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What is cryptocurrency and why is it important to keep an eye on?

Earlier this summer Freshminds hosted leaders from the consulting, retail and financial services worlds for a Strategy Dinner, bringing with it many thought provoking conversations. Prior to the meal we were all asked to make one prediction for the year ahead, either business related or otherwise. The accumulative brain of the room foresaw macabre events surrounding the Trump administration through to more optimistic ideas around all of us piloting flying cars before 2017 was finished. But one significant topic that came up was one of cryptocurrencies and how they will significantly change the way we look at money.

Although many of us read about it in financial publications on a daily basis, I would hazard a guess that few can actually explain what cryptocurrency really is in all of its intricacies? So here is a brief overview to both explain, in brief, what cryptocurrencies are, and also why it is worth knowing about them!

To put it simply, a cryptocurrency, such the most widely known Bitcoin, can be described as:

A digital currency maintained by a community of individuals, as opposed to conventional currency that is governed by a central bank .It is run via cryptography, converting readable information into a virtually un-crackable code.  

Apart from potential structural benefits highlighted below, more immediate pros include no transaction charges, and no exchange fees. 

So what is Bitcoin really?

Invented by the anonymous person with the pseudonym Satoshi Nakamoto in 2008 in the form of a mathematical publication, bitcoin is based around a public ledger. This takes the form of a completely visible list of all the transactions ever made by anyone with a bitcoin wallet (an app to trade the digital currency). This public ledger, known as the “block chain” is similar to your own bank statement, it chronologically lists all transactions although, in this instance, completely anonymously.

Using online market places such as ig.com and etoro.com you can buy and sell bitcoins for conventional currencies, but the peer-to-peer transaction takes place using the app (many of which are available for Android and iOS users).

Now the immediate question most of us ask is how can one trust the system and be sure that no transactions are missed or fraudulent?

There are two main answers to this, one of which is highly complex and beyond the remit of this article. Firstly, everyone who has a bitcoin wallet keeps a copy of the ledger so that compatibility is checked after each transaction. Additionally, a specific sender key (a string of code) is created for each transaction to validate the amount and to whom it is addressed.

 Secondly, there is an incentive system of paying individuals (known as miners), or rather their computers, to solve a mathematical puzzle and adding the transaction (or block) to the blockchain – any further dive into how this works is beyond what my A level in extended maths allows me to explain.

But what can I buy with bitcoin?

The simple answer is almost anything! From takeaways to plane tickets it can all be purchased with this cryptocurrency. Although far from completely mainstream, more and more e-tailers, not least in developing countries, accept them. Unfortunately, due to the anonymity of the currency people also use it to buy illegal substances and weaponry, which is the main and relatively glaring negative opposing the technological advantages.

For those not interested in bitcoin as a practical replacement of real money, many have used it as an investment vehicle (seeing that bitcoin’s value has grown from 5 US cents to $3,733 as of today). The Financial Times even recently reported some 68 “Crypto hedge funds” being established in recent years.

Why is it important to know something about it?

In short, cryptocurrency has illustrated how technology can fundamentally disrupt our current financial system of notes, coins, commercial and central banks.

Recently, we have seen technology have a massive influence on payment through contactless and mobile payments along with online banking in general which has greatly simplified the way we run banking errands on a daily basis. However, none of these inventions and technologies have structurally changed our banking systems on a more fundamental level; they have rather been horizontal improvements on the centuries old set ups. Cryptocurrency, on the other hand, is something completely new.

One of the most interesting reasons why we should keep a close eye on bitcoins and other cryptocurrencies is where people google it. Google trends lists Nigeria and Ghana followed by Bolivia and South Africa as having the highest proportion of the word “bitcoin” as a proportion of total all search terms (the US sits at 14th place in the ranking).

Both Nigeria and Ghana have inflation rates over 12 percent and are reputed to struggle with corruption and lack of transparency – the Nigerian Central Bank has even recently been accused of illegal funding. It could be the case that the reason for intense bitcoin-googling springs from a distrust in the centralised system and optimism for a global, peer-reviewed one.

More broadly, I personally think it’s a kick in the back for the tech development departments of our high street banks although the technology is not mature or mainstream enough (yet) to directly compete with them.

On the other hand, some people are more pessimistic about cryptocurrencies and bitcoins in particular. Most notably is perhaps Jamie Dimon, the JPMorgan boss, who has had a long campaign comparing the bitcoin craze to tulipmania ­– the explosion of price of tulips in the 1600’s Netherlands which eventually led to a burst bubble. However others contest that there are clearly more useful aspects of bitcoins compared to those of Dutch flowers.

There are enough websites and opinionated experts out there to provide sufficient information to make your own judgement call. Either way, the dinner party prediction stands that cryptocurrencies are worth keeping a close eye on. 

Jon White

Jakob Sandstrom

Consultant for the Projects team

 

Jakob manages business relationships for the Projects team, working on strategic interim or freelance roles in the consulting and private equity space.

 

Interested in discussing this topic further? Get in touch with Jakob to find out more.