An Overview

What is cryptocurrency? This is an important question to address because it is a digital technology that is quietly transforming our financial landscape in a very big way. Yet many people, even those who consider themselves to be digitally savvy, have only a tenuous grasp on the topic and likely associate it with its more dubious applications, such as its role in darknet marketplaces like Silk Road. However, cryptocurrencies and their underlying blockchain technology are rapidly forging their way into the mainstream, and many experts are predicting that the scale of their collective disruption could rival or exceed that of the Internet in the very near future.

In short, the term “cryptocurrency” refers to any decentralized digital asset that uses cryptography as a means of securing transactions that are completely independent of central banking systems. This is all made possible by blockchain, a distributed database system that acts as a self-regulating public ledger for all transactions. Blockchain was made famous by “Satoshi Nakamoto,” a pseudonym for the still-unknown creator of Bitcoin who launched the world’s first cryptocurrency in 2009. The industry has since ballooned at a rapid pace, and while bitcoin is still the most recognized and most valuable cryptocurrency on the market today ($2,228 per bitcoin as of today), a variety of other cryptocurrencies have since emerged that include Litecoin, Dogecoin, Ethereum, Ethereum Classic, Zcash and many more.

However, the proliferation of this technology has yet to translate into sustained stability, and that has many critics questioning crypto’s long-term viability. While it is still the very early days to be sure, it is important to note that trading in this field is an exceedingly volatile proposition, the general rule of thumb being that investors should not acquire any assets that they cannot afford to lose. A quintessential example of the inherent “flash crash” cycles that investors are regularly subjected to occurred last month when it was reported that Vitalik Buterin, the founder of Ethereum, had been killed in a car crash. The story was a hoax, but the impact was anything but. The fake headline resulted in a massive devaluation that ultimately wiped out around $4 billion from the currency’s market value.

Still, despite the unpredictable nature of this market, the creation of new currencies is on the rise and has given way to a new transaction type called the “ICO” (initial coin offering), which is being used as a fundraising tool for businesses in a way that is vaguely similar to an IPO, but instead issues existing or soon-to-be-launching cryptocurrencies as “digital coupons” to help fund the enterprise. The primary benefit of ICOs from the consumer perspective is that the investment is highly liquid and can be traded at will, but the caveat is that they do not provide any ownership rights in the company. Because this is such a new concept, there is currently no regulation in the space. However, this week the Securities and Exchange Commission released an investigative report with important implications for issuers and sponsors of ICOs that raise funds for cryptocurrency ventures. (This recent development is discussed in more detail in the article below.)

Most ICOs are marketed as “software presale tokens” and use language that helps further insulate them from any legal requirements. This lack of oversight has been seen as both a blessing and a curse. The absence of regulation has helped encourage innovation, but at the same time it exacerbates the potential for fraudulent activity. Yet, all things considered, this has not abated interest in the ICO realm. While the ever-changing value of cryptocurrencies makes it difficult to determine a definitive value for the total amount raised by ICOs this year, it is estimated to be more than $700 million. If correct, this would put ICOs well ahead of traditional VC funding in the blockchain space, lending further credence to the notion of blockchain’s role in democratizing the global financial system.