One of the starkest differences between the cyberworld of websites, binary code, and clouds, and the physical world of cities, banks and brick-and-mortar stores is how commerce is conducted in those realms; more specifically, the currency that drives that commerce. In the physical world, we trade dollars, Euros, yuan, rubles, etc. but in the cyber world, there is a new player – cryptocurrency. It began with bitcoin, a wildly-successful peer-to-peer currency, but now there are thousands of imitators, called altcoins and tokens.
Crypto tokens have value in that they can be converted to cash or used for a function, but it’s the sale or function that creates the value, not the crypto tokens, per se. As an independent entity, crypto tokens do not have intrinsic value because they are not supported by a government, central bank or precious metal.
The only thing that makes cryptocurrency work, and therefore allows it to possess an implied value, is the assuredness that it will be accepted online for the exchange of goods and services like bitcoin or some of the Privacy Coins, or used to perform a specific function like with VeChain for product authenticity verification. Without the across-the-web acceptance, the currency fails, and there is no safety net to catch it. The variations and potential for cryptocurrency is staggering, the stuff of science fiction fantasy. But the reality in 2020 is still way behind the future potential, while the markets in 2017-18 got way too far ahead.
Cryptocurrency – What it is and What it Isn’t
Crypto tokens and cryptocurrency are not the same thing. As I discuss in another post, Cryptocurrency encompasses all forms of digital currency. Crypto tokens and altcoins, are sub-categories that operate in a different manner. For most purposes, the differences aren’t crucial to the average person, but for investors, the difference is substantial.
Cryptocurrency, of which bitcoin is the star of the show, is a standard currency for making or receiving payments on the blockchain. A blockchain is similar to a bank ledger. It stores the data of who paid whom, how much, in what denomination, and how much is left in the affected accounts.
Altcoins are essentially the same thing as bitcoins and are called altcoins only because they are not bitcoin. Bitcoin is so successful that the name became synonymous with cryptocurrency, much in the way cameras used to be called “Kodaks” and copiers used to be called “Xerox Machines.” But doing so ignores major fundamental differences in what individual cryptocurrencies and tokens are designed to do.
It’s a little different for crypto tokens. They can represent physical assets, be used as a method of escrow in smart contracts, or programmed to perform an unimaginable number of processes. Tokens are stored on blockchains, most prominently on the Ethereum Virtual Machine, and generally have clearly defined attributes. Crypto tokens can represent discounts on websites, or provide a set value, be used for gambling, exchanged for cloud storage, exchanged for shared supercomputing time, or used to track shipments or authenticate luxury goods. They are tradable and transferable and can be cashed in for paper money. While ethereum is the most common network of tokens other competitor networks include NEO and Cardano.
Crypto tokens are distributed after creation in a sale called an initial coin offering (ICO), but that’s not the only way they are born. Anyone can create crypto tokens, using a template that involves programming source code on one of the primary networks like Ethereum. They can issue proclamations of this new project to build up backing and give it recognition. The parameters for use, network rules, utility and functions are programmed in by the token creators. Initial price is set at the beginning, but market forces take over after that. And therein lies the fundamental flaw in ICO’s as fundraising: there is no product.
Traditional companies are built by creating a product or service, and selling that to customers. As growth occurs, the need for capital to expand arises. Usually company owners turn to angel investors or venture capital at that point, trading equity in their company for cash to provide for growth. Well-managed companies will pour their earnings back into their businesses, adding value and growing revenue, until at some point it may make sense to go public and sell shares to raise even more money.
Crypto tokens, on the other hand, were mostly created and released to raise money on the promise that a future product would be built. It was easy to see the giant flaw in this method: what incentive does a developer have to build a network product after being handed $40-50 million dollars? In most cases, the answer is none. Examples of successful blockchain projects and their tokens we’ve previously covered include VeChain for authenticity and Waltonchain which combines RFID technology with a crypto token for tracking shipped items.
Most were scams (my report) with developers disappearing after the token sale. Token “lockups” failed to prevent this. And this is why over 95% of crypto tokens will fail or have already failed. When I look at CoinMarketCap, I see dead tokens (source.) Only they don’t know they’re dead. They keep trading on exchanges day after day with no real development.
It All Started With Bitcoin
If Bitcoin made a noise, it would be the hum of powerful computers, churning through massive amounts of data in an effort to create a unique address on a blockchain. That’s a huge over-simplification of a process that involves a labyrinth of codes and algorithms that can be parsed with only the most powerful computers in a process called mining.
By definition, bitcoin is a decentralized digital currency that can be sent from peer to peer without the need for intermediaries or a central bank or administrator. Bitcoin was invented in 2008 by a person named Satoshi Nakamoto, who has never been formally identified or located. It may not be one person but a group of people.
Bitcoins are created as a reward for the successful completion of the mining process. They can be exchanged for other currencies – including paper money – or used to pay for products and services. Estimates for the number of bitcoin owners worldwide are hard to pin down because even the term “own” is subject to interpretation when it comes to Bitcoin. The amount of Bitcoin is finite, however, capped at 21 million.
Meet the Top Five Bitcoin Millionaires and Billionaires
First off, we don’t even know if he exists, and if he does, if that is his real name. The inventor of Bitcoin made the biggest haul of them all, collecting 980,000 BTC, and watching his stash leap sky-high in an incredible bull market. His net worth is around $20 billion.
The Winklevoss Twins
Cameron and Tyler Winklevoss, who settled a lawsuit against Mark Zuckerberg over ownership of Facebook for $160 million, used that money for investments, including a hefty investment in Bitcoin. At one point, they claimed to own one percent of the entire world supply of Bitcoins.
The investment has paid off well for them. While estimates of their total wealth is not publicly available, it can be safely assumed to be in excess of $1 billion and is likely much more.
Silbert’s firm, Digital Currency Group, has invested in more than 100 Bitcoin-related companies and is the world’s leading firm for Bitcoin investments. He is known as “The King of Crypto.” DGC owns both the crypto exchange Coinbase and the crypto news site Coindesk, so be aware of the potential conflict of interest there.
Not all “Bitcoin Millionaires” acquired their wealth through traditional “buy low, sell high” strategies. Blythe Masters, who already had a sterling reputation as a former manager at J.P. Morgan Chase, became CEO of Digital Asset Holdings, which produces tools that protect Bitcoin traders. In 2018, DAH entered a lucrative partnership with Google Cloud, which has paid off handsomely for her and her company.
Morehead is the founder of Pantera Capital, the world’s first investment firm focused exclusively on cryptocurrencies. By late 2018, it had become one of the world’s largest institutional owners of cryptocurrencies. Their investors have consistently enjoyed earnings of over 20,000%.
Along came Virtual Networks, or functional tokens.
Bitcoin has been the inspiration for thousands of start-ups in the cryptocurrency industry. All dream of matching Bitcoin’s staggering success, but so far, it’s been “not even close, and certainly no cigar.” But that’s not to say that these altcoins are bad investments – far from it.
These alternate currencies operate in much the same manner as Bitcoin, competing to become a worldwide transactional currency platform. But tokens have a different goal: to provide a functional platform for creation of useful tools and decentralized apps (D’apps), similar to our current mobile apps but using a token economy instead of an underlying fiat payment system.
- Ethereum – This is a software platform that allows decentralized applications (DApps) to be developed in an unrestrained environment, free from third-party interference. Examples of current tokens that actually have functions are logistics tokens X and Y, and virtual sports betting platform Unikrn (backed by Mark Cuban and Ashton Kutcher) which uses its token UnikoinGold.
- NEO – often referred to as the Chinese Ethereum. It arose in 2017 as a competitor to Ethereum network for creation of tokens and handling of tokenized assets and functions. The best know NEO projects are…
- Cardano – Developed in 2018, it was set to be a cheaper version of the Ethereum VM.
- Ethereum Classic – the fork that was left behind when Ethereum founder Vitalik decided to roll back part of the Ethereum network to the point where a hack occurred, called the DAO, that stole millions in Ethereum. Controversial at the time, the rollback resulted in two types of Ethereum: ETH and ETC. Development continues on the Classic network in the forms of … tokens.