Steve's note: I'm not an expert when it comes to cryptocurrencies, but I believe everyone should understand how these assets work before they consider dipping their toes into the space. That's why I'm sharing this essay from my colleague, Crypto Capital editor Eric Wade, in which he explains that the world of cryptos involves much more than just bitcoin...
If you've heard of cryptocurrencies... you know about bitcoin.
Bitcoin is the largest and most widely known cryptocurrency, accounting for around 65% of the total crypto market value. But it is just one of roughly 5,000 cryptos currently trading in the market. And more are being added every day.
Bitcoin is the original "proof of concept" cryptocurrency. It was the first one, released in 2009 by an individual (or group) known as Satoshi Nakamoto.
Bitcoin proved that it's possible to build, deploy, and support a fully decentralized and secure digital asset that doesn't rely on any centralized issuing authority. Bitcoin showed that a scarce digital asset (one that can't be copied) can be stored and transferred over the Internet.
If the Internet in the 1990s was about the transfer of information, blockchain and cryptos are about the secure transfer of value. The implications are mind-boggling.
The birth of bitcoin has paved the way for hundreds of other cryptos to flourish. However, as with all early stage industries, most early cryptos will fade away into obscurity.
In my Crypto Capital advisory, I'm focused on bringing my subscribers the ones that won't... and finding the ones that will double, rise 10-fold, or even 100-fold. But before you consider investing in cryptos, you must learn the basics about the crypto ecosystem...
Just like there are different types of stocks, there are many different types of cryptos. So when I refer to the entire crypto market, I'm talking about crypto assets.
I break these down into three sub-categories:
- Crypto protocols
- Crypto enterprises
Let's start at the top...
Since it will eventually have no inflation, bitcoin is like "digital gold."
But cryptocurrencies have very different characteristics and purposes. Some are more like businesses, some are like gambling services. Some provide the investor or token holder with some form of "utility" (like decentralized digital storage or identity verification).
At the moment, all crypto assets tend to get lumped into the "cryptocurrency" bucket. But that's wildly misleading...
The majority of "cryptocurrencies" aren't currencies at all. The yen, dollar, pound, euro – these are currencies. They are mediums of exchange. Bitcoin is a digital currency, and there are a handful of other competing digital currencies.
But the entire crypto market involves much more than these digital currencies...
Hypertext Transfer Protocol ("HTTP") is the foundation for data communication on the web. It's a protocol that defines how messages are formatted and transmitted, and the actions web servers and Internet browsers should take.
Simple Mail Transfer Protocol ("SMTP") is the foundation upon which billions of e-mails are sent daily around the world.
A handful of other protocols exist, but these are the backbone the Internet was built on. They are the fundamental infrastructure, the roads, the water pipes, and the electricity pylons of our global digital economy.
They're worth trillions of dollars, but you can't invest in HTTP or SMTP. When it comes to the existing Internet ecosystem, all the investible "value" has been captured by the likes of Amazon, Google, Facebook, and other Internet-based businesses.
But there's a new Internet backbone being created right now, and it's being built on blockchains. These crypto protocols are what the next blockchain version of Amazon will be built on. And you can invest in these protocols.
Joel Monégro from technology investment company Union Square Ventures coined the term "fat protocols" to describe the backbone of a new blockchain-based Internet. You can buy into these fat protocols using their tokens, and the ones that succeed will be worth tens or hundreds of billions of dollars.
Blockchain technology and crypto protocols have led to new businesses being built and distributed to investors as crypto assets. These kinds of crypto enterprise tokens provide investors exposure to that particular business.
That exposure could be in the form of utility. For example, holders of a decentralized version of digital storage company Dropbox might have a certain amount of storage depending on how many tokens they hold. And if they don't use all their allocated storage, maybe they could rent it to someone else for some bitcoin.
Or the exposure provided by the token could be more like an interest in the business.
(Note: The regulatory and legal framework behind how these kinds of tokens are distributed and structured is extremely important and will vary on a case-by-case basis. You do not want to buy anything that could potentially be labeled a security by regulators.)
I'll use a hypothetical example here... Let's call it "Bettingcoin."
Let's say the team behind Bettingcoin decided to build a global casino platform on blockchain.
They decide to create 1 million Bettingcoins and sell 900,000 of them (90%) to the public in return for some bitcoin to build, launch, and market the platform. They do this in an initial coin offering ("ICO") or initial exchange offering ("IEO").
These Bettingcoins give the holders an economic interest in the Bettingcoin business.
The Bettingcoin platform takes a small commission on all the bets on their platform (known as a "rake"), and then every month, it distributes a portion of that out (like a dividend) to the Bettingcoin token holders.
Bettingcoin isn't a digital currency – it's a stake in an underlying business.
So why do this on the blockchain?
By building the application on one of the crypto protocols, Bettingcoin can...
- Prove that its games are fair. If you play online blackjack with a regular online casino, you have no way of knowing if it's fair or not. Bettingcoin's games are open-source, so anyone can audit the code to see the cards are being dealt fairly.
- Provide complete transparency. All token holders can see how much rake is being generated since the blockchain captures everything. You don't need an auditor for the business because everything is on the blockchain.
- Become fully decentralized. Once the company is up and running, a portion of the monthly rake can be allocated to token holders who "bid" to help improve the platform. For example, a young programmer enters into a contract to build another casino game for the platform in return for some Bettingcoin. This way, there's no corporate structure. It's just a decentralized application that exists on the Internet, run by its own community and outside of any jurisdiction.
In short, the term "cryptocurrency" can be confusing. Most cryptos are not currencies. The term could mean crypto assets, cryptocurrencies, crypto protocols, or crypto enterprises.
The crypto revolution is just getting started... But in the end, entire industries will be upended – and the investment opportunities will be as large as those during the dawn of the Internet era.
The gains could be bigger than any asset class on earth... And they are within your reach right now. But before you get started, it's important to know the different types of investments you can make in the space.
Editor's note: Eric wouldn't be surprised if bitcoin soon hit a new all-time high, but it isn't his top crypto recommendation today. That's because he believes a major event on September 12 could cause one tiny crypto to soar five, 10, or even 50 times over the long run. He just put together a special presentation with all the details. Watch it right here.