What most people love about cryptocurrencies is that they represent a radical new vision of the global economy. Rather than stodgy institutions dictating the fiscal trajectory of a particular nation, the virtual currency market provides a viable alternative. However, what most people arguably can do without is the overwhelming “nerd talk” that permeates this investment sector.
If you want to know the basic nuts and bolts of cryptocurrencies in human language, and more importantly, why you should care as we march toward the second half of 2020, you’ve come to the right place.
At the heart of all cryptocurrencies is the blockchain. As the name suggests, this is quite literally a series of data blocks chained together. Technically, crypto proponents will refer to this concept as a decentralized, distributed public ledger.
In a traditional business environment, ledgers may contain all kinds of information. But the process of inputting this information is private (say, a corporation’s financial ledger) and centralized (only authorized managers can input information).
But what if data could be inputted in a fair, transparent manner that is open to all and yet has the security protocol of the wealthiest institutions? With the blockchain, anyone can participate in the data inputting process, called “mining.” For their troubles, miners receive cryptocurrencies, or blockchain reward tokens.
Later, the free market comes in and determines the valuation of these tokens. Nine popular examples of which I’ll discuss in greater detail are below:
- Bitcoin (CCC:BTC)
- Ether (CCC:ETH)
- XRP (CCC:XRP)
- Litecoin (CCC:LTC)
- Bitcoin Cash (CCC:BCH)
- EOS (CCC:EOS)
- Lumens (CCC:XLM)
- 0x (CCC:ZRW)
- Dai (CCC:DAI)
By no means is this a comprehensive discussion. So long as demand for blockchain technologies sustains, the amount of innovations possible is perhaps limitless.
Cryptocurrencies: Bitcoin (BTC)
No breakdown of cryptocurrencies is complete without mentioning bitcoin first and foremost. As the pioneer that launched both the concept and the product to market, bitcoin is synonymous with virtual currencies. In recent years, demand for this token has proven resilient and can occasionally rise to absurd levels.
As a proponent of cryptocurrencies, I anticipate another big leg up. However, the idea of bitcoin is just as important to understand. By providing a decentralized currency alternative, bitcoin is a rejection of the traditional fiat currency system.
We just saw this play out with the Federal Reserve. Even before the pandemic, the Fed adopted a dovish monetary policy, sending benchmark interest rates lower. Naturally, this had the effect of incentivizing risk-on assets as you wouldn’t get growth through low yields.
But such actions aren’t holistically beneficial. Primarily, artificially lowering yields hurts savers. And if these folks had their say, they probably wouldn’t agree with the Fed’s policy.
Now, in the real world, there’s not much room for complaint. But with the blockchain, people can vote through public consensus, either by mining for cryptocurrencies or otherwise participating in that blockchain’s network, such as buying and selling goods through the target virtual currency.
Naturally, regular people love that measure of control and transparency. World governments? Not so much.
As the second largest virtual currency in terms of market capitalization, ether, which is the digital token of the Ethereum blockchain, is one of the most compelling investments in this space. Particularly, Ethereum’s open-source platform and complex architecture facilitate multiple applications that extend well beyond financial transactions.
To understand what makes Ethereum tick, you have to know how it’s different from Bitcoin. Though the latter pioneered this exciting space, the original blockchain conspicuously has limitations. Principally, Bitcoin’s architecture is written in a Turing Incomplete language. Without getting overly complicated, Bitcoin has a very limited purpose; basically, it records financial transactions.
Essentially, Bitcoin was an experiment to prove that cryptocurrencies could work. On the other hand, Ethereum took this concept to the next level by extending the logic: What if we could use the blockchain for other purposes, such as multi-tiered contracts?
To enable the complexities involved in expanding the blockchain’s reach, Ethereum’s developers built its architecture in a Turing Complete language. Theoretically, Ethereum can accommodate and secure any contractual relationship. And the completion of the terms of the contract can involve the exchange of ether as opposed to a fiat currency.
Of course, you can just buy ether for its potentially outrageous free market value. But just know that the fundamentals of Ethereum have deep-seated implications for next-generation globalized societies.
If you browse through forums focusing on cryptocurrencies, you’ll undoubtedly come across heated arguments about XRP. This is the digital token associated with the Ripple blockchain. Over the years, Ripple has made huge waves for its potential to overturn the global payments paradigm.
Currently, if you want to send money to another part of the world, it’s a laborious, slow and expensive procedure. For one thing, you can’t just send money directly to the receiver. Well, you can, but that would typically involve sending money through the post mail, which is a bad idea. But sending money through the traditional financial system can be onerous due to the fees involved.
That’s where Ripple comes in. Utilizing the power of the blockchain, Ripple can facilitate transactions anywhere at lightning speed. Furthermore, the costs of sending money is much, much lower than via traditional means. That also applies to smaller value transactions, which can otherwise be eaten up with fees.
However, the one knock on Ripple is that its XRP token is not mineable. Therefore, the Ripple blockchain is a decentralized, distributed ledger that is not influenced by public consensus. To many, that does away with the whole point of cryptocurrencies.
Still, I like XRP because Ripple has gained the support of mainstream institutions. In my view, the more, the merrier.
Although ether is now firmly slotted in second place, litecoin was the original alternative cryptocurrency, or altcoin. As the name implies, it’s a lighter, quicker version of bitcoin. While that wasn’t so important when cryptocurrencies first became a thing, as mainstream societies gradually accept the blockchain concept, practicality takes on greater relevance.
Like I mentioned earlier, the bitcoin blockchain was an experiment of sorts. It proposed a new way of thinking about financial transactions. In turn, the bitcoin reward token was established, allowing people to transact it as a currency alternative.
But as more people dived into the sector, crypto proponents quickly realized the limitations of the bitcoin architecture. Namely, as more people joined the network, transactions became slower and more expensive. Perhaps you wouldn’t mind this so much if you’re moving large denominations. But if you want to buy a loaf of bread, you don’t necessarily want to sit around for an hour.
Thus, litecoin addressed a growing problem of people who not only used cryptocurrencies as a store of value but also as a means of distributing it. As a peer-to-peer focused system that specializes in instant, near-zero payments, litecoin is one of the workhorses of the blockchain.
Bitcoin Cash (BCH)
Bitcoin cash came to existence due to a hard fork of the bitcoin blockchain. To summarize this in normal terms, I would think of bitcoin cash as a spinoff. It has some of the characteristics of the original virtual currency. However, it also carries some improvements that arguably make this a superior platform.
But as with anything, some spinoffs work and some don’t. On one hand, you’ll find plenty of folks that consider bitcoin cash to be Frasier to the original token’s Cheers. On the other hand, many bitcoin loyalists consider the hard-forked version to be Joey, the ill-fated spinoff to Friends.
Loyalists may argue that hard-forking the bitcoin blockchain — especially doing so multiple times — impedes its “brand.” In terms of credibility and evangelism toward mainstream society, I can understand that point.
However, in many ways, bitcoin has failed to live up to its original purpose — act as a currency alternative. Because of massive demand and limited architecture, it more serves as a benchmark and a store of value.
With bitcoin cash, you can legitimately use these tokens as transactional vehicles. Over time, this should have significant implications, especially toward the broader push toward cashless societies.
When the concept of cryptocurrencies first launched, early adopters recognized the revolutionary nature of the platform. However, as the idea gained steam, programmers and developers wanted to expand the blockchain technology’s potential. For some, that might include the concept of “smart” contracts, which is Ethereum’s specialty. In other cases, a development team may want to create a new virtual currency that aligns with a specific agenda.
In theory, most blockchain architectures feature open-source capabilities. But early systems were often difficult to use from both the developers’ and users’ perspective. Moreover, they were difficult to scale to accommodate a larger user base. Finally, steep fees often made blockchain-based projects pointless.
In response, developers came up with the EOSIO blockchain to address the limitations of early blockchain systems. Mainly, the platform is much easier to use, with programmers able to create custom-made systems quickly. As well, the ability to scale has become crucial as interest continues to rise for cryptocurrencies.
EOS is the digital token and platform that’s built off the EOSIO blockchain. Although one of the more speculative cryptocurrencies, it currently ranks in ninth place in terms of market capitalization.
Moving forward, we could see substantial interest in EOS, not only for its low price point but also the underlying blockchain’s user-friendly interface.
Stellar Lumens (XLM)
One of the exciting concepts of emerging blockchain projects such as Stellar is that they seek to solve problems. With Stellar, developers hope to transform the notion of globalized currency exchanges and transactions.
Primarily, the biggest impediment to a truly globalized marketplace is the use of multiple currencies. Obviously, currencies are different from country to country, with unit bases not aligning with each other. As well, some currencies are more stable than others.
Even digital payment platforms, such as Square (NYSE:SQ) or PayPal (NASDAQ:PYPL), run into problems because they don’t necessarily talk to each other. This makes payment transfers slow and cumbersome. Plus, some people may prefer one platform over another, causing system communication issues.
Therefore, the idea of Stellar lumens sprouted to unite various currencies and platforms under a single umbrella. Usually, mistrust prevents countries and major institutions from operating under a unified channel. However, with the immutable, transparent and decentralized blockchain, the trust issue is significantly mitigated.
Furthermore, with lumens, transactions can occur anywhere at the speed of the internet. This has very positive implications for both cashless societies as well as unbanked and underbanked communities.
On paper, 0x is an open-source infrastructure that enables frictionless peer-to-peer exchange of tokens. But what does this actually mean?
To understand the principle behind 0x, you must appreciate the concept of tokenization. Essentially, you can think of tokenization as digitalization, as in making a digital copy of a physical document. But tokenization goes a step further, bringing documents and other intangible assets under the protection and security of the blockchain.
Basically, almost anything can be tokenized — the title to your car, stocks in a publicly traded company or even money. The benefit of tokenization is that the target object does not require a third-party intermediary to protect its ownership integrity.
For instance, if you tokenize the title to your house, you don’t have to worry about that title being stolen or fraudulently manipulated. The blockchain keeps a perfect, immutable record that you own the title to your home.
Thus, the 0x project assumes that in the future, all of our contracts and titles to ownership will be tokenized. And in this paradigm, 0x could be the cryptocurrency that drives out intermediaries, such as attorneys and escrow agents.
Of course, this is a lofty goal so you shouldn’t jump into 0x with the assumption of riches. Still, it’s an intriguing concept to gamble on with “dumb” money.
Phonetically, Dai has an unfortunate name. However, it’s a very interesting concept that will likely grow in importance over the next several years.
Dai represents a new asset class called stablecoins. These cryptocurrencies are backed by a reserve asset and are pegged to a specific benchmark, in this case, the U.S. dollar. Basically, stablecoins offer the best of both worlds — the convenience and lightning-quick transactions of cryptocurrencies and the stability of traditional fiat currencies.
Although I wouldn’t necessarily recommend investing in Dai or other stablecoins, they offer a tactical advantage for crypto traders. As you know, cryptocurrencies can be very wild. Therefore, to actualize your profits, you need to sell your digital holdings for dollars (or other fiat currency).
But doing so would put you in the “system,” so to speak. For some folks, an easier way to trade cryptocurrencies is to secure your profits in Dai. Later, when you’re ready to cash out, you can exchange Dai for dollars.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he is long all the cryptocurrencies mentioned in this article except EOS and Dai.