200 million euros. This was the amount of money raised by a company from Switzerland in the summer of 2017. The young start-up Tezos successfully developed a digital currency and used a way to raise money from its users, similar to crowdfunding, by allowing them to buy a stake: a so-called initial coin offering (ICO). Tezos' story is but one of many recent examples where so-called cryptocurrencies are involved. A cryptocurrency is a digital currency that uses blockchain technology as a means of security. This technology was first conceptualized by Satoshi Nakamoto in 2008, as the basis for its first known application: Bitcoin. In recent months, the interest in these currencies increased dramatically, even sparking interest and endorsements from celebrities such as Paris Hilton and Floyd Mayweather. This has multiple reasons, the first of which is the growing value of Bitcoin. In March 2017, the market cap of Bitcoin was valued at approximately 20,64 billion dollars. On 1 September 2017, one Bitcoin was (briefly) valued to be worth 5,000 U.S. dollars. A second reason is the success of Ethereum. In 2014, this company had a successful ICO of approximately 14 million U.S. dollars worth of Bitcoin, equaling 0,40 U.S. dollars per ether (Ethereum's digital currency). Three years later, this was worth 307 U.S. dollars per ether. Ethereum's succes proved so alluring that Goldman Sachs estimated in August 2017 that over one billion dollars had been raised through ICOs that year, overtaking traditional seed and angel funding as the main source of tech funding in 2017. With so much talk about blockchain and cryptocurrencies, it's worth taking a look at what this exactly technology is and what its future holds.
In essence, the blockchain protocol works like a distributed ledger. Rather than a record existing in a single location, such as a regular computer server, the data is shared by multiple personal computers anywhere in the world. Additionally, the data is not only shared by its users, but can also be edited and checked by them. This means that users can complete transactions without having to go through a central intermediary. As every participant is both an active user as well as a server, the data becomes difficult to shut down or to hack. Therefore, expectations in Europe on the effect of blockchain technology on payment solutions are high. However, it does not end there. The Spanish bank Santander, together with its partners Oliver Wyman and Anthemis Group, estimated in 2015 that blockchain technology could reduce banks' infrastructure costs by 15 to 20 billion dollars per year. Other sectors in Europe could also profit from blockchain.
Cryptocurrencies can therefore be used for daily financial transactions. In 2015, approximately four percent of consumers in France stated that they use cryptocurrencies as a daily payment method. They also have some attributes of traditional currencies. Ethereum, for example, has its own exchange rate. Despite this, cryptocurrencies do not act like like a regular currency. Most currencies have an expectation of inflation built into them, meaning that the same amount of money in a few years time will not have the same purchasing power as it has today. While traditional fiat currencies are expected to decline in value, cryptocurrencies instead are determined by supply and demand. This transforms them into a valid investment asset to buy and to trade with. In 2016 alone, trades of Ethereum on the Ethrade platform reached a total of over 3,000. Numbers peaked in February 2016, when monthly trades amounted to 408.
Largely, financial supervisors in Europe struggle with this phenomenon and tend to not yet promote cryptocurrencies as a means for investment. Based on a survey conducted in the Netherlands, for example, currencies are not listed as an investment instrument. Indeed, the total number of European investments in blockchain and its most-known application Bitcoin reached a number of seven in the third quarter of 2014. In the same year, 96 percent of respondents in Great Britain also indicated they neither used nor acquired any cryptocurrencies such as Bitcoin, or other currencies such as Litecoin, Devcoin, Dogecoin or Feathercoin. European central banks recognize the existence and potential of blockchain and cryptocurrencies, but prefer to warn investors of the high risks and volatility involved with investing in this type of asset. Even Goldman Sachs, the bank that pointed at the increased use of ICOs, estimated in 2017 that the aggregate market cap of cryptocurrencies equated to less than two percent of the value of all the mined gold in the world.
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