We're just three weeks from turning the calendar on 2017, but cryptocurrency price appreciation has shown absolutely no signs of slowing. While marijuana and cloud-computing stocks have impressed, they can't hold a candle to the 2,050% return in the aggregate cryptocurrency market cap ($17.7 billion to $380 billion) since the year began.
The secret sauce behind bitcoin's exponential ascent
Leading that charge has been bitcoin, the world's most popular virtual currency. Bitcoin, which began the year at $967, blew through the $13,000 level on Dec. 6, pushing its market cap to nearly $220 billion. With bitcoin up well over 1,200% this year, it's almost laughable to think that it's underperformed many of its peers on a percentage basis year to date.
As a whole, cryptocurrencies have benefited from the excitement surrounding blockchain technology. Blockchain is what underlies most cryptocurrencies and is responsible for digitally logging all transactions in a secure and efficient manner without the need for a financial intermediary like a bank. The key to its success is its decentralization, which ensures that cybercriminals are unable to cripple a network by gaining access to a server. Blockchain may offer the financial services industry a means to complete payments in a quick, or perhaps instantaneous, manner as opposed to waiting days for funds to clear, as is common with banks today.
The uptake of virtual coins has also been encouraging to investors. Bitcoin has been accepted by a handful of brand-name merchants for three years, but it's been gaining steam with smaller merchants. Not only do these virtual currencies offer the potential to complete transactions, but they may also be used in combination with blockchain technology to speed the settlement of transactions.
Forget bitcoin, and say hello to IOTA
Yet despite bitcoin's dominance (it makes up 57% of the aggregate cryptocurrency market cap), it's far from the only show in town. There are more than 1,300 other virtual currencies that are tradable, and quite a many are making waves with their currency or blockchain development. In fact, one lesser-known cryptocurrency might make you forget all about bitcoin.
Late last month, the IOTA foundation, a German nonprofit that oversees the IOTA virtual currency, announced the release of its Data Marketplace that utilizes its "blockless" blockchain. This blockchain-based marketplace will allow businesses to sell data in an effort to create incentive for the sharing of data that would otherwise be wasted. Five brand-name businesses have already signed up to test the two-month demo, including software giant Microsoft (MSFT -1.00%), Cisco Systems, Samsung, Volkswagen, and Fujitsu.
Unlike most blockchain networks that are open source but encrypted to protect information, IOTA's is open source and blockless, meaning users are able to make transactions on the network for free. This fact resolves one of the biggest drawbacks of blockchain technology -- that is, transaction fees -- while incorporating the scaling that's needed to make such data sharing work.
While it should be noted that this is just a two-month demo, it's not surprising to see Microsoft jumping onboard. Microsoft's enterprise cloud platform, known as Azure, has been absolutely dominant since its debut, and Microsoft's deep pockets potentially give it a lot to gain through data sharing, or perhaps data acquisition. Microsoft isn't shy about trying to buy its way into new trends, and IOTA's blockchain-based marketplace gives it a chance to do just that.
Though the IOTA Foundation didn't do much advertising before the release of its Data Marketplace, IOTA tokens rallied more than 1,000% in November once the cat was out of the bag. As of the moment, IOTA has vaulted past Litecoin, Dash, and Ripple to become the fourth-most valuable cryptocurrency in the world, based on market cap.
Will expectations meet reality?
But the bigger question that should be on the minds of virtual currency investors is this: Can the lofty expectations actually be met?
On the bright side, we're seeing plenty of instances where big businesses are testing blockchain-based technology – either developed in-house or underlying an existing virtual currency. Ethereum, and to some extent Ripple, have been especially successful in luring in enterprise customers to test versions of its blockchain technology.
Yet that's the problem: These are small-scale or pilot programs. As noted, the IOTA Data Marketplace is being tested as a demo over a two-month stint. Even if it's wildly successful, there's no guarantee that businesses jump onboard right away, or that enough businesses share data to make the blockchain-based marketplace worthwhile.
In other words, no one is disputing that blockchain technology can change the landscape for a number of sectors. What is debatable is how quickly today's big players will accept and integrate that technology. Practically every instance of a game-changing technology that hit the market over the past two decades has led to a bubble that eventually burst, because investors are notorious for overestimating how quickly new technology will be integrated. It's quite possible cryptocurrencies and blockchain face the same fate.
Further complicating matters is that blockchain is where the real value lies for most virtual currencies. Because cryptocurrencies have no federal government or central backing, there's nothing fundamental that allows investors to "fairly" value them.
Long story short, while IOTA has firmly announced its entrance to the growing cryptocurrency stage, "caveat emptor" remains the key phrase investors should have at the forefront of their minds.