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Cannon Financial Institute

Three Bitcoins in a Fountain: Cryptocurrencies

In the brave new world of internet anarchy, we inhabit, crypto-currencies are all the rage. What exactly is a cryptocurrency? It’s “a digital currency secured through cryptography or codes that can’t be read without a key.” 1  This is the definition used by the U.S. Financial Industry Regulatory Authority (FINRA). Bitcoin, which has been around for nine years, is the most well-known.

How many cryptocurrencies exist besides Bitcoin? A staggering number. As of May 2017, according to FINRA, more than a thousand cryptocurrencies existed. 2  Initial Coin Offerings (ICO) —as they are called— for new cryptocurrencies continue at a blistering pace. According to the New York Times, approximately 270 separate crypto-cash start-ups sought funds via ICOs in 2017. These offerings raised three billion dollars (US$).

Partisans of cryptocurrencies posit the following reasons to use them:

  1. Startup companies can issue cryptocurrencies to raise capital far more easily through Initial Coin Offerings than the traditional method of issuing stock through initial public offerings. “Companies like ICOs because they are quick, easy, and free from regulatory red tape,” reports the BBC.3
  2. Global peer to peer financial transactions without paying a fee to a middleman such as a bank. (However, people on different sides of Bitcoin transactions are charging fees, so this isn’t true across the board).
  3. For various reasons, transactions can now take up to take 4 ½ hours to clear, and the cost per transaction can be as high as $26.00. This is much different than the original value proposition when Bitcoin first came to market when its transactions cost a few cents, and execution was instantaneous.4
  4. Anonymity
  5. Unique encryption (hence the term ‘cryptocurrency’) of each transaction through a platform known as “blockchain.”  This is actually the key feature of Bitcoin since as of this writing, Bitcoin has never been hacked.5
  6. Says FINRA, “Without blockchain technology, there would be no Bitcoin. Many would argue, in fact, that when it comes to the world of finance, blockchain technology is more important and disruptive than Bitcoin.” (We will report on this in a separate article.)
  7. “…the underlying technology of Bitcoin is regarded by some major financial institutions as bullet-proof.”6 As you might imagine, if this is actually the case, then a platform which cannot be hacked would have vast implications worldwide.
  8. Bitcoin is a global currency not controlled by any central bank or government which makes it attractive to individuals who don’t trust their own government to manage their national currency.7
  9. “It’s an algorithmic money supply rule, which is much different than a fiat currency, where it’s up to the central bank to determine how much to print,” said cryptocurrency expert, Campbell R. Harvey, a finance professor at Duke University.8
  10. While Bitcoin is being accepted by more and more businesses, the cryptocurrency received a major boost in credibility in 2017 when both the CBOE and the Chicago Mercantile Exchanges, two of the most important global commodity exchanges, allowed investors to trade futures contracts on Bitcoin.9 This is a huge step in legitimizing cryptocurrencies in the world of international finance as well as providing needed liquidity to the Bitcoin market.

 

Will Bitcoin and other cryptocurrencies become a permanent part of the financial world or will they collapse as the tech bubble did in the 1990s? No one knows so stayed tuned.

 

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Resources:

1 http://www.finra.org/investors/bitcoin-basics-9-things-you-should-know-about-digital-currency

2 http://www.finra.org/investors/bitcoin-basics-9-things-you-should-know-about-digital-currency

3 http://www.bbc.com/news/business-40704306

4 https://www.ccn.com/bitcoin-com-co-founder-switches-bitcoin-cash-says-transaction-issues-doom-bitcoin/

5 https://www.nytimes.com/2018/01/16/magazine/beyond-the-bitcoin-

6 http://www.bbc.com/news/business-42150512

7 http://www.finra.org/investors/bitcoin-basics-9-things-you-should-know-about-digital-currency

8 http://www.finra.org/investors/bitcoin-basics-9-things-you-should-know-about-digital-currency

9 http://www.bbc.com/news/business-42915437

Contributing Writer: Subject Matter Expert Charles McCain