With just over a week left to go before the calendar shifts to 2018, I believe it's pretty safe to say that cryptocurrencies absolutely whooped traditional equities this year. Whereas the stock market has historically returned 7% a year, inclusive of dividend reinvestment and adjusted for inflation, and the S&P 500 has handily surpassed that level this year, cryptocurrencies as a whole have left stocks eating their virtual dust.
Cryptocurrencies make their presence known
When the year began, the combined value of all investable cryptocurrencies was just $17.7 billion, with bitcoin making up the vast majority of this market cap. But as of Dec. 19, the combined market cap of the more than 1,360 cryptocurrencies hit as high as $642 billion. That's a better than 3,500% increase in cryptocurrency market value in less than a year, which is a bigger increase than some investors will see throughout their lifetimes.
Bitcoin obviously gets a lot of credit for this push higher. It is, after all, the most popular virtual currency in the world, and the coin most likely to be accepted by merchants as a form of payment. This year, we saw the commencement of futures trading in bitcoin on multiple platforms, as well as Japan welcoming the cryptocurrency with open arms as a legal and regulated form of tender. Bitcoin comprises close to half of the aforementioned aggregate market cap of digital currencies.
Yet the real story this year isn't the ascent of bitcoin, which has actually underperformed relative to its peers. Instead, it's all about those virtual coins viewed as "becoming the next bitcoin." When the year began, the aggregate value of all digital currencies, excluding bitcoin, was a mere $2.24 billion. On Dec. 19, it was as much as $321 billion -- a 14,200% increase! This is where the real value creation has taken place in 2017.
Say hello to a unique virtual currency up more than 201,000% in 2017
While a lot of attention has been placed on burgeoning cryptocurrencies like Ethereum and Ripple, both of which have risen by more than 10,000% year to date, their gains pale in comparison to a unique virtual coin that's come out of practically nowhere to surge 201,000% since the year began. Ladies and gentlemen, say hello to Einsteinium and its aptly named coin, EMC2.
EMC2 began the year valued at just $0.000875 per coin. It wasn't even worth a tenth of one cent. As of Dec. 19, its value had increased to $1.75 per coin (and it was actually above $2.50 recently) -- a gain of more than 201,000%.
Like most virtual currencies, Einsteinium has a token -- EMC2 -- that's tied to its underlying blockchain, which is the digital and decentralized ledger used to record transactions. But make no mistake about it, the mission of the Einsteinium Foundation, which guides the direction of Einsteinium's development, is like no other cryptocurrency.
Einsteinium's mission is to be a charitable fund for scientific, technological, educational, and blockchain-based studies. It uses a similar proof of work algorithm to that of bitcoin, but is the very first research-focused nonprofit organization in the crypto market space.
The 411 on Einsteinium's research projects and block rewards
How is this research funded, you wonder? Every time a block reward is paid out to miners for having proofed transactions, the foundation receives 2.5% of that reward. Of that reward, 80% goes toward funding scientific research, with the remainder heading to donations and marketing. The foundation notes that 16 million EMC2 coins have thus far been contributed for science projects.
Like most cryptocurrencies, these block rewards (paid out in EMC2 coins) shrink over time. This would appear to suggest that mining EMC2 would become less profitable and enticing over time. But there's a solution in place that keeps miners interested: wormhole events. These wormhole events are random lottery-like EMC2 coin payouts (2,973 EMC2 coins per block) that are given to miners for proofing a block. They're designed to become more prominent as the standard block reward declines over time. What's more, if EMC2 increases in value over time, these wormhole events could prove more profitable for the miners than standard block rewards.
According to the foundation, every 36,000 blocks built into Einsteinium's open-source ledger equates to what it calls an "epoch." It takes about 25 days for each epoch to be completed, according to CoinCentral.com. Once an epoch is complete, members of the community are asked to vote on what project they believe demonstrates the most potential. The chosen project is the one that the Einsteinium Foundation funds.
The recent buzz behind Einsteinium's stellar year
Now that you have a better of idea of what separates Einsteinium from a typical virtual currency, let's have a closer look at what's been driving EMC2 coins higher of late.
In October, the foundation announced the implementation of a hard fork, which was designed to reduce the number of EMC2 coins by 55 million. This hard fork was completed on Dec. 10, and it reduced the maximum supply of EMC2 from 300 million to 245 million. Why the excitement? Think about this in terms of a company repurchasing shares of its own stock. Buying back stock reduces the number of outstanding shares, thereby increasing the value of each remaining share, which is now scarcer. The same ideal applies here -- each virtual coin is now scarcer, which presumably makes EMC2 more attractive to investors.
Even more recently, rumors were flying about a "big announcement" from the Einsteinium Foundation. A few speculators believed it might be a tie-up with Apple, but the foundation quickly threw those rumors out the window.
However, on Dec. 19, the foundation announced a second fork is upcoming. This time, Einsteinium will be changing the mining algorithm for the EMC2 coin in order to make it ASIC resistant and GPU friendly. ASIC, or application-specific integrated circuit, is what's used to mine bitcoin, and it requires a hefty upfront investment before mining can begin. Comparatively, GPU's, or graphics processing units, are comparatively cheaper and allow most anyone to get involved with mining cryptocurrencies. In short, the foundation is ensuring that anyone who wants to mine will have an opportunity to do so.
Nonetheless, it remains to be seen if Einsteinium, which currently is the 50th largest cryptocurrency by market cap, can maintain its 201,000% gains in the weeks and months to come. Considering the enormity of the move and the lack of understanding of what cryptocurrencies are and do among the public, a significant pullback may well be in order.
Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.