak, the American photography company best known for printing your beloved baby pictures from the high street, had faded into obscurity after its redundancy in the wake of the ever-changing digital age.
In the dawn of handheld devices such as cell phones, smart phones and tablets—all of which can take photographs themselves—Kodak underestimated the constant change in our technological society, whereas competitors took advantage of the market to remain up-to-date in a rapidly modernizing world. Its share worth paints a clear picture of this despite its financial peak in 1996, with the brief bankruptcy it filed for in 2012 and the subsequent steady slope downwards in worth from then onwards as solid proof of its growing irrelevance.
That is, until you reach January 2018, and a large spike in value ends its loss-making trend.
The cause? Eastman Kodak Co. announcing Kodakcoin, Kodakone and Kodak KashMiner, another entry in the list of growing cryptocurrencies and miners attempting to bank on Bitcoin’s success. The announcement prompted Kodak’s shares to surge from $3.13 per share to $12.75, slating 31st January 2018 as the date for the Initial Coin Offering (ICO) for Kodakcoin to begin.
ICOs are used to raise funds in the development of a new cryptocurrency, often in exchange for fiat currency or other cryptocurrencies such as Bitcoin. The announcement was made at the CES2018 convention in Las Vegas. Kodakone, created in partnership with London-based WENN Digital, will be the platform for which Kodakcoin can be used, utilizing blockchain technology to help photographers keep track of how their photos are used online. They will allegedly benefit from being able to register their work, sell rights to images and receive payment through the new cryptocurrency.
Among these announcements was the plan to install rows of Bitcoin mining rigs at Kodak’s headquarters in Rochester, New York—a power intensive process run by Spotlite branded as Kodak KashMiner, that will verify cryptocurrency transactions rapidly.
Kodak KashMiner computers can be leased by anyone for a two-year contract for over $3000, with alleged returns reaching over $9000 for the customer at $375 a month. Despite this, the overall worth of these machines is under scrutiny due to the fact that Bitcoins become harder to generate over time, signalling the potential that customers will earn far less than they anticipated. The scheme was also criticised over fears that a cryptocurrency bubble will form because of it.
Kodak’s move is among many others who have recently joined in the trend of creating unique digital currencies or taking advantage of Bitcoin’s success—including Mark Zuckerberg, who recently detailed plans to incorporate Bitcoin into Facebook in order to fix its underlying problem of centralism.
But is this move worth the risk?
Bitcoin itself has become common knowledge at this point, with headlines reporting its changes in worth on a daily basis—however, its worth plummeted by 14% in just 24 hours due to the continued discussion over South Korea’s potential ban of the cryptocurrency. With its future up to debate, it is unknown whether Kodak will reap the benefits that it undeniably needs. It has, at least, dragged itself out of the grave and back into the limelight for now.
With cryptocurrencies building stable ground in the currencies markets, and ICOs hitting headlines globally, here Richard Tall, Partner and Head of Financial Services at DWF, discusses the challenge of counterfeiting problems within the crypto markets.
As we have experienced in the post-2008 era, the value of a currency depends on the market's perception of its security. People want to hold assets, including currencies, which are generally recognised as being safe and fungible, and which they can swap for something they need - whether that be food, shelter or something else. Currencies that are recognised by others are of benefit to the holder. But the moment there is any doubt as to their heritage, they become less so.
Counterfeiting has long been a thorn in the side of any currency’s heritage. But now, with cryptocurrencies coming to the fore, will counterfeiting continue to exist? And if so, what could the repercussions be?
Counterfeiting capabilities
Some of us may be familiar with Operation Bernhard, in which Nazi Germany sought to destabilise sterling through the printing of £5 notes. Aficionados of the film The Eagle has Landed will recall the significant amounts of forged £5 notes carried by the paratroopers.
Now, the passing of an individual forged note does not undermine faith in a currency. But, if a retailer were to receive a number of these which were later rejected by their bank, it follows that the retailer would be unwilling to continue to accept that note. This is still the case today and naturally, retailers are wary of high value notes which open them up to the risk of loss.
Exponents of true cryptocurrencies will tell you that they are incapable of counterfeiting - and the short history of cryptocurrencies bears that out. However, there have been scandals - for example, Mt Gox and the ethereum DAO attack - which have given rise to significant losses.
Let me elaborate. Mt Gox and similar cyber-attacks follow the same sort of pattern as normal cyber-attacks with the hacking of accounts and removal of the contents. The ethereum DAO attack took advantage of a bug in the system, which it seems quite a few people knew about. And as blockchain is open source and anybody can get to it, there will always be some brainbox out there who can do something befitting of a James Bond film.
In contrast, if you instruct your stockbroker to buy you shares in XYZ plc, you rely on your stockbroker to actually buy real shares in XYZ plc, and not something which they think is XYZ plc shares. Afterall, as a regulated entity, the stockbroker has obligations, and if they breach those then they have a regulatory problem. They will therefore trade via particular systems with certain counterparties to keep themselves, and your trade, safe.
Structural weaknesses
If you go onto a cryptocurrency trading platform, you are relying on that platform being keyed into the right blockchain to deliver to you what you ordered. A blockchain itself should be impenetrable to the malintent. However, the whole point of the blockchain is that it is a public peer to peer network. If I were a James Bond villain, I would look at nefarious means by which I could convince everyone that my blockchain was the right one.
In a way, this happens when a cryptocurrency undergoes a hard fork, which is the mechanism by which a hacked network can "roll back" to the pre-hack period or when a network needs updating. Hard forks can take various forms, but the basic premise is that when one happens, a new blockchain is created, and usually there will either be disruption to the service; preventing transactions between peers, or gross instability introduced to the system; leading to equally gross price fluctuations.
So, if I were an incredibly clever, evil mastermind and was bored of hacking crypto wallets or wallet providers (a bit like hacking a bank account) and wanted to head to the top of the criminal mastermind league table, all I would need to do is to convince trading platforms and wallet providers that my blockchain is the right one. In Operation Bernhard, the premise was the same; the enemy simply wished to convince the UK populace that their fivers were the right ones, so nobody would trust the real ones. The desired effect? Chaos and economic uncertainty.
Could this possibly happen with cryptocurrencies? Yes. But it has little to do with the sanctity of a cryptocurrency's blockchain, and much more to do with the security systems of the cryptocurrencies' platforms and wallet providers, and the extent to which they are able to verify that they are dealing with the right counterparty.
Reducing the risk
One of the straplines for using cryptocurrencies is that, as peer to peer networks, they remove the overheads associated with credit and banking. However, the overheads for credit and banking arise because those entities provide a particular type of service, and a user of that service is able to rely on being made whole if it all goes wrong for any reason - such as when a system is hacked.
Blockchains have huge numbers of applications, but one of their overwhelming threats is their public nature. It's why sophisticated networks of users deploying the blockchain for commercial purposes will most likely do so through private networks, with a view to security enhancement. Yes, this might defeat the point of cryptocurrencies for many - but it'll also reduce the risks associated with cryptocurrencies for many more, enabling them to become the functional currencies most of them seek to be.
Russia’s plan to launch its own cryptocurrency, dubbed the ‘CryptoRuble’, is currently unfolding as President Vladimir Putin has given the green light for its go ahead.
This move will put Russia on the digital currency market and consequently allow Russian currency to rival the current cryptocurrency leaders such as Bitcoin, Bitcoin Cash and Ethereum.
Minister Nikolay Nikiforov, the Russian government’s Top Communications Official, says the authorities plan to completely regulate the ‘CryptoRuble’.
“I am so confident to declare that we will run CryptoRuble just for one simple reason: if we don’t, our neighbours in the Eurasian Economic Community will do it in a couple of months,” He told Russia Today.
“When buying and selling a CryptoRuble, the rate will be 13 percent from the earned difference. If the owner cannot explain the reason for the appearance of his CryptoRubles, when converting them into Russian rubles, the tax for him will be 13 percent of the total,” he continued.
However, Andrei Barysevich, Director of Advanced Collection at Recorded Future, seems to think Russia has missed the mark on this matter:
"With the widespread introduction of supporting infrastructure only available to the government-backed cryptocurrency and swift oppressive regulations aimed at bitcoin and other blockchain currencies, the Russian government is frantically attempting to regain the control of the “runaway train" by introducing a legitimate alternative.However, Russian lawmakers seem to be missing the main point.
“Aside from criminals, the majority of the people purchase bitcoins, not because of convenience or anonymity, but rather the staggering profit levels it provides. The Russian Government is unlikely to see a widespread adoption of the CryptoRubles unless Moscow is able to convince people that the value of it will surge."
Do you think governments introducing cryptocurrencies is a strong move in opposition of digital currencies, or that it may actually function via central regulation and oversight?
According to reports, Jordan Belfort, the American stockbroker immortalized in the blockbuster movie Wolf of Wall Street, claims Initial Coin Offerings, the IPOs for new crypto coins, have become “the biggest scam ever.”
Belfort told the Financial Times that fundraising ICOs are “far worse than anything I was ever doing,” adding that “"It's the biggest scam ever, such a huge, gigantic scam that's going to blow up in so many people's faces.”
Many see crypto currencies as a massive investment in the future of finance, while other see them as a bubble, with rising prices inciting a speculative investment spin. According to official figures from CB Insights, $2 Billion was raised in ICOs in the first nine months of 2017 alone. In 2016 the same period saw $54 Million raised. Bitcoin, the leading crypto currency has also seen a rise from circa $1,000 to up to $5,000 this year.
Cryptocurrency expert and Founder of London firm CommerceBlock disagrees and says the old guard of banking and finance are running scared. Nicholas Gregory, founder and CEO of cryptocurrency enabler CommerceBlock, said: "The old guard are being cut out by ICOs which means the banks, VCs and lawyers are losing billions. No wonder they're upset.
"It's wrong to ban them because an ICO is just a way of crowdfunding investment for technology firms who choose to do it in cryptocurrency because that is their field.
"In the old days - up to a year ago - you would go to a VC and they would decide whether to invest in your company and you would have to follow their rules. ICOs make it easier for companies to raise funds from more sources and free themselves from the straitjacket of VC interference.
"Are there scams? Of course. But there are scams in every financial system from penny stocks to fraudulent gambling sites.
"It's too easy for critics to point the finger of blame at the technology and not the criminals who exploit every loophole in every kind of commercial environment.
"Investors take a risk by buying into ICOs just as they do buying equities, even though they are not securities. But they are offered far greater transparency. There is more they can vet with ICOs because you can look at the source code of the firm you are funding. You can download the product and play with it. In the stock market all you get is a brochure.
"This is why it's more transparent and that's why VCs hate it. The VC model is all about the 1%. Only a multi-millionaire could invest in Facebook in 2009. With the ICO model, if you and I spot the next Facebook we can get in on it."
Bitcoin just hit the $5,000 mark, and the growth of blockchain is taking various sectors by storm, in particular that of currencies. In this article, Fraedom CIO Simon Raymer identifies five important points to consider when discussing the use of cryptocurrencies.
1 - Gaining a greater understanding
There remain many challenges ahead for the established financial services businesses before they can start to successfully embrace these new technologies, in general there remains today a low level of understanding of the impact, both perceived and real, of new cryptocurrencies.
Most discussions around cryptocurrencies are directed or based on the perception of bitcoin. There is generally a great deal of misunderstanding about bitcoin and blockchain, especially in the media where they are both hot topics.
However, many established financial services organisations have a mixed understanding of the impact both blockchain and cryptocurrencies can and will have on their businesses. The way decentralised transaction mediums and P2P are likely to reshape the way businesses interact with financial services (such as loans, or cross-border financial exchanges) is something of a grey area, as is how it will affect the way businesses pay or receive payment for their goods or services.
Other challenges businesses face in embracing cryptocurrencies include creating expensive innovation centres within existing teams. Moreover, gaining senior support to provide budgetary allowances to obtain subject experts who understand these technologies to educate and champion them within the organisation is a difficult task, as is supporting the technical entrepreneurs to use these technologies to find the right business opportunities to challenge the market with.
2 - The blockchain infrastructure
A Direct transactional P2P model does not typically use blockchain today, but with faster and more cost-effective processing as a by-product, it’s only a matter of time before its use becomes widespread.
That, in turn, will help drive further growth in already burgeoning cryptocurrencies, like bitcoin, ethereum and ripple. Almost every one of these new secure payment mechanisms uses blockchain as its underlying infrastructure, with its success in doing so raising prospects for the cryptocurrencies also.
3 - The chance to innovate
Established businesses who embrace blockchain and/or cryptocurrencies have great opportunities to drive innovation themselves in these areas. They have the chance not only to deliver both existing and new services to the market using new technology but also to bring their own established trusted brands to the table.
While a lot of consumers and businesses are willing to take a risk with a small start-up, many are hesitant to either try or commit at a large scale without the backing of a trusted established brand, and the sense of control, security and maturity that comes with that. This encapsulates the opportunity that established financial services businesses are likely to have by embracing these new technologies – but they must not delay too long. The success achieved already by P2P and cryptocurrencies, together with the growing number of start-ups using traditional financial services, acts as a warning shot to any established financial services business that they cannot ignore these new technologies and start-ups.
4 - The peer-to-peer boom
The use of peer-to-peer (P2P) transactions that bypass the banking channel is gathering pace. We see this especially in developing nations like India, where traditional banking and financial services are not as well established, and consumers and businesses are jumping directly to P2P transactions providers.
The saturation of smartphone devices has also driven growth and this usage is likely to grow further as apps become more widely accepted across the P2P delivery platform. Currently, the strongest growth of P2P is taking place in the B2C space but many new start-ups are embracing the P2P concept and trials are taking place using blockchain and P2P-based approaches
It’s true that the direct transactional P2P model does not typically use blockchain today, but with faster and more cost-effective processing as a by-product, it’s a matter of time before its use becomes widespread.
5 - Welcoming third party expertise
Third party technology providers with knowledge and understanding of how new technologies, not just limited to blockchain and cryptocurrencies, can best be taken advantage of to challenge and disrupt the market in the right way.
Traditional financial services providers need to tap into the experience and expertise of their peer group, the key providers in the marketplace. In addition, they need to tap into those in the industry who can help them to navigate these new technologies successfully, quickly and with less cost, than if they try to do it alone.
