Cryptocurrencies –
The Future Of Money?

Florence Fang
Managing Director and Principal Consultant
Flame Communications Pte Ltd

June 15, 2018

The first cryptocurrency the world ever knew was first described by a software developer named Satoshi Nakamoto in 2010. In the white paper he wrote, titled ‘A Peer-to-Peer Electronic Cash System’, he defined a decentralised distributed ledger that would determine ownership of a virtual coin and record all transactions that ever occurred in serialised blocks of encrypted information.

This elegant concept used distributed cryptography and proof-of-work to validate new transactions. Every transaction or transfer ever made is added to a “ledger” held by every owner of the currency in the network, with each additional transaction forming an additional ‘block’ which is chained to previous blocks.

With blockchain technology, the entire transactional history of the digital currency is available for viewing by every computer on the network– preventing duplication or editing of records, and ensuring robustness and security: the data in any given block cannot be altered without the alteration of all previous blocks and all the blocks that come after it, which requires vast computing power and the collusion of the network majority.

Everyone who owned Bitcoins, and everyone who owns a Bitcoin later, would have and receive the same “ledger” updates. Most importantly, no editing of transaction records would be possible.

This removed the need for a trusted middleman or agency, such as a government or bank, to guarantee the transactions between buyers and sellers of goods and services.

The rise of bitcoin

In essence, this new currency works via a peer-to-peer network in which the participants jointly emulate the central server that controls the correctness of transactions, in particular: it ensures that there is no “double spending”, i.e., a given coin was not spent twice by the same party.

It could in theory overcome any hostile party’s attempts to undermine, change or control its records. What’s more, each peer is incentivised to stay honest because they were allowed to mine and own new coins by taking part in the proof-of-work for new transactions.

Most importantly, the currency is also invulnerable to attempts to manipulate its value by governments, as well as hard to trace.

The first ever recorded bitcoin transaction was made on May 22, 2017, when two Papa John’s pizzas were purchased for 10,000 BTC.

Skip forward to today, and BTC is now accepted for payment at over a hundred companies worldwide. The market cap of bitcoin has surpassed 100 billion USD, with the coin touching an all-time high of $19,783 on December 17th 2017 before dropping back to its present level below $10,000.

However, adoption of Bitcoin as a mode of payment is slowing.

One of the reasons is that as bitcoin began to be traded at higher and higher prices, it was increasingly seen as an store of value instead of a currency. Technological issues too, such as a slow transaction rate per second and rising transaction fees, means it is now more attractive for cryptocurrency punters to hold on for the long-term, than to use bitcoin for what it was actually created to do: pay for things.

Besides, there are now more 1,300 other cryptocurrencies in the market, many of them based on much faster technology and lower transaction fees, which makes them more practical to use and own as virtual currencies.

The rise of new cryptocurrencies

Like bitcoin, these new cryptocurrencies are “independent” currencies whose exchange rates fluctuate freely. They owe their popularity mostly to the fact that they have no central authority, and hence it is infeasible for anyone to take control over the system, “print” the money (to generate inflation), or shut the entire system down.

The majority of them are made available to the public globally via what is called Initial Coin Offerings (ICOs), which is akin to Initial Public Offerings (IPOs) held by corporations. A total of 235 ICOs were launched in 2017, raising a total of 3.7 billion dollars[1].

Virtually everyone who hasn’t been living under a rock has heard of these ICOs and the amount of capital they raised in short amounts of time, which is unprecedented in the history of capitalism.

But experts caution that most cryptocurrencies, including bitcoin, are overvalued, and that the ‘bubble’ for bitcoin itself will burst as it has not fulfilled its purpose as a currency.

Despite this, people are still buying many new cryptocurrencies during ICOs, as they want to cash in on the promise of quick and easy gains. However, many crooks too have jumped into the game, and many companies launching ICOs have inexperienced people at their helms as well.

How to choose a safe ICO

So, before buying into a new ICO however, ask yourself these four questions:

  1. Does the ICO’s white paper inspire you with its vision? Or do you feel like you are afraid to miss out on value creation if you do not take part in it? This is the primary tactic scammers use to manipulate readers.
  2. What is the team’s track record, reputation and trustworthiness?
  3. Does that business or use case really require blockchain? Or is it simply using the word to generate buzz and raise capital?
  4. Is it the onlu company delivering this kind of product? How does this company intend to differentiate itself from the rest in future?

Not all ICOs will make money in the long term. So do your due diligence before committing your hard earned money.