Running with the Crypto bulls: 2017 in review
If you look around you right now in your office environment, there will be that one person; the belated bitcoin expert. They speak of cryptocurrency, bubbles, blockchain technology, mining, altcoins and ICOs, leaving many scratching their head. What is it all about you ask? Thankfully this insight article will break it all down, giving you a basic understanding of cryptocurrency, Bitcoin, what exactly happened in 2017 and what may happen in 2018.
Starting with the basic question, what is a cryptocurrency?
A cryptocurrency is a digital currency that uses cryptography (encryption/decryption) as security. Bitcoin (BTC) was the first cryptocurrency and most-well known to this day, founded in 2009 by the mysterious name of “Satoshi Nakamoto”. The intention of Bitcoin was to create a decentralised digital cash system, in the same way that files are shared on a peer-to-peer network [i].
Bitcoin has a network of peers (users) and each peer will have a record of the history of all transactions and the balance of the accounts on the network. Each transaction will be known immediately by the network but the transaction is only confirmed after a specific amount of time (~10 minutes). This is where the miners come in, as they have the job of confirming/verifying the transactions as legitimate. Essentially the miner will run a computer program to mine groupings of transactions or blocks, with the miner receiving BTC per block solved and in the process creating new Bitcoins. Once confirmed the transaction is part of a permanent record/ledger of historical transactions, known as the blockchain.
Figure 1 [ii]
Each user will have a bitcoin wallet; a program used to send/receive/store/monitor BTC balances by interacting with the blockchain. Each wallet has an associated private key (password), which allows the wallet to send the user’s BTC to others by acting as a digital coordinate. The private key will also generate the bitcoin address, which the user will give out to others they want to send BTC to.
So now that you have a basic grasp on Bitcoin and what a cryptocurrency is, you may wonder why it has been so popular and why are banks not expressing the same enthusiasm as the crypto-community?
With regards to the popularity of Bitcoin, there is not one right answer but I will propose a few:
1. The first reason is that some people like the potential for bitcoin and blockchain technology to change the way money is transferred.
2. The second is that there is a finite amount of bitcoin available, with a current supply of around 16 million and a maximum of 21 million BTC, creating a demand among investors of all levels.
3. Finally, bitcoin was so popular in 2017 because it was in a bull market [iii]; essentially it is popular because of speculation, adding to the existing demand mentioned in point two.
It is the third point that worries investors and why most internationally recognised investors and banks are steering clear of the currency, warning of a “bubble”. No one knows what the “true value” of bitcoin is and the same can be said for other cryptocurrencies. This sentiment among the professional investment community was summed up by the founder of Vanguard Jack Bogle [iv], who told people to avoid bitcoin like the plague, explaining that “bitcoin has no underlying rate of return… you know bonds have an interest coupon, stocks have earnings and dividends, gold has nothing. There is nothing to support bitcoin except the hope that you will sell it to someone for more than you paid for it."
It does have to be pointed out though, that banks do like the blockchain technology and its potential, with support coming from the likes of UBS’s Chairman Axel Weber and JPMorgan CEO Jamie Dimon, despite earlier dismissive comments [v], who said “the blockchain is real. You can have crypto yen and dollars and stuff like that. ICOs you have to look at individually.” [vi]
In 2017, we heard about much more than just Bitcoin and its astronomic rise to fame. There was a wider movement of speculative investment in other alternative coins, or as they are more commonly known “Altcoins”. The term Altcoin was “coined” to describe those cryptocurrencies other than Bitcoin as they had much lower market caps but as 2017 went on some of these Altcoins grew remarkably in their own right. There is no way I could talk about all cryptocurrencies but I will give an insight as to how Bitcoin and some of the “Major Alts” performed over the past year, while also giving some detail on these altcoins.
Bitcoin by any classical measurement had a 2017 to remember. When you look back to January 1st 2017, BTC had a price of $997.69, according to Coindesk’s Bitcoin Price Index [vii]. Fast-forward to 31st December 2017 and the coin could be bought for $13,860; with a nice record high point of $19,343 on December 16th. This is an unprecedented growth of nearly 1300% in a calendar year, giving Bitcoin a market cap of nearly $220bn. To put this into perspective, on the New York Stock Exchange, McDonalds has a market cap of ~$140bn, Pfizer has a market cap of ~$217bn and Wal-Mart has a market cap of $297bn.
Ethereum (ETH) is not a new method of making payments or online banking like Bitcoin, rather it has a business model using blockchain technology to replace internet third parties. Ethereum aims be a centralised “world computer” with volunteers running “nodes” which will replace existing servers and clouds. It uses a cryptocurrency called “Ether” which is used to compensate the nodes for computations performed. At the opening of 2017 Ethereum had a price of $10.63, before closing the year out at a record high of $755.27 (~7,000% growth) and has continued to grow steeply since. Again for perspective, Ethereum currently has a market cap of ~$125bn, putting it in line with companies such as BHP Billiton ($123bn) and SAP ($138bn).
Litecoin (LTC) is popularly described as the “silver” to bitcoin’s “gold”, when it was founded in 2011 by the former Google engineer Charles Lee, as it had a lot of similar principles to bitcoin but with a goal to improve on bitcoin. One of its key improvements was shortening the average 10 minute time to generate a block down to 2.5 minutes, therefore meaning Litecoin can handle a higher volume of transactions. The bigger difference though is that Litecoin uses a different algorithm to mine the coin, called a Scrypt. This essentially is a faster and simpler algorithm [viii], which requires less processing power but it does have a possible future negative. As the blockchain in Litecoin will increase in size more quickly than Bitcoin, this could possibly lead to increased Government oversight at an earlier stage. Also, it is worth noting that Charlie Lee no longer works on the project and now works as technical director for Coinbase. To begin 2017 Litecoin had a price of about $4.33, before closing the year out at a record high of $232.10 (5,260% growth). Litecoin currently has a market cap of ~$13bn. This may seem a lot lower but this is due to the amount of LTC in circulation, with only around 54 million LTC available compared to 96 million ETH.
Ripple (XRP) was co-founded by Chris Larsen and Jed McCaleb in 2012 and touted as a go-to digital currency for the global settlement network, as an alternative to credit cards or the likes of PayPal. The Ripple team never intended it to be a competitor to the likes of bitcoin but rather to complement it by allowing the seamless transfer of any form of currency, including bitcoin. Compared to PayPal it does not collect transaction fees but will rather take a small portion of a ripple from each transaction, which is then destroyed from the available ripple in circulation to avoid market dominance. At the start of 2017, Ripple had a price of about $0.006507, before a major surge brought the price at the end of the year to $2.32 (35,500% growth). Ripple currently has a market cap of ~$82bn, giving Ripple a higher market cap than FedEx and UBS and in line with BlackRock but this is majorly inflated by the nearly 39 billion XRP in circulation and the fact that it is centrally mined, with Ripple Labs themselves owning a majority of the coins; so take it with a pinch of salt.
As 2017 closed, everyone’s crypto-curiosity was at new heights and they now want to make 2018 the year they join in on the bubbling sector. I use the term “bubble” quite liberally here. I don’t personally think all of cryptocurrency is a bubble but I still believe there will be a bursting. Undoubtedly some of the blockchain technologies associated with the currencies have the potential to revolutionise the industry but many do not and are merely riding the crest of a wave. When the bubble bursts, only the strongest currencies and platforms will survive.
Therefore, I will posture some themes and ideas I think could come to the fore in 2018 and which will be worth watching out for.
Many coins currently on the market will fall off the map as they are found to be inapplicable to the real-world, overpriced, irrelevant hype machines or even scams. This was already seen in the past with OneCoin [ix] and BitConnect [x] and will be a continuing theme.
Volatility will markedly increase in 2018 creating larger swings in prices, with more coins released to the market and increased institutional investment; coupled with inexperienced investor panic. This has already been seen in 2018 with Bitcoin.
Government regulatory involvement will become a growing theme. If other countries put the blockers up for investors to trade in cryptocurrency, then look for major corrections in pricing; as seen in South Korea [xi]. On the other hand, if more countries decide to create a digital currency like Sweden has discussed, or ease their stances on current coins then a broader acceptance of cryptocurrency could develop.
Finally, after reading this article you have decided that you want to invest in some cryptocurrency then there are a few points that will be worth taking into consideration in order to get a better understanding of the currency and to mitigate some level of the risk:
Does the currency/platform have a real-world application?
What stage of testing is the currency at?
Who is involved in the team behind it? Do they have experience?
If you consider the rewards of investment outweigh the risk of investment after the three points above and the coin is valued correctly then it is possibly worth buying. Some coins I will be keeping an eye on in 2018 are Stellar (same team as Ripple) and NEO; if China eases its stance on ICOs and coins more broadly.
In the world of cryptocurrency 2018 will be even more intriguing than 2017. I believe 2018 will be the year that makes blockchain but maybe it will have to break some cryptocurrencies along the way.
John joined FinTrU in April 2016 through the Third Financial Services Academy intake, after graduating from Queen’s University Belfast with a BEng (Hons) in Product Design Engineering. John chose to come to FinTrU because of the Academy model, which allowed for someone without a finance or economics background to build a knowledge base if they had the right attitude and aptitude. The FinTrU Financial Services Academy is a bespoke programme, comprising intensive training in financial markets, and financial regulation with a focus on data analysis and management.
Since joining FinTrU, John first worked on a mini data analytics project with a leading Asset-Management firm. Upon completion John went on to work with a Tier 1 Investment Bank, with the UK & Ireland Corporate Broking team; within the Investment Banking Division. As a member of the UK & Ireland Corporate Broking team John would provide market reports for the bank’s corporate clients, whether on a daily, weekly or monthly basis, helping to summarise the performance of the client, its peers and the wider equity markets. John would also support the team on building investor targeting packs, which would help to advise corporate clients on where to source further institutional investment. The work has helped John build a knowledge base in UK equities as well as broader market and macroeconomic events.