Morning everyone! We hope you had a great break from financial markets and from us :) Now, let's start this year with x3 performance! Today HNFC are participating in the most popular topic of the year 2017 "Cryptocurrencies and of course Bitcoin".
Wanna know more? Jump in....
The words “Bitcoin”, “blockchains” and “cryptocurrency” seemed to be in every mouth in the last few months. HNFC breaks down for you this recent phenomenon and gives you its insight on what’s coming next.
Blockchains and the genesis of cryptocurrencies
A cryptocurrency is a virtual currency that uses cryptography for security, its attractiveness resides in the fact that it is not issued by any central authority and is therefore immune to any government interference or manipulation. Various cryptocurrencies are in circulation (Ripple, Litecoin, Ethereum, Monero…) but Bitcoin is the mother of them all, at such a point that its name is often used as a generic term. The purpose of cryptocurrencies is to be sent directly from one party to another without going through a financial institution and therefore avoid the fees involved. In 2009, the mysterious creator of Bitcoin published a paper under the pseudonym Satoshi Nakamoto, describing it has “A Peer-to-Peer Electronic Cash System”.
Considering their non-organic feature, the biggest issue with digital currency is the risk of double-spending by users. Usually, it is the role of the third party to make sure that there is no such trouble during a transaction, but with the absence of any financial institution the biggest challenge for cryptocurrencies is to avoid double-spending. For that purpose, Satoshi Nakamoto introduced in 2009 – still in the same paper – the Blockchain, a digitized and decentralized public ledger of all cryptocurrency transactions. Every transaction is registered as a “block” and added to the chain in a chronological order, allowing every participant to keep track without any central recordkeeping. Every block contains a hash of the previous one and information about the different users involved in the transaction (digital addresses and balance-right from the first block to the most recent one).
Each time a block is mined, it goes to the chain as a permanent and encrypted database and a new block is immediately generated. In order to modify the chain without anybody noticing it, a hacker has to adjust every block coming after the altered one. Thus, as the chain grows, the number of blocks involved increases and the complexity of the ledger makes it harder to crack. Today, we’ve reached a point where there are countless numbers of blocks and the blockchain can’t be approached without high-performing computers.
The second concern often raised by people around such a public ledger is about privacy. In a Blockchain, every participant owns a private key and a public key under the form of large series of letters and numbers. The first one is used by owners as a signature to complete transactions and is also the key to their Bitcoin wallet, the second is used as an address, to link participants to all their transactions without giving any personal information about them.
Chart 1: Scheme of the Blockchain pattern
Why is everybody talking about Bitcoin so suddenly?
Although it exists since 2009, Bitcoin has known a peak of popularity in the last twelve months, being referred as “The Next Big Thing”. On the 3rd of March, for the first time ever, Bitcoin surpassed gold on the stock exchange. This was partly attributed to a strong demand coming from China, after the country placed restrictions on Gold imports.
Since then, the value of bitcoins kept going up, reaching an all-time high of 19,343.04$ on Saturday 16th of December meaning an increase of more than 1,900% during the year of 2017 only (997.69$ on the 1st of January). By overtaking the 12,000$ mark – on the 5th of December – Bitcoin became the world’s sixth most valuable currency circulating, only eight years after its creation. Largely exceeding what economists predicted, Bitcoin is expected to keep up this growing trend and could now be on track to reach the 25,000$ mark in the next 5 years to come.
Despite a huge increase this year, the growth of Bitcoin started more than 4 years ago. Until 2013, the cryptocurrency was mostly known for being the host of all sort of underground markets and illegal transactions, keeping investors away from it. But then, a few praises coming from Washington senators describing cryptocurrencies as “legitimate financial services” rose the curiosity of Venture Capitals, making investments going from barely nothing up to almost $600M in three years. Today, Bitcoin’s capitalization is registered around $286bn.
In the meantime, another cryptocurrency has known an exponential growth, even bigger than Bitcoin. Ripple registered a market growth of 70,000% in the year 2017 only, its value going from less than 1cent to around $4. With a $120bn capitalization, it is the second biggest cryptocurrency, followed by Ethereum ($100bn) and Cardano ($26bn), but it is a nonsense to compare it to Bitcoin as a competitor. Ripple’s success has come from an announced partnership with a group of Asian financial institutions. It is not a cryptocurrency like Bitcoin, it is not widely distributed but only used by banks and financial institutions as a currency compensator. For example, rather than converting directly an amount from EUR to USD, the bank converts it in XRP and then converts it from XRP to USD, avoiding the need of a third part and the fees related to it. It is a private network and the only way to enter it is to accept the chart written by Ripple Lab. “It’s a cryptocurrency which is serving the banking system, if you are looking for a decentralized network to avoid the banking system, it is not for you. Ripple is not an alternative to Bitcoin, it is not searching for disruption but for optimization of what is already existing.” explains Alexandre Stachtchenko, co-founder of the start-up Blockchain Partner and President of the Chaintech association.
What future do we expect, should we invest in it?
When Bitcoin first registered a market value of $2Bn a while ago, it fell nearly by 50% shortly after. And despite a huge increase in the year 2017, it is now facing a concerning decrease. Legitimately, this phenomenon raised a lot of concern around the volatility of Bitcoin and cryptocurrencies in general. The lack of regulation around Bitcoin – which is also the upside of it – is the source of these fluctuations, considering that there is no central authority to back its value. Bitcoins are created through a “mining” process made by specialized companies with powerful computers and algorithms. In opposition to a local currency, Bitcoin has no support mechanism from a form of government and is fully dependent on what investors are willing to put into it. Moreover, users of cryptocurrencies are under the risk of being victims of a hacking or of a computer crash that can take their bitcoins away from them, with no recourses to get them back.
Besides this, the complexity and the heaviness of making a transaction with Bitcoin (up to 10 minutes for a typical transaction) will make it hard to widen it to the public. Litecoin – one of its leading competitors – is supposed to be faster and lighter to use, meaning it is more appropriate for small transactions but also less secure. Furthermore, the main problem is that the recent explosion of Bitcoin and the spread of its reputation could also lead to the fall of cryptocurrencies. The more popular they become, the more likely they are to attract regulations from financial institutions, which would erase the core of their existence itself and the number-one attractiveness for their users. Right now, surveys show that most of Bitcoin owners are buying it only to wait for it to appreciate, and then exchange it for dollars. For most people, Bitcoin is not a currency yet, it is an asset. To take over usual currencies, cryptocurrencies would have to fulfill a large range of criteria. They would have to be encrypted enough to avoid hacking but simple enough to be used by the public, decentralized but providing insurance and security for its users and protect anonymousness without making it the center of underground activities.
Joseph Lubin, CEO of the Blockchain firm ConsenSys, described the cryptocurrency market as a “good bubble”. Saying that such a “profound technology” could only help “strengthen the industry going forward”. On the short term, it seems clear that investing on Bitcoin or Ripple may result to big profits. On the long term it is harder to guess what will happen. Cryptocurrencies cannot replace usual currencies as they are now but might evolve enough to be a credible alternative. The current success and evolution of Bitcoin will likely determine the future of the cryptocurrencies market. As some are skeptical about it, they should know about the story of Campbell Simpson. Mr. Simpson is Australian and bought for $25 of bitcoins in 2010. Unfortunately, convinced that it was worthless, he threw out the hard drive containing his private key a few years later and can only cry now that his inaccessible Bitcoin wallet is worth nearly $15.9M.
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Written by Tim Rouger│ Independent Stock Analyst
Edited and Corrected
by Vee Venski
This article is not a promotion of financial investment. Investing money in financial instruments is risk-reward process. Losses and gains are part of financial investment process. Only invest money you can afford to lose.