Crypto 101: what are cryptocurrencies and ICOs?

Here’s an overview on the basics of cryptocurrencies and Initial Coin Offerings (ICOs).

One of – if not the – hottest finance topics in 2017 was cryptocurrencies. Bitcoin (BTC), Litecoin (LTC), and Ether (ETH) were some of the top contenders for our attention, and crypto ambassadors see these digital currencies as a pathway to a truly borderless financial system. When you consider the skyrocketing values many cryptocurrencies have seen over the past year, it’s no surprise that some believe they’re just getting started.

Yet despite their surge in popularity (and price), cryptocurrencies are still very much a mystery to many of us. With that in mind, let’s explore the principles of cryptocurrencies and Initial Coin Offerings (ICOs).

What is a cryptocurrency?

Cryptocurrencies, like Bitcoin or Ether, are similar to the currencies we’re familiar with, like CAD, USD or the Euro, except they don’t have any physical cash, and they’re decentralized, meaning they don’t have a regulating body like the Bank of Canada or America’s Federal Reserve. Another differentiating factor is that when a cryptocurrency is developed, there are a finite amount of coins that will be made available.

Like traditional currencies, cryptocurrencies can be used to buy goods and services, as well as exchanged for other cryptocurrencies, or for cash like CAD, USD, or the Euro.

Wondering how cryptocurrencies are tracked and monitored if there’s no central bank or physical cash? The answer lies in blockchain technology.

Blockchain technology is an open distributed ledger, where all transactions are constantly updated and maintained, where anybody holding that cryptocurrency has access to review those transactions. For example, if you send 1 BTC to Adam in exchange for a couch, that exchange of bitcoin would be recorded in the ledger.

This technology creates a transparent, secure environment, which is in theory, unhackable. Because every transaction is openly recorded (the people involved aren’t named, only the transactions), every crypto-coin is accounted for at all times, so there’s a tracked record of each coin from beginning to end.

By having an open ledger, it also removes the need for a third-party to act as the middle man. Instead, parties can transact directly with each other.

What’s an Initial Coin Offering (ICO)?

An ICO is the introduction of a new cryptocurrency, which are individually referred to as coins, hence initial coin offering.

Entities or individuals can launch an ICO as a way to raise capital for a business, technology development or project. Coins are sold in exchange for cryptocurrencies like Bitcoin or Ether or a fiat currency (e.g. CAD). Investors may consider some ICOs just like other investments where they hope the value of the coins appreciate over time. However, unlike shares or stock in a company, ICOs do not represent equity ownership in the business and furthermore, do not afford investors traditional shareholder rights.

Let’s look at an example. Imagine there’s a company called LiveVideo. They want to raise money to develop a new virtual reality (VR) video streaming service, so they develop a cryptocurrency, which we’ll call VidCoin, to sell to early adopters. Those who buy the currency would have access to LiveVideo’s new VR technology, and the value of VidCoin could increase based on the success of LiveVideo’s technology.

Will cryptocurrencies replace cash as we know it?

Honestly, nobody knows. Crypto-supporters think they’re the way of the future, where the power of currency isn’t tied to a government or national economy. On the other hand, many think it’s a bubble destined to burst at any moment. There’s really no way to know with any certainty how cryptocurrencies will end up in the future. The concept of cryptocurrencies and ICOs are still in its infancy so it’s important for those looking to participate to proceed with caution.

Want to learn more about new financial technologies and trends? Check out our latest articles on fintech, millennials’ investing habits, and financial overconfidence.

Sources:

Custodio, Nik “Explain Bitcoin Like I’m Five” https://medium.freecodecamp.org/explain-bitcoin-like-im-five-73b4257ac833

Rosic, Ameer “What is BlockchainTechnology? A Step-by-Step Guide for Beginners” https://blockgeeks.com/guides/what-is-blockchain-technology/