This turned out to be a truly incredible year for cryptocurrencies, which left traditional equities eating their dust from the get-go. Having begun the year with a combined market cap of just $17.7 billion, the aggregate value of close to 1,400 cryptocurrencies hit $654 billion on Dec. 21, representing an increase of almost 3,600%. This very well could be the single-greatest year you'll witness for an asset class in your entire life.
Bitcoin and Ethereum provide the foundation for this rally
At the heart of the rally are two key catalysts: the uptake of digital currencies as a means to buy goods and services, and the emergence of blockchain, which is the digital and decentralized ledger underlying a digital currency that records all transactions without the need for a financial third party.
The former has been led by bitcoin, the world's most valuable cryptocurrency by market cap, and is easily the one accepted by more merchants than any other digital currency. Bitcoin has certainly been able to exploit its first-to-market advantage, securing a handful of well-known merchants in 2014 and successfully adding new merchants with each passing year.
Bitcoin is also responsible for bringing blockchain technology into the mainstream, albeit bitcoin isn't exactly trying to lure big businesses with its blockchain. The Ethereum Foundation, which oversees the development of the Ethereum blockchain and Ether coin, has been much more involved with creating a blockchain platform that appeals to enterprises. The Enterprise Ethereum Alliance, formed in February, has 200 organizations from a variety of industries currently testing a version of Ethereum's blockchain in small-scale and pilot projects.
Blockchain is the basis of long-term growth for many cryptocurrencies
The reason blockchain gains so much attention is that it has the potential to fix three long-standing issues with payment processing networks. First, the fact that there's no financial intermediary involved (which is often a bank) suggests that transaction fees could be lower. While it doesn't mean that consumers will see a break in terms of lower transaction fees, it should boost the margins of companies implementing blockchain technology.
Second, blockchain is decentralized, meaning information is stored on servers and hard drives all over the world as opposed to in a central data hub. This ensures that cybercriminals can't bring a cryptocurrency to its knees.
Third, the fact that proof-of-work or proof-of-stake algorithms are running 24 hours a day, seven days a week, means there's a chance of rapid or instantaneously settling transactions. This could be especially helpful in cross-border payments, where funds can take days to settle under the current system.
Everyone say hello to Qtum, a business-focused blockchain company
But there's a vast universe of digital currencies and blockchain evolutions beyond just bitcoin and Ethereum. If you're interested in keeping up on the next-generation blockchains that matter most, Qtum should be on your radar.
Why Qtum? The simple answer is that it takes the best of both worlds and combines them together into what it believes to be a seamless blockchain that'll appeal to big businesses. It combines bitcoin's core infrastructure with a version of Ethereum's Virtual Machine to deliver a blockchain rich with possibilities thanks to smart contracts.
Smart contracts are digital protocols built into blockchain that help to facilitate, verify, or enforce the negotiation of a contract. Some of the exciting potential applications of smart contracts include blockchain ID, which could replace passports and proof-of-existence services that could replace notaries. In particular, though, smart contract protocols beef up the legal standing of contracts, which makes them the perfect carrot to dangle in front of enterprises.
But it's what Qtum brings to the table with regard to mobile applications that's likely to create the most buzz, at least in the near term. Qtum's Simple Payment Verification protocol allows these smart contracts to be executed in lite wallets via mobile applications. Considering that half of all internet traffic is generated from mobile devices and tablets, Qtum is offering a way for blockchain-based applications to be accessed by mobile devices, yet still be decentralized (and secure). Qtum's proprietary Account Abstraction Layer is opening doors to allow blockchain apps to be accessible where they've never been before.
It's also worth noting that this infrastructural blockchain will remain backward compatible, according to its website. This means, despite future updates to its blockchain, Qtum will remain compatible with bitcoin gateways and existing Ethereum contracts, which could be a major selling point to those businesses that opened their arms to Ethereum's smart contracts earlier this year.
But keep these concerns in mind
Still, there's a big difference between monitoring the development of Qtum's blockchain and being an active investor in the Qtum coin. There are still a number of major risks associated with investing in Qtum and cryptocurrencies in general.
For starters, Qtum is still in the process of fine-tuning its blockchain technology and is seeking out its first really big partner. It may offer the best of both worlds from bitcoin and Ethereum, but Ethereum has a smorgasbord of brand-name enterprise partners compared to Qtum, and that's probably not going to change in the near term.
This brings up another valid point: The barrier to entry among cryptocurrencies is exceptionally low. All it really takes is some time, money, and a team that understands how to code in order to create blockchain technology and a tethered virtual coin. What this suggests is that a new competitor with a more versatile and secure blockchain could come along at any moment and displace a major player. That fluidity is a good thing from a competitive standpoint, but it's not good news for investors in the cryptocurrency space.
We also can't forget just how bad investors have historically been at predicting the uptake of new technology. Whether it's 3D printing or human genome decoding, investors' expectations with regard to new technology are almost always unreachable. This is what leads to bubbles being burst and disappointment. Though blockchain is being tested by numerous companies, these are pretty much all small projects for the time being. It could be years before blockchain really becomes mainstream at the enterprise level.
Finally, there's a genuine disassociation between virtual coins and their blockchains that makes it difficult to value this new asset class. For example, when you buy stock in a publicly traded company, you own a percentage of that business. But when you buy cryptocurrencies, you're not getting a stake in the blockchain. Deriving a fair valuation for cryptocurrencies will remain challenging, which could lead to unsettling volatility for investors.