The close relationship between cryptocurrency and its technology
is a cause of confusion. Cryptocurrency is a store of value that is
recorded and managed in electronic data. Blockchain is the distribution system for a cryptocurrency. In other words, a cryptocurrency
is the content that is stored and identified via blockchain technology.
Blockchain was the original distribution mechanism for Bitcoin beginning in 2009, although today blockchain is used for
many types of stored data besides cryptocurrency. 3 Recently,
many blockchain business applications and custody products
have hit the market. 4
What is an Initial Coin Offering
and What are Tokens?
An initial coin offering is a new alternative method to raise funds
using electronic means rather than traditional stock offerings. In
2017, substantial capital was raised through ICOs, which became
a significant alternative to initial stock offerings, and ICO activity
has been even greater in 2018 ( www.businessinsider.com/global-
ico-activity-spikes-2018-7). In an ICO, the funders receive tokens,
which are electronic instruments representing a digital asset or
utility. There are different kinds of tokens. Some represent
a right to a not yet released product or application
(utility tokens). Others represent equity and are
often intended to be converted into a cryptocurrency at a later stage in the development of
the funded venture (equity tokens).
Why are Virtual Currencies
and ICOs Important?
As mentioned at the beginning of this
article, a growing number of inves-
tors generally—and millennials spe-
cifically—treat virtual currencies as
acceptable alternatives to traditional
currencies and investments. In addi-
tion to the rapid rise of the ICO as a new funding mechanism for
businesses, cryptocurrencies and related exchanges, and financial
derivatives, have proliferated. Although Bitcoin is the most well-
known, today there are over 1,500 cryptocurrencies (en.wikipedia.
Some businesses take certain cryptocurrencies as payment, and
the financial markets are devising instruments that pay out in cryptocurrency. In December 2017, Bitcoin futures began trading on
both the Chicago Board of Options Exchange and the Chicago
Mercantile Exchange, and other virtual currency-related pooled
investments and financial derivatives have been offered.
The Roller Coaster of
Virtual Currency Valuation
Bitcoin in particular has seen significant fluctuations in market values
throughout its relatively short life. Bitcoin was valued at virtually
nothing from its inception until around May 2010, when the value
of a single Bitcoin rose to near $0.01 ( www.coindesk.com/price). By
February 2011, the value of a single Bitcoin was approximately $1.
July 2011 saw the first Bitcoin bubble with a high of approximately
$31 per coin. By December 2011, the value of a Bitcoin had dropped
to $2. The next highpoint was April 2013, with a per coin valuation
of $266, followed by a low of $100 two months later. In November
2013, prices had hit $1,242 per coin.
Prices bounced up and down between $1,000 and approximately
$300 until March 2015, when prices hit a low of $200 per coin. The biggest price spike—from a low in January of $750 to a high in December
of $17,900, occurred in 2017. In 2018, the roller coaster change in prices
generally trended downward to an early July price of $6,560 per coin.
The high price volatility of Bitcoin and other cryptocurrencies
is attractive to investors and other market participants in spite
of the financial risks. In addition to the high volatility risk of
virtual currencies, it is important to note that over 800 virtual
currencies are reported to be dead or have a current valuation
of a penny or less. 5
WHAT BANKS NEED TO KNOW