Are Cryptocurrencies the Best Investment Opportunity of the Next Decade?

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This is part one of a comprehensive primer on cryptocurrencies and blockchains that reviews a large sample (over 50 sources) of recent information from International Monetary Fund (IMF) and Goldman Sachs reports to cryptocurrency ‘expert’ analyses to crypto-industry updates. It distills all of the relevant information into one template that you can use to understand the arena, make crypto-investment decisions and advise your clients. Part two will focus on the risks of the new technology as well as how to invest, plus an update on the current state of the crypto markets. The focus now is on understanding digital currencies, blockchains and digital ledger technology (DLT) in the context of value, advantages, and returns.

Gold was discovered in California in 1848 leading to the largest land migration the world has ever seen. The next ‘gold rush’ may be under way but the migration is to a new technology of trust. Cryptocurrencies, like Bitcoin, Ethereum and Litecoin, are digital currencies based on blockchain technology that have exchange value with fiat currencies. According to Coinbase, a large crypto exchange, there are currently more than 800 cryptocurrencies worldwide. The top 10, including the above, account for most of the capital.

Bitcoin, the first cryptocurrency, came into being in January 2009 when someone, under the pseudonym, Satoshi Nakamoto, launched an online mathematical algorithm, now known as a blockchain, with the potential of providing anonymity and security to its users. The market capitalization of Bitcoin today is over $40 billion. All cryptocurrencies are valued at over $100 billion. According to Aswath Damodaran, a professor of Finance at the NYU Stern School, one dollar invested in Bitcoin at the beginning of 2012 was worth $1,026 on July 29, 2017.

According to Goldman Sachs in a recent published study, “Today, transactions are verified by a central authority – like a government or a credit card clearinghouse. Blockchain applications could replace these centralized systems with decentralized ones, where verification comes from the consensus of multiple users.” According to a recent Wired article, Bitcoin’s promise is that it can supplant national currencies and financial institutions and execute seamless financial transactions. According to Don Tapscott, a University of Toronto adjunct professor, business executive, author and speaker, it is the technology most likely to have the greatest impact on the next few decades – not social media, not AI, not robotics, but the underlying technology of digital currencies called the blockchain.

Still, contrary reports abound. According to Brett Arends of Marketwatch, China’s recent regulation of cryptocurrencies may be the first move that will reverse their upward trend. According to a recent Los Angeles Times column, in spite of its recent rise close to $5,000, Bitcoin is still a “dumb investment.”

Legendary investor Howard Marks initially came out with a negative report on Bitcoin, but recently has said that his view is evolving. According to a writer for Forbes, “There is no blockchain stock market frenzy yet, but it will come and understanding it will be very valuable.”