Crypto Boom: What You Need to Know Before You Invest

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It’s the ultimate disruptor.

In 2016, the aggregate value of crypto coins was  $17.7 billion.

By the close of 2017, the value soared to $500 billion.

And could very well be worth $1 trillion, according to analysts.

Bitcoin for example soared from $13.36 in 2013 to $19,005 by 2017.

That’s a gain of 142,153% in four years.  

Or Ethereum.  In September 2015, it was valued at just 68 cents. It would run as high as $1,338 for a gain of 196,665%.

  • Ripple jumped from $0.0057 to $3.28, or 57,444%.
  • NEM soared from $0.0517 to $1.56
  • DASH jumped from $134 to $1,146
  • Litecoin jumped from $4.25 to $248
  • Verge jumped from $0.0055 to $0.1453
  • IOTA jumped from $0.16 to $4.12

At one point, even billionaires were jumping on board with one predicting that cryptocurrencies could be valued at more than $5 trillion by 2021, such as billionaire Michael Novogratz.

“Ten percent of my net worth is in this space. It’s the ‘best investment of my life,’” he says, as quoted by Coin Telegraph. “The Nasdaq got to $5.4 trillion in 1999, why couldn’t it be as big? There’s so much human capital and real money being poured into the space and we’re at a takeoff point.”

But just what is this currency that’s taken the world by storm?

In its simplest terms, cryptocurrency is an encrypted decentralized digital currency transferred between peers and confirmed in a ledger (or blockchain), a process referred to as mining.  As a peer-to-peer system, transactions are carried out between other users, eliminating any cost incurred by an intermediary.

In short, transactions are made with no middlemen.  

There is no bank or government involvement.   There are no transaction fees and no real reason to give your actual name.  Better yet, merchants around the world are just beginning to accept them, including web hosting to pizza and manicure salons.

It’s just about revolutionized transactions.

So much so that the number of businesses accepting cryptocurrency is growing rapidly, including Microsoft, Intuit, PayPal, Dish Network, and Overstock.com.

Even Fidelity Investments rolled out a program in August 2017 that allowed investors to track their cryptocurrency holdings right alongside traditional assets.  

Bitcoin ATMs popping up, too.  

In fact, according to Coin ATM Radar, there were 2,445 Bitcoin ATMs in the world, as of March 2018.

Global companies, governments and financial institutions have taken notice.

G20 nations called for regulators to debate crypto-regulations at the 2018 summit.

In January 2018, the U.S. Treasury Secretary expressed concerns that Bitcoin could become the next “Swiss bank account.”

Under U.S. law, “if you have a wallet to own Bitcoins, that company has the same obligation as a bank to know” you as a customer, the U.S Treasury Secretary noted, as quoted by Bloomberg. “We can track those activities. The rest of the world doesn’t have that, so one of the things we will be working very closely with the G-20 is making sure that this doesn’t become the Swiss bank account.”

In Arizona, the Senate passed a bill that could allow residents to pay their taxes with cryptocurrencies, too.  

According to Coin Desk:

Arizona State Rep. Jeff Weninger, one of the co-sponsors of the bill and a sponsor himself of several related bills – including one submitted this week that, if approved, would block local and county regulation of blockchain nodes – recently told Fox News that the tax measure is aimed at making the state an accommodating place for users of the technology.”

Venezuela launched an oil-backed cryptocurrency to help the country dig out of inflationary issues.  According to Reuters, “The government appears to be hoping the petro will offset a collapse in Venezuela’s currency – 97 percent in one year against the U.S. dollar on the black market – and isolate the country from the U.S. dollar…”

In Russia, the government has promised legislation to regulate the currency.  

“The purpose of these bills is to define the scope of action and of the regulations of cryptocurrencies, not their prohibition, and this is good news for Russia,” says Anti Danilevski, CEO of KickICO, as quoted by Forbes.com.

In Japan, it’s now a legal currency.  In fact, on April 1, 2017, Bitcoin was declared as legal tender for payment in the country.

The U.S., Canada, Germany, Holland all accepts it, too.

In short, it’s only a matter of time before cryptocurrency becomes globally accepted.

Crypto Basics 101

We already know it’s a decentralized currency transferred between peers.

But you’ll hear the term “coins” tossed around as well.  Coins are publicly agreed upon records of ownership.  In short, it’s all digital.

You’ll also hear about miners, which generate the “coins” in a ledger (also known as a block chain, which applies to most but not all crypto currencies).  In order to spend or receive the currency, a user must first create a transaction and broadcast it to the entire network, which then stores the information in a ledger.  For that transaction to be successful, it must be added to the public digital ledger.

This is where “miners” come into play.

Miners are those in the network that compete to collect transaction data, verify transactions against the existing ledger and then solve a cryptographic puzzle that allows them to add a block of transactions to the chain.  

As a reward in this “competition,” the miner receives new coins.

Once the block is added to the chain, the transaction becomes public record.  All without the use of a financial institution to govern the transaction…

Other crypto currencies such as ethereum are designed to support “smart contract applications,” or a computer program that automatically executes the terms of a crypto currency contract when specific conditions are met.

You’ll also hear about your “wallet.”

“People who wish to hold and spend bitcoins must create a bitcoin “wallet,” which stores the information needed to complete bitcoin transactions. The bitcoins themselves remain a part of the blockchain, but your wallet contains the information necessary to access and use your own bitcoins,” according to Motley Fool.

And, of course, you’ll hear the term, blockchain, too.

In short, a blockchain is distributed ledger technology.  It’s a virtual distributed database that millions of computers around the world are constantly updating.  

According to Evening Standard:

Any data put into the blockchain must be verified. Transactions are grouped together in blocks, hence the name blockchain, then verified by the computers (nodes) in the network. When a computer joins the network as a node, they receive a copy of the blockchain, which acts as proof of all the transactions that have been performed. This means that all data stored on the network is transparent; it is public by default. This also means that all the data in the blockchain network cannot be corrupted or deleted. However, this doesn’t mean you can see who is doing the transaction. For instance, with bitcoin, the public can see that someone is sending an amount to someone else but there is no information linking the transaction to anyone. This is because the public keys linking the transaction are kept anonymous. 

Even better, such technology is beginning to gain momentum in business, too.

What it allows you to do is produce a dependable ledger without record-keepers.  It also eliminates the dangers that come with data being kept in a central location.  Not only does it foster trust, it replaces third-party intermediaries with all blockchain participants certifying the transactions taking place.  

Plus, according to Fortune:

The blockchain enables companies doing business with each other to record transactions securely. Its strength lies in its trustworthiness: It is difficult to reverse or change what’s been recorded. The blockchain can also hold many more documents and data than traditional database storage, allowing for more nuanced insights and analysis. It can also hold embedded contracts, such as a lease for a car, whose virtual key could be transferred to a bank in the event of a default.

How to Bet on Blockchain

There are two main ways to bet on blockchain.

One, you can buy cryptocurrencies, like bitcoin or Ethereum.

But by buying cryptocurrencies, you’re not betting on blockchain itself.

Instead, you’re betting on a specific application of blockchain. For your investment to work out in the long run you must be right about blockchain living up to the hype and about the cryptocurrency living up to all of its hype.

The other way to bet on blockchain is by investing in companies that are using the technology or are fully invested in it.  Demand for blockchain – which is best known for supporting Bitcoin – is growing so rapidly that it will be one of the biggest users of capacity at about 60 data centers run by IBM for example.  

“That a 106-year-old company like IBM is going all in on blockchain shows just how far the digital ledger has come since its early days underpinning bitcoin drug deals on the dark web. The market for blockchain-related products and services will reach $7.7 billion in 2022, up from $242 million last year, according to researcher Markets & Markets,” as noted by Fortune.

But it gets even more exciting than that.  As Fortune also explained:

Almost six in 10 large corporations are considering using blockchain, according to a Juniper Research survey of 400 executives, managers and tech staff. The technology is increasingly being tested or used by companies such as Wal-Mart Stores Inc. and Visa to streamline supply chain, speed up payments and store records.

Deployments of blockchain should bump up sales growth in cloud services, databases and servers by 35 percent, according to Susan Eustis, chief executive officer of WinterGreen Research. Within five years, blockchain technology will push more than 55 percent of large companies with more than 1,000 employees to use the cloud instead of their own data centers, up from 17 percent today, she said.

No wonder investors are so excited for the possibilities.

However, whenever it comes to any booming space, you must use caution when investing.  

A lot of companies have made claims of involvement in the space without really being involved.

We’ll list a few in just a moment.  

Let’s first look at some of the most respected of the bunch.

Bank of America for example has 43 blockchain patents or applications, for example.

According to CEO Brian Moynihan:

“We have more patents, I think, than almost anybody in blockchain,” Moynihan said. “We believe in the idea of distributed ledgers, and smart contracts, and all the words you hear about that. We are developing stuff… But it’s not new concepts. The Registry of Motor Vehicles is a distributed ledger. We know who owns a car, we know who owns a house. The idea is that you can do it more electronically, and can do it across borders.”

Even Square Inc., which develops and provides payment processing, point-of-sale (POS), financial, and marketing services worldwide, is involved with cryptocurrency.  In fact, its Cash app is now giving users the option to buy or sell Bitcoin.  

According to a Forbes report:

“A Square spokesperson said in a statement: ‘We’re always listening to our customers and we’ve found that they are interested in using the Cash App to buy Bitcoin. We’re exploring how Square can make this experience faster and easier, and have rolled out this feature to a small number of Cash App customers. We believe cryptocurrency can greatly impact the ability of individuals to participate in the global financial system and we’re excited to learn more here.’”

According to Business Insider, Credit Suisse said Square’s venture in crypto could be a tailwind translating into $30 million in revenues.

“See ~$30m revenue opportunity in two years: We estimate that if SQ can accumulate 10m bitcoin buyers over two years (tracking Coinbase’s growth), this could drive an incremental $30m in revenue (~2% additional growth to our current forecast). This assumes average bitcoin purchases of $200/yr and fees of 1.5%.”

That’s just part of the reason shares of Square ballooned from $26 to a high of $50 recently.

Overstock.com, Inc. even became the first retailer to accept bitcoin and even made the coin offering through its exchange, tZero, according to CNN.  In fact, according to analysts at DA Davidson, “Overstock stands head and shoulders above the others, when it comes to having developed a portfolio of companies with significant efforts to exploit blockchain technology.”

In December 2017, Overstock CEO Patrick Byrne made things a bit more exciting when he say he may want to sell OSTK’s e-tailing operations and put even more cash into speeding up the blockchain-business instead.

DPW Holdings, Inc. also announced that its subsidiary Coolisys Technologies would launch a new line of power systems aimed at crypto currency mining. The company said it believes Coolisys could make great strides in reducing the power load crypto currency mining consumes and the costs that come with higher demand.

According to Digital Power President and CEO, Amos Kohn:

“Coolisys Technologies is very pleased to announce this new relationship with PoW Digital Mining whose management has vast experience in all facets of the crypto currency marketplace. Starting with our current catalog of power efficient and durable products as a base, we will collaborate with PoW and combine our efforts to develop a unique in-demand portfolio of equipment and packaged solutions for personal miners and the large pool operators exploiting mining and other activities within this exciting and still often misunderstood sector. Crypto currencies recently surpassed the milestone of generating revenues of $1B annually.”

“The Company over the past few years has experienced an increase demand for Data Center solutions and stated that its power solutions are based on the next-generation of digital synchronous rectifier design and believes they are among the most technologically advanced power processing solutions on the market, which directly addresses the various requirements of the Digital Mining Market. While the Company is excited about the prospects of developing a specialized product line for a robust, sophisticated and demanding audience, the Company provides no assurances that any revenue will be generated or its products and services accepted by this dynamic marketplace. The Company is not changing its investor guidance or company growth strategy.”

Too Good to be True…

There’s always that one bad grape in the bunch.

Sneaky companies are attempting to piggyback the boom by putting the word “blockchain” in their name or convincing unsuspecting investors they’re the next big blockchain player.

As a result, it’s causing many people to jump into volatile, risky ideas, without realizing they were being scammed.  And while there have been many scams on the books, we could see another 100+ of them in the next year, say analysts.

For example, you may remember that The Long Island Iced Tea Company (LTEA) changed its name to Long Blockchain Corporation and rallied from $1.79 to $9.50.

In reality, it had no business at all tied to blockchain.  

In fact, it announced it did “not have an agreement with any of these entities for a transaction and there is no assurance that a definitive agreement with these, or any other entity, will be entered into or ultimately consummated.”

Even Croe Inc., which made fitness apparel changed its name to The Crypto Company, sending its stock up 2,700%.  But it had no blochain technology either.  

A biotech penny stock once known as Bioptix changed its name to Riot Blockchain.  

Once a struggling biotech company, the company morphed into a bitcoin investor that said it owned 1,200 cryptocurrency mining rigs and equity stakes in Coinsquare and Verady, a cryptocurrency exchange and audit and accounting service provider.  

The stock was so hot it ran from $3.43 to $46.20 – a 1,247% move – in months, as a result.

But even Riot’s activities became questionable.  

Rich Cigars, a cigar maker that trades over the counter (OTC) tried it, too.  

“If history is a guide we’ll see 100+ instances of this in 2018 — an academic study found that in the Dot Com bubble the instances of name gaming went from 13 in 1998 to 126 in 1999,” Autonomous analyst Lex Sokolin said in an email, which started off with a section on “blockchain pretenders,” as quoted by Investors Business Daily.

In February 2018, the SEC suspended another three companies that were claiming involvement in the crypto and blockchain space, including Cherubim Interests, PDX Partners and Victura Construction Group. The SEC also said that recent press releases from those companies claimed that they “acquired AAA-rated assets from a subsidiary of a private equity investor in cryptocurrency and blockchain technology among other things.”

How to Avoid the Scams

Crypto and blockchain have become so popular that even companies that make sofas and sports bras have attempted to make claims of involvement.

Even when there is no real involvement at all…

According to the Financial Industry Regulatory Authority:

“Do your research before purchasing shares of any company offering investment opportunities in cryptocurrency.  And don’t be fooled by unrealistic predictions of returns and claims made through press releases, spam email, telemarketing calls or posted online or in social media threads.”

“In today’s ‘hot’ cryptocurrency environment, it’s easy for companies or their promoters to make glorified claims about new products, services and other cryptocurrency-related connections,” notes FINRA. ”And, even when legitimate companies flock to a hot, new sector, fraudsters almost always follow suit, exploiting the news to launch their latest frauds du jour.”

One way to avoid scams is to stay away from any stock that’s over the counter, quoted with an OTC quotation platform.  It’s also essential that you do your best due diligence before investing in any stock making such an outrageous claim.  A simple way to do that is by viewing securities records in the SEC’s EDGAR database.  

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