An Introduction To Cryptocurrencies

Over the coming weeks, for one of our clients - Origin Markets - we’re going to be exploring the world of cryptocurrencies.

We’ll be investigating their inception, the current state of the burgeoning market, and the future possibilities and ramifications for the capital markets.

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An Introduction To Cryptocurrencies

At every turn in the financial and technology press right now, you find stories about cryptocurrencies. Many people are confounded by what the real-world implications of this revolutionary technology will be. As with any revolution, so much that we hear is nothing more than hot air.

But cryptocurrencies – and blockchain technology, upon which cryptocurrencies are built – are different. This revolution will fundamentally change the way we live, work and trade. It’s a matter of ‘when’, not ‘if’. So it makes sense to get to grips with cryptocurrencies and their significance.

We’re going to start at the beginning and look at the origins of cryptocurrencies, focusing on Bitcoin, the founding currency upon which this revolution is built.

What is a ‘cryptocurrency’?

The word ‘crypto’ comes from the Greek word meaning ‘hidden’; ‘crypt’ translates as ‘hiding place’. And therein lies the origins of cryptocurrencies, which are a form of private, hidden and secure money.

The unique level of security offered by cryptocurrencies is based on the underlying technology. Long, unique blocks of code protect every aspect of the cryptocurrency. Each coin, transaction and person involved is given a code. Cryptocurrencies involve layers of encryption, built one upon another, which makes them anonymous, secure and unique. Every layer is stored infinitely on a distributed master ledger, the blockchain, and every cryptocurrency holder has a key that authenticates their identity, allowing them to buy and sell.

So, cryptocurrencies are highly secure electronic currencies that run on blockchain technology.

The origins of cryptocurrencies

Despite the origins of the technology dating back to the 1980s, cryptocurrencies as we know them are a relatively new development.

Bitcoin dates back only to 2008 when Satoshi Nakamoto (whose identity remains unknown) unveiled a white paper outlining its first principles, combining decentralized control, user anonymity and record keeping on the blockchain.

In 2009, Satoshi released Bitcoin, and a small group of enthusiasts began exchanging the currency. From this point, alternative cryptocurrencies and exchanges appeared, and a few merchants began to accept digital currencies.

What is Bitcoin?

Bitcoin is the oldest and, by far, the largest cryptocurrency. It uses a decentralised system of peer-to-peer technology to facilitate origination and transactions. The Bitcoin network involves ‘miners’, motivated by financial rewards, who release bitcoins into circulation, up to a total of 21 million bitcoins.

As more bitcoins are created, the difficulty of the mining process – the amount of computing power involved – increases. In 2009, the mining difficulty was 1.0. In April 2017, the mining difficulty is over 4.24 billion. It’s estimated that the daily electricity spent by miners globally is well over $1 million.

Market capitalisation for all bitcoin in circulation today exceeds $40 billion.

Adoption of bitcoin

For the first few years, bitcoin’s usage was confined to transactions between enthusiasts, as well as being used by the Dark Web and web-based black markets.

But over recent years, we’ve seen a sea change. Bitcoin is rapidly entering the mainstream, with adoption by established companies. The likes of Goldman Sachs and Fidelity have begun investing in personnel and platforms that trade and provide technology for bitcoin and other cryptocurrencies.

Adoption is at a tipping point – Bitcoin is set to hit Wall Street and Main Street.

The rise of Alt-coins

A problem that has hindered the mass adoption of Bitcoin has been concerns around the scalability of Satoshi’s original vision. The growing user base has meant an ever-increasing number of transactions and the Bitcoin network is unable to process transactions fast enough. Hence, Bitcoin is at a crossroads.

Given these concerns, alternative electronic currencies – many of which are simply bitcoin copies, some of which are genuinely progressive – have appeared. We’ll explore these developments next week. 

The future

Awareness and adoption of cryptocurrencies over recent years has been phenomenal. Developments in the wider market continue at great pace, too. There’s now a bitcoin derivatives market. Barclays is talking to regulators about bringing cryptocurrencies “into play”. Even the IMF is encouraging banks to invest.

As with any new technology, there are concerns. Some proclaim the rise of cryptocurrencies as spelling the end of capitalism. But, as with any paradigm-shifting innovation, phase one of adoption involves passionate enthusiasts and doubters in equal measure, which gives rise to an inevitable level of scepticism and uncertainty.

What we do know is that the development of cryptocurrencies won’t be linear, but they are here to stay and their impact will be significant for the capital markets and the world at large.

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This article was created in association with Origin Markets, directly connecting dealers and issuers in the primary marketplace for the first time. 

Edward Playfair