How hot is the digital currency craze? So hot that 10 million people are signed up to transact on the digital currency platform Coinbase as of the first week of September, with 800,000 new sign ups just in the last three weeks. The rise in popularity has spawned a boom to find the next Bitcoin: Initial Coin Offerings. (Learn more about what Bitcoin is and if you should buy it.)
Initial coin offerings, or ICOs, are a way for startups to raise funds by issuing a new cryptocurrency in exchange for cash. Via crowd funding, a portion of the startup or business is sold to raise money for operations to supporters that want to invest in a new digital currency. It is somewhat similar to when a startup files an IPO.
Say Hello to ICOs
How hot is ICOs? Hot enough that Paris Hilton has endorsed LydianCoin, which is funding a platform by Miami-based marketing firm Gravity4 that promises “blockchain driven technologies to reduce ad fraud and to maximize the effectiveness of ad marketing expenditures.”
— Paris Hilton (@ParisHilton) September 3, 2017
The surge in ICOs—nearly 400 so far this year vs. just 69 in 2016, according to Visualcapitalist.com—is both the product of Bitcoin’s emergence as a mainstream funding vehicle and a potential threat to its current position as the world’s dominant digital currency.
“To participate in an ICO, the infrastructure built around Bitcoin over the past few years must be used: exchanges, wallets, and other blockchains,” says Nolan Bauerle, Director of Research at CoinDesk, a website dedicated to news about cryptocurrencies. “This has increased Bitcoin transactions, trades, and demand,” helping the currency surge in price from under $1500 at the start of 2017 to a recent high above $4800.
“Bitcoin is the monster in the room,” says Matt Oppenheimer, CEO of Remitly, the largest independent mobile remittance company in the U.S. “The entire digital currency space is still considered a big TBD—but the rapid growth is interesting to watch.”
Still, Bitcoin’s share of the cryptocurrency market has fallen even as its price has soared.
With so many new coin offerings taking place, the crypto market is likely to see the cable-lization of digital currencies—meaning there will be many coin offerings but only a few that stand out in the end. It begs the question of whether multiple coins competing against each is good or bad for future success.
“Bitcoin could have been the dominant cryptocurrency and solved 95% of all use cases, but we’ve seen it stumble in the past few years,” Brian Armstrong, CEO of Coinbase said during an ‘ask me anything’ chat this summer. “What’s essential is that there are competitive forces in a free market providing choice to consumers. This will ensure digital currency succeeds, even if any one coin struggles because it will create a check and balance on any one coin – or developer group behind it—from bad behavior.”
It’s the Technology, Stupid
While Bitcoin and ICOs are receiving plenty of media attention, the real breakthrough is the underlying technology: Blockchain, which holds a record of all transactions using the digital currency. That decentralized technology can secure payments and store money so users can buy merchandise and products anonymously. Those anonymous transactions don’t require a bank, and there are no transactions fees.
As Carl Gunell, CEO of Maximin Management explains, just as the Internet was the first native digital medium for information, Blockchain is the first native digital medium for value. The blockchain facilitates peer-to-peer transactions without a bank to serve as the middleman. If funds can be transferred without involving a bank, the cost of sending money is drastically reduced. All you need to send money is the recipient’s cryptographic address which you can think of like an email address.
To keep the frequency by which Bitcoin blocks are generated to about 10 minutes, the cryptographic puzzle so-called miners need to solve to obtain more Bitcoin continuously increases in difficulty. The means that the transaction speed for Bitcoin is about seven transactions per seconds compared to VISA which handles on average around 2,000 transactions per second. Thus Bitcoin in a high volume environment may not be ideal unless the objective is to lower the transaction cost of receiving payment.
While bitcoin is better as a medium to store value, alternative cryptocurrencies such as Litecoin are better suited for point of sales transactions. It makes you wonder if different cryptocurrencies for various purposes are needed for the market to bear out.
“There are Bitcoin maximalists who think Bitcoin will dominate all coins. But, the market will decide how many coins exist and proliferate,” says Bauerle.
And for the moment at least, the market is saying ‘let a thousand digital currencies bloom.’ Time will tell how many have staying power beyond the current frenzy.