Over the past two months, the growth of digital currencies has accelerated at an incredible pace. Having recently crossed the $100B threshold, the market capitalization of the digital currency sector illustrates the confidence of investors. Rather than rehash the news, the purpose of this post is to give beginners a brief overview on this emerging sector and how to get started in exploring this sector.
In my twenty-year career in the marketing of Consumer Technology this is the single biggest trend I have seen since the arrival of the Internet itself.
What is a Cryptocurrency?
At the most basic level, cryptocurrencies operate similarly to government issued (fiat) currencies, allowing individuals to store and exchange value. Bitcoin is the original and most well known digital currency, however, there are now a thousand different currencies, each proposing a solution to a different problem.
Cryptography is defined as the writing or solving of codes. Digital cryptocurrencies use the process of solving codes as a means to validate transactions and control the supply of money, this process is referred to as mining. Almost all cryptocurrencies are based on the technology behind Bitcoin called Blockchain. Through Blockchain information is decentralized and stored in duplicate in small chunks around the world. Largely immune to hacking Blockchains distribute multiple copies of data in pieces throughout the network.
Blockchain as a technology holds tremendous potential however due to the distributed nature it requires more computing power than traditional computer systems. At present this issue around computing resources and energy requirements will slow the global rollout of this technology. This means that organizations have a couple of years to develop their business strategies before the wave of change begins in earnest.
Why is it important?
Digital cryptocurrencies such as Bitcoin appeal to investors for a variety of reasons. These include faster settlement of international transfers, elimination of credit card transaction fees in large purchases, security, avoidance of government oversight, and as a place to store value.
The truly transformative aspect of this technology is the enabling of the Internet of Value where money (or value) is as easily exchangeable as information on the Internet.
To understand the Internet of Value concept it helps to look beyond Bitcoin into some innovative solutions that are already developed. These examples illustrate that we are now watching a whole new form of industry infrastructure being developed:
Steemit is a social media site that rewards the creators and curators of content. Posting an article on Steemit that gets upvoted by peers can earn currency.
Ripple is an example of a digital currency that serves as a new form of industry infrastructure, facilitating bank to bank settlements while significantly reducing costs and processing times.
IOTA is a cryptocurrency that uses an alternative approach to Blockchain that may provide faster processing and be ideal for small value transactions for the Internet of Things.
Who is using Cryptocurrencies?
Through the eyes of the average North American, it might be difficult to understand the appeal. As a Canadian, I can make payments in person by tapping my credit card or phone. Online shopping and banking is already easy with a credit card readily available. Furthermore, as a store of value, holding the government issued currency seems pretty safe as well.
Understanding the appeal of cryptocurrencies means understanding the global financial system and the nature of government. It has been reported that 90% of Bitcoin trading takes place in China. In a digital and globalized world the value of these currencies are no longer determined by economics at a national level but instead by circumstances around the globe.
Governments around the world are increasingly taking note of the emermgence of this technology. Japan recently made Bitcoin a legal form of payment. Not only may this make things easier for consumers, this gives Japanese firms a head start on building the Internet of Value. Governments now need to weigh regulation of this emerging technology with the business opportunity provided by being a leader in this space.
How do I get started?
The first step to get started with digital currencies is to download a wallet. While there are many different ways to do this, I started with the Coinbase app available through the AppStore. After that there are several steps to set up your account, including payment details to enter funds.
My journey began by purchasing $5 worth of Bitcoin. Shortly after and feeling especially generous, I sent a few Satoshis to friends and family by email. For reference a Satoshi is the smallest form of the Bitcoin currency and proof that you don’t need to buy a full coin at $3000 to participate.
Once you become familiar with the basics and ready to put in more money, it is a good idea to carefully record the private keys for your account. There are stories of people who had millions of dollars lost because they threw out their computer and didn’t have the private keys recorded. It turns out for these people that the private keys for their digital wallets are more important than remembering your Facebook password. If you are not sure about keeping these on paper you can also utilize a small physical wallet similar to a USB key to store your private keys.
In writing on this topic I sought to provide an easy to understand overview of the implications of this technology. With such a broad new topic with far-reaching implications it can be difficult to keep any discussion of this short.
Through a twenty year career in the marketing of Consumer Technology, my focus is on capturing opportunities during technology transitions to drive business strategy and performance. In the coming weeks I will write further posts that expand on the implications of this sector on business. If you found this post to be informative please connect with me directly.