Innovation, Venture Capital, and Cryptocurrency
With the cryptocurrency space exploding, so many companies are opening on a daily basis. Like with any new industry very few of these companies are likely to survive in the long term.
In order for a new cryptocurrency to succeeding in the long term, three things are necessary. First a company needs to be innovative and offer something unique. Second the company needs to produce a product or multiple products that can have a real use case and solve real problems for the customer. Third the company needs early stage financial backing from investors, otherwise known as venture capital.
Disclaimer: this article is theoretical and does not offer any financial advice or endorsement of any type of product or investment mentioned or not mentioned directly. Do your own research, manage your risk, and never invest more than you can afford to lose.
Innovation
The term innovation is often associated with the creation of a new technology, but it can also be associated with a new method of applying an existing technology. There are countless well known examples of innovation over the last 200 years.
Famous examples of innovation in the 19th Century include the invention of the light bulb by Thomas Edison and the telephone by Alexander Graham Bell. LED light bulbs are a great example of improving on something that already exists. Cell phones are great examples of how the telephone has been taken to the next level.
20th Century examples of innovation include the Ford Motor Company introducing the assembly line to the production of the Model T Ford in 1913. This manufacturing method revolutionised the automotive industry. It also enabled automobiles to be mass produced at an affordable price and become more and more commonplace. Tesla is another classic example of innovating something further.
21st Century examples of innovation include the Smartphone and iPhone. Both these phones are pocket size devices that function as both computers and mobile phones.
Venture Capital
Venture Capital is a form of financing a start-up company where investors provide financial capital to enable the company to function at an early stage. Often the company will run with very few resources and the venture capitalist(s) will keep the company afloat in hopes that it will succeed and thereby make money on the investment when the company starts making a profit.
This type of investing commonly known as high risk/high reward. It is very different to buying shares in well established Blue Chip companies with a proven track record. Investing in Blue Chip companies are usually low risk because they usually yield low but stable returns.
The high risk lies in 2 main areas. The start-up company might not off the ground or the venture will not be able to sustain itself for long enough for the company to succeed. However if a start-up company is able to overcome their early barriers, launch a successful product, and is able to sustain itself in the long term, investors can make a lot of money.
A notable example of an early stage investment that yielded a high return is the Australian Internet Service Provider OzEmail. In 1994, Australian Investment Banker and former Prime Minister (2015–2018) Malcolm Turnbull invested AUD 500,000 in OzEmail. In 1999, he sold his stake in the company for AUD 57 million, which is an incredible 114 times the price that was paid for that stock. This yielded him a 11,400% profit of AUD 56.5 million. Disclaimer this is only meant to serve as an example, not advice to invest in anything. Many more other startups have folded at various points and many investors have lost their money.
Digital Money vs. Cryptocurrency
Over the last 25 years, the idea and reality of digital money, also known as electronic money, has vastly grown in online banking, ecommerce, and other electronic forms of transferring money and doing business. This has significantly reduced and largely replaced people using cash and cheques for everyday business and personal transactions. This form of electronic money is based on government backed fiat currencies such as the US dollar, the Euro, the Japanese yen, or the Pound sterling.
Unlike the digital money, cryptocurrency is not backed up by any government or central bank. Cryptocurrency is generally classified as a digital asset, but could also be a security. The differentiation is only relevant because of the laws applied that apply to each category and you have to know which category a cryptocurrency falls under in order to make sure what you are doing is legal and you have paid the correct types and amounts of taxes.
The conceptual idea of cryptocurrency was first conceived in the early 1980s by David Chaum. He was also the founder of DigiCash in 1989 which was an anonymous digital currency that has since been discontinued.
Cryptocurrency in its decentralised form was started in 2009 with the introduction of Bitcoin. There are many other decentralised cryptocurrencies that have since been introduced to the market, appropriately named alcoins (or alternative coins to Bitcoin). These cryptocurrencies include Litecoin, Ethereum, and Ripple.
Cryptocurrency as an Innovation itself
Decentralisation of digital coins/tokens, or cryptocurrency, is revolutionary. It allows the middleman to be cut out, thereby lowering fees, and the unbanked to possibly benefit. Being innovative, there is still a long way to go and there is much speculation about its prospects of delivering. There is also a lot to learn and many problems to solve. It is like the internet in its beginning stages.
Cryptocurrency as a Venture Capital Prospect
Cryptocurrency as a venture capital prospect is so high risk because, not only do most companies fold and some are scams to begin with, but the cryptocurrency market is so volatile that most traders would probably not venture there (pun intended). This means it is essential to do your research and not invest more that you can afford to lose.
Those who do succeed and make good on the venture capital invested can be highly profitable. Big risk, big reward is definitely applicable. Again caution because big risk, big chance of failing too! There are many pitfalls.
Initial Coin Offerings (ICO) are usually the way in which to invest in cryptocurrency. However some are traded on exchanges. Trading is highly volatile as stated above and is very risky, but so is investing in an ICO. You really have to educate yourself to a level where you can invest wisely, if at all, and do your research carefully.
Is Cryptocurrency a Bubble that will Burst?
Cryptocurrency is in its beginning stages and everything is uncertain. Therefore this is an impossible question to answer. Everything is speculation at this stage. Bitcoin was started as social experiment. There are many opinions on this. First is that Bitcoin, and altcoins, will fail and all will be lost or almost lost completely. That is, cryptocurrency is a bubble that will burst and finally disappear. Second is that Bitcoin, and maybe another or other altcoins, are here to stay and will continue to do well and pay off long term. There are many options and opinions in between these 2 extremes. Another is that Bicoin will always be around, but the bubble will burst.
Conclusion
Exciting innovative opportunities have opened up for investors. In addition those who would otherwise not have had the opportunity in the past to invest in startups have a new avenue to get in at the start. However an investor needs to keep a level head, especially with all the hype surrounding startups and especially in the ICO/cryptocurrency industry. Do your own research because this article is an introduction and cannot cover enough in enough detail to use as a basis for any financial investment.
