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The arrival of blockchain technology signals a profound shift in our society. Its implementation has given rise to bitcoin and at least a thousand other cryptocurrencies whose combined market cap has reached well into the hundreds of billions of dollars. However, adoption has not been uniform. As the technology underpinning cryptocurrency continues to evolve, we may be headed for a digital divide comparable to that of the Internet.
The case for exploring cryptocurrency is quite simple: With bitcoin prices rising 1,000% over the past two years, investors are increasingly becoming interested in the world of digital currency. In other words, they are seeking reliable entry into a rapidly expanding asset class that has received a lot of bad press in recent years.
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Once viewed as an obscure and esoteric currency, bitcoin is now considered a leading alternative asset. Contrary to belief, bitcoin is not just some random trend but a byproduct of several years of growth and innovation. Bitcoin has been the best-performing currency in six of the past seven years, and in 2017 is giving us another run for our money.
The concept behind Bitcoin was first penned in a 2008 white paper by Satoshi Nakamoto, the person or entity responsible for the original blockchain protocol. The search for Satoshi Nakamoto continues to this day, as no information pertaining to his true identity has been uncovered.
Bitcoin is a digital currency that relies on encryption techniques to regulate its generation, usage and transfer. There is no physical bitcoin, only balances maintained on a public ledger along with transactions. These balances and transactions are verified by a massive amount of computing power commonly referred to as the Bitcoin network.
Those who participate in the Bitcoin network are known as miners. They own the computing power used to generate new bitcoin and verify transactions on the blockchain – a public, immutable ledger that cannot be altered in any way. Miners are responsible for solving complex mathematical equations needed to mint new bitcoin – a process that occurs at a fixed but periodically declining rate until supply of coins reaches 21 million. This hard cap is not expected to be reached until the middle of the next century based on current mining trends. So, we’re talking at least 2140.
Miners are compensated via bitcoin for releasing new tokens into circulation, although the rate they receive declines incrementally through a series of “halving” events until the total supply of bitcoin is uncovered. The mining community maintains the integrity of the Bitcoin network, which operates independently of governments, central banks or other supranational institutions.
Bitcoin’s decentralized network, finite supply and integration of the blockchain are what have made it so popular, especially among investors. However, bitcoin’s association with criminality and the dark web has prompted governments to be much more cautious about accepting cryptocurrency into the fold of traditional payments. A lack of accuracy and adequacy of public disclosures has also prompted regulators to halt trading in shares that are exposed to cryptocurrency. Regulators have also rejected plans for a bitcoin ETF, citing the risk of fraud and a lack of uniform regulation across the global bitcoin market. Combined with the element of criminality associated with bitcoin, several governments have sought to limit access to the digital asset.
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Earlier this year, digital currency issuer First Bitcoin Capital Corp (OTCMarkets: BITCF) announced history’s first dividend to be paid in cryptocurrency. The company intends to pay 10% quarterly digital cash dividends in cryptocurrencies, provided that they have a surplus of money in reserves. The company intends to pay additional dividends in various cryptocurrencies, provided that the surplus condition is met.
BITCF is one of the only publicly traded bitcoin companies available today. As such, it provides a degree of exposure to bitcoin, which is the world’s largest cryptocurrency by market cap. This partly explains the share’s huge jump in value this year.
BITCF has also launched a decentralized digital currency called the TeslaCoilCoin, or Teslacoin for short. The Teslacoin utilizes a proof-of-stake protocol that allows coins to be created as interest in your cryptocurrency wallet. The specifications limit total currencies to 75 million, which will keep the token’s value high. Providing a hard cap on the number of coins that can be created is a common feature of cryptocurrency. However, unlike some other coins, the Teslacoin isn’t pegged to traditional measures of wealth. Instead, the developers have focused on improving the existing system. This has resulted in a much more stable cryptocurrency relative to others.
The growth and widespread adoption of cryptocurrency have raised important questions for value investors. Chief among them is whether it is possible for normal dividend companies to announce payouts denominated in cryptocurrency. Can, say, Johnson & Johnson (JNJ ) or Apple Inc. (AAPL ) announce dividends in bitcoin? The answer is yes and no.
It is possible for fiat-based companies like JNJ or AAPL to issue cryptocurrency-denominated dividends only if they mint their own digital currency and create a modality that rewards investors with crypto coins. While these companies won’t be able to issue bitcoin-based dividends, they can mint their own cryptocurrency and issue dividends in it. (Note: Neither JNJ nor AAPL has developed their own cryptocurrency.)
You may be asking, can companies really create their own cryptocurrency? They absolutely can. In fact, hundreds of startups have already raised billions of dollars through initial coin offerings (ICOs). An ICO is essentially an IPO for a blockchain-based startup. Instead of purchasing dollar-denominated shares, investors contribute money to a project and receive a corresponding portion of the company’s newly supplied cryptocurrency. In general, the cryptocurrency a company issues needs to have solid use cases to be successful.
Most companies have relied on the Ethereum network to build their cryptocurrency. Ethereum is the second-largest cryptocurrency when measured in terms of market cap.
ICO issuers typically reward investors with a share of the profits, but dividends are also possible. However, U.S. investors need to be made aware that any ICO returning dividends is deemed illegal by the Securities and Exchange Commission (SEC). This stems from the simple but important question, are ICOs securities? The SEC has shown support for ICOs that are obviously not securities. On the flipside, the regulator has put the clampdown on DAO tokens after concluding they were, in fact, securities.
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Blockchain could very well be the single biggest disruptor since the Internet. Although cryptocurrencies remain a highly volatile endeavor, many people understand the potential of this decentralized, open system for online transfer. As such, the author strongly believes that the new digital divide is upon us.
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