What is a cryptocurrency?

7min read

A cryptocurrency is a form of digital asset generally intended to be used as a medium of exchange in much the same way traditional currencies are. Often they are also held as assets by investors who expect the cryptocurrency to increase in value over time. Cryptocurrencies rely upon the cryptography used within a blockchain; the way in which cryptography is used alongside certain other protocols ensures that these assets have characteristics desirable in a digital currency (security, transferability and immutabillity).

They were first brought to prominence when the first decentralised cryptocurrency, Bitcoin, was created in 2009 by the anonymous person or persons, Satoshi Nakamoto. Since then multiple alternative cryptocurrencies (or 'altcoins') have been created and cryptocurrencies have seen increasingly widespread adoption and huge gains in value as a whole. In early 2011 a Bitcoin was worth 1 USD. As at August 2017, Bitcoin trades at a value of 3400 USD per coin.

  • What is the legal status of Bitcoin/altcoins?

    As Bitcoin has grown in prominence, it has seen greater recognition by world governments. The way Bitcoin is treated under the law varies from region to region. A fairly comprehensive list of the regional legal status of bitcoin may be found here. Many governments are only now focusing their attention on cryptocurrencies and the SEC has recently begun investigating ICOs and token sales. ICOs are described below.

  • What is a blockchain?

    Imagine a spreadsheet duplicated and stored on thousands of computers in a decentralised network. Then imagine that this network is designed to regularly update this spreadsheet based on user interactions and in accordance with a well defined set of rules. This analogy should give you a basic understanding of a blockchain. For a more in-depth explanation see here.

    The technology extends far beyond just being a means of data storage. Blockchains can be thought of as a set of protocols - a way of doing things - that is enabled through the use of powerful cryptography and computation. These protocols define exactly how interactions take place and therefore dictate how the system behaves on the whole. These aspects brought together constitute a breakthrough and facilitate completely new solutions to previously unsolved problems.

What is Ethereum?

  • What is Ethereum and Ether?

    Ethereum is the most advanced blockchain in terms of it's capabilities and functionality. It was launched in 2015 and facilitates the running of decentralised applications.

    The cryptocurrency directly linked to the Ethereum blockchain is known as Ether. It can be seen as the life-blood of the blockchain and is needed for many interactions within the network.

  • What are Smart Contracts?

    Smart contracts are programs that run entirely on the Ethereum blockchain. Anyone can use their computer to join the network. Anyone can write and deploy code to it and once the program is on the blockchain it is run simultaneously on thousands of computers around the world. The properties and capabilities of the program are decided beforehand by whomever coded it.

    Although smart contracts are capable of implementing any sort of program, they are commonly used to issue and keep track of their own cryptocurrencies (Ethereum Tokens), that may be used as part of a greater ecosystem. Other examples of smart contract use include: keeping immutable registries of information, facilitating escrow services or operating betting and banking services.

  • What is an ICO?

    An ICO or ‘Initial Coin Offering’, is a modern approach to raising capital through the creation of a new cryptocurrency - which is usually implemented as an Ethereum Token. Tokens are sold to investors in exchange for fiat currency, or frequently, through a more established cryptocurrency such as Bitcoin or Ether. These coins are sometimes thought of as shares in the newly established firm or are sometimes used in the firm’s specific ecosystem/business model. Investors participate such that they can gain access to the proposed platform or in the hopes that these coins will increase in value from the original purchase price available during the ICO.

  • What is an index fund?

    An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor's 500 Index (S&P 500). This type of fund aims to buy a broad array of assets in line with its mandate in order to track the general trend of the markets. An index fund provides broad market exposure, low operating expenses and low portfolio turnover. These funds adhere to specific standards (e.g. efficient tax management or reducing tracking errors) implemented by predetermined rules that stay in place regardless of the current state of the markets.

    'Indexing' is a passive form of fund management that has been successful in outperforming most actively managed mutual funds. While the most popular index funds track the S&P 500 - a number of other indexes, including the Russell 2000 (small companies), the DJ Wilshire 5000 (total stock market), the MSCI EAFE (foreign stocks in Europe, Australasia and the Far East) and the Barclays Capital Aggregate Bond Index (total bond market) are widely used for index funds.

  • Index Funds vs. Actively Managed Funds

    Investing in an index fund is a form of passive investing. The primary advantage to such a strategy is the lower management expense ratio. A majority of mutual funds fail to beat broad indexes, such as the S&P 500, partly because of their expense ratios. For the five-year period ending in 2015, 84% of large-cap funds generated a return less than the S&P 500. In the 10-year period ending in 2015, 82% of large-cap funds failed to beat the index. [1]

    Since the fund managers of an index fund are simply replicating the performance of a benchmark index, they do not need the services of research analysts and others that assist in the stock selection process. The extra costs of fund management are reflected in the fund's expense ratio, and are passed on to the fund’s shareholders.

    Index funds are generally considered ideal core portfolio holdings for retirement accounts, such as individual retirement accounts (IRAs) and 401(k) accounts.

  • Cash Flow to Index Funds

    Due to index funds outperforming their actively managed counterparts on a large scale, asset flows have grown significantly in index fund products. For the 12-month period ending May 2016, investors poured more than $375 billion into index funds across all asset classes. Most of that money came at the expense of actively managed funds, which experienced outflows of roughly $308 billion during the same time frame. [2]