‘Initial Coin Offering (ICO)’
An unregulated means by which funds are raised for a new cryptocurrency venture. An Initial Coin Offering (ICO) is used by startups to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks. In an ICO campaign, a percentage of the cryptocurrency is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, but usually for Bitcoin.
Also called an Initial Public Coin Offering (IPCO).
BREAKING DOWN ‘Initial Coin Offering (ICO)’
When a cryptocurrency startup firm wants to raise money through an Initial Coin Offering (ICO), it usually creates a plan on a whitepaper which states what the project is about, what need(s) the project will fulfill upon completion, how much money is needed to undertake the venture, how much of the virtual tokens the pioneers of the project will keep for themselves, what type of money is accepted, and how long the ICO campaign will run for. During the ICO campaign, enthusiasts and supporters of the firm’s initiative buy some of the distributed cryptocoins with fiat or virtual currency. These coins are referred to as tokens and are similar to shares of a company sold to investors in an Initial Public Offering (IPO) transaction. If the money raised does not meet the minimum funds required by the firm, the money is returned to the backers and the ICO is deemed to be unsuccessful. If the funds requirements are met within the specified timeframe, the money raised is used to either initiate the new scheme or to complete it.
Early investors in the operation are usually motivated to buy the cryptocoins in the hope that the plan becomes successful after it launches which could translate to a higher cryptocoin value than what they purchased it for before the project was initiated. An example of a successful ICO project that was profitable to early investors is the smart contracts platform called Ethereum which has Ethers as its coin tokens. In 2014, the Ethereum project was announced and its ICO raised $18 million in Bitcoins or $0.40 per Ether. The project went live in 2015 and in 2016 had an ether value that went up as high as $14 with a market capitalization of over $1 billion.
ICOs are similar to IPOs and crowdfunding. Like IPOs, a stake of the startup or company is sold to raise money for the entity’s operations during an ICO operation. However, while IPOs deal with investors, ICOs deal with supporters that are keen to invest in a new project much like a crowdfunding event. But ICOs differ from crowdfunding in that the backers of the former are motivated by a prospective return in their investments, while the funds raised in the latter campaign are basically donations. For these reasons, ICOs are referred to as crowdsales.
Although there are successful ICO transactions on record and ICOs are poised to be disruptive innovative tools in the digital era, investors are cautioned to be wary as some ICO or crowdsale campaigns are actually fraudulent. Because these fund-raising operatives are not regulated by financial authorities such as the Securities Exchange Commission (SEC), funds that are lost due to fraudulent initiatives may never be recovered.
In early September, 2017, the People’s Bank of China officially banned ICOs, citing it as disruptive to economic and financial stability. The central bank said tokens cannot be used as currency on the market and banks cannot offer services relating to ICOs. As a result, both bitcoin and ethereum tumbled, and it was viewed as a sign that regulations of cryptocurrencies are coming. The ban also penalizes offerings already completed.
A cryptocurrency is a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency, and arguably its most endearing allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.
BREAKING DOWN ‘Cryptocurrency’
The anonymous nature of cryptocurrency transactions makes them well-suited for a host of nefarious activities, such as money laundering and tax evasion.
The first cryptocurrency to capture the public imagination was Bitcoin, which was launched in 2009 by an individual or group known under the pseudonym Satoshi Nakamoto. As of September 2015, there were over 14.6 million bitcoins in circulation with a total market value of $3.4 billion. Bitcoin’s success has spawned a number of competing cryptocurrencies, such as Litecoin, Namecoin and PPCoin.
Cryptocurrency Benefits and Drawbacks
Cryptocurrencies make it easier to transfer funds between two parties in a transaction; these transfers are facilitated through the use of public and private keys for security purposes. These fund transfers are done with minimal processing fees, allowing users to avoid the steep fees charged by most banks and financial institutions for wire transfers.
Central to the genius of Bitcoin is the block chain it uses to store an online ledger of all the transactions that have ever been conducted using bitcoins, providing a data structure for this ledger that is exposed to a limited threat from hackers and can be copied across all computers running Bitcoin software. Many experts see this block chain as having important uses in technologies, such as online voting and crowdfunding, and major financial institutions such as JP Morgan Chase see potential in cryptocurrencies to lower transaction costs by making payment processing more efficient.
However, because cryptocurrencies are virtual and do not have a central repository, a digital cryptocurrency balance can be wiped out by a computer crash if a backup copy of the holdings does not exist. Since prices are based on supply and demand, the rate at which a cryptocurrency can be exchanged for another currency can fluctuate widely.
Cryptocurrencies are not immune to the threat of hacking. In Bitcoin’s short history, the company has been subject to over 40 thefts, including a few that exceeded $1 million in value. Still, many observers look at cryptocurrencies as hope that a currency can exist that preserves value, facilitates exchange, is more transportable than hard metals, and is outside the influence of central banks and governments.
Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture. Crowdfunding makes use of the easy accessibility of vast networks of people through social media and crowdfunding websites to bring investors and entrepreneurs together. Crowdfunding has the potential to increase entrepreneurship by expanding the pool of investors from whom funds can be raised beyond the traditional circle of owners, relatives and venture capitalists.
BREAKING DOWN ‘Crowdfunding’
In the United States, crowdfunding is restricted by regulations on who is allowed to fund a new business and how much they are allowed to contribute. Similar to the restrictions on hedge fund investing, these regulations are supposed to protect unsophisticated or non-wealthy investors from putting too much of their savings at risk. Because so many new businesses fail, their investors face a high risk of losing their principal.
How Crowdfunding Works
Crowdfunding has created the opportunity for entrepreneurs to raise hundreds of thousands or millions of dollars from anyone with money to invest. Crowdfunding websites such as Kickstarter and Indiegogo attract thousands of people hoping to invest in the next big thing. In 2015, nearly 80,000 people put up more than $20 million on Kickstarter for a company that developed a smartwatch alternative to the Apple Watch.
Crowdfunding provides a forum to anyone with an idea to pitch it in front of waiting investors. One of the more amusing projects to receive funding was from an individual who wanted to create a new potato salad recipe. His fundraising goal was $10, but he raised more $55,000 from 6,911 backers. Investors can select from a hundreds of projects and invest as little as $10. Crowdfunding sites generate revenue from a percentage of the funds raised.
What’s in It for Investors?
Many crowdfunding projects are rewards-based; investors may get to participate in the launch of a new product or receive a gift for their investment. For instance, the maker of a new soap made out of bacon fat sent a free bar to each of its investors. New video games are a popular crowdfunding investment for gamers, who are rewarded with advance copies of the game.
Equity-based crowdfunding is growing in popularity because it allows startup companies to raise money without giving up control to venture capital investors, and it offers investors the opportunity to earn an equity position in the venture. Investments in equity-based crowdfunding ventures are regulated by the Securities and Exchange Commission (SEC).
Trillion Dollar Coin
A trillion dollar coin is a theoretical coin that could be legally minted because of a United States law that allows the Treasury to produce platinum coins of any denomination. The concept of creating this platinum coin first came about in 2011 in an effort to solve the issue of the debt crisis in the U.S.
BREAKING DOWN ‘Trillion Dollar Coin’
Although there are statutory limits regarding how much paper money can be in circulation at any particular time, as well as rules regarding gold, silver and copper coinage, the U.S. Treasury does have the authority to print coins of any denomination provided they are made with platinum. And unlike the limits on paper money circulation, there are no limits on the amount of coinage that can be in circulation at any one time.
Specified in Title 31 (Money and Finance) of the United States Code (see above), the law was intended to allow for the minting of collectors’ coins in various sizes. Because of this “loophole,” some have cited that the trillion dollar coin could serve as a viable option to avoid the U.S. debt ceiling.
The theory behind a trillion dollar coin is as follows:
1. The U.S. Mint could make several trillion dollar platinum coins.
2. The president could order the coins to be deposited at the Federal Reserve.
3. The Federal Reserve could put the coins in the Treasury.
4. The Treasury could use the money to pay off some of the nation’s debt.
Shortly after the trillion dollar coin was brought up in early 2013 as an option to avoid U.S. default, opponents made plans to introduce a bill that would block the Treasury from minting such coins. The idea gained notoriety and went viral with #MintTheCoin trending for a period of time on social media platforms.
Two years later when the debt ceiling debate reared its head again, there were talks the president could invoke the Fourteenth Amendment of the Constitution to issue debt that exceeds the ceiling. However, at the time, the Treasury Department’s Daniel Watson said that the Amendment does not give the president the power to ignore the debt ceiling.
Launched in 2015, Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built and run without any downtime, fraud, control or interference from a third party. Ethereum is not just a platform but also a programming language (Turing complete) running on a blockchain, helping developers to build and publish distributed applications. The potential applications of Ethereum are wide ranging.
BREAKING DOWN ‘Ethereum’
The applications on Ethereum are run on its platform-specific cryptographic token, ether. During 2014, Ethereum had launched a pre-sale for ether which had received an overwhelming response. Ether is like a vehicle for moving around on the Ethereum platform, and is sought by mostly developers looking to develop and run applications inside Ethereum. Ether is used broadly for two purposes, it is traded as a digital currency exchange like other cryptocurrencies and is used inside Ethereum to run applications and even to monetize work. The current market cap of ether (ETH) is now more than Ripple and Litecoin although its far behind bitcoin (BTC).
According to Ethereum, it can be used to “codify, decentralize, secure and trade just about anything.” One of the big projects around Ethereum is Microsoft’s partnership with ConsenSys which offers “Ethereum Blockchain as a Service (EBaaS) on Microsoft Azure so Enterprise clients and developers can have a single click cloud based blockchain developer environment.”
Donation-based Crowd Funding
DEFINITION of ‘Donation-based Crowd Funding’
Donation-based crowdfunding is a way to source money for a project by asking a large number of contributors to donate a small amount to it. In return, backers may receive token rewards that increase in prestige as the size of the donation increases; for small sums, the funder may receive nothing at all. Sometimes referred to as rewards crowdfunding, the tokens for donations may include pre-sales of an item to be produced with funds raised. Donation-based crowdfunding can also be used in an effort to raise funds for charitable causes.
Because this sort of crowdfunding is predicated on donations, funders do not obtain any ownership or rights to the project, nor do they become creditors to the project.
BREAKING DOWN ‘Donation-based Crowd Funding’
If an entrepreneur or inventor has a great idea for a new product or service, crowdfunding offers an alternative way to raise money, as opposed to traditional methods of bank or private loans or by offering equity shares. Through donation-based crowdfunding, the entrepreneur can pre-sell his product to a large number of backers who each donate a relatively small sum toward the project. To encourage higher donation amounts, the entrepreneur may also offer token rewards of increasing value or significance, while retaining full ownership of the project or company being funded.
Examples of donation-based crowdfunding platforms include Kickstarter, Indiegogo, CrowdFunder and RocketHub. Donation-based crowdfunding platforms aimed at fund-raising for charitable causes include GoFundMe, YouCaring.com, GiveForward and FirstGiving. Typically these services take a 5%-10% fee of all donations.
What is ‘Startup Capital’
Startup capital refers to the money that is required to start a new business, whether for office space, permits, licenses, inventory, product development and manufacturing, marketing or any other expense.
Startup capital is also referred to as “seed money.”
BREAKING DOWN ‘Startup Capital’
The money can come from a bank, in the form of a business loan; or from an investor, group of investors, or venture capitalist(s). In the case of a bank loan, the business will be expected to make monthly payments to pay down the debt plus any interest and/or fees. In the case of an investor, he or she will negotiate to provide that startup capital in exchange for a certain stake in the company.
Startup capital from backers such as angel investors and venture capitalists may be done in a series of rounds, beginning with the initial funding to launch the business. As the startup continues to try to grow and develop its product or service, it might not generate enough revenue to sustain its operations or staff. This may lead to subsequent rounds of funding. These rounds may include several investors, typically with at least one lead backer who puts forth the greatest share of funding for that round. While this does dilute control of the company between the founders and the investors, it provides greater liquidity for the startup to push its ideas closer to being market-ready.
How Startup Capital Can Lead to Greater Returns
It is not uncommon for startups to require more than one funding round as they develop. Expenses for research, procurement of necessary hardware, and professional talent all require funds that may not be available to the company on its own initially. Backers of startups typically invest based on the hopes that these companies will develop into lucrative operations that not only will be able to cover the initially funding provided as startup capital, but also pay them higher returns. While the high attrition rate of startups means the majority of these endeavors fail and the startup capital they received will be lost, the few companies that endure and grow to scale may go public or even sell the operation to a larger company. Such exit scenarios are hoped to provide investors with a substantial return on investment, however that is not always the case. Some exit scenarios may see the startup company valued below the level of the funding it raised, which means the investors who injected the company with startup capital will not see a positive return.
A teachable and learnable method for creating success when founding a new company or when introducing a new product by an existing company. The lean startup method advocates developing products that consumers have already demonstrated a desire for so that a market will already exist as soon as the product is ready rather than developing a product and then hoping that a market will grow around it.
BREAKING DOWN ‘Lean Startup’
By employing lean startup principles, product developers find out whether a product interests customers and how the product might need to be refined, through a process called validated learning, before spending time and money to create that product. This way, when an idea isn’t interesting, it fails quickly and cheaply instead of slowly and expensively. The lean startup method considers experimentation to be more valuable than detailed planning. Five-year business plans built around unknowns are considered a waste of time, and customer reaction is paramount.
Instead of business plans, lean startups use a business model canvas based on hypotheses that they need to quickly test. Data doesn’t need to be complete before proceeding; it just needs to be good enough. When customers don’t react as desired, the startup quickly adjusts to limit its losses and get back on track to developing a product customers actually want. Failure is the rule, not the exception.
Entrepreneurs following this method test their hypotheses by engaging with potential customers, purchasers, and partners to get their reactions about product features, pricing, distribution, and customer acquisition. With the information they gain, they make small adjustments called iterations to fix anything minor that isn’t working, and large adjustments called pivots to fix anything major that isn’t working. This testing phase might result in changing the target customer or modifying the product to better serve the current target customer. For example, a healthy prepared meal delivery service that wants to target single 20-something workaholics in the city might learn that it has a better market in 30-something affluent mothers of newborns in the suburbs. The company might then change its delivery schedule and the types of foods it serves to provide optimal nutrition for new mothers with the ability to add on meals for spouses or partners and other children in the household.
The lean startup method first identifies a problem that needs to be solved. It then develops a minimum viable product, or the smallest form of the product that allows entrepreneurs to introduce it to potential customers for feedback. It is faster and less expensive to develop than the full-blown product idea. This method reduces the risk that startups face and decreases their typical high failure rate. Lean startup also redefines a startup as an organization that is searching for a scalable business model, not one that has an existing business plan that it’s determined to execute.
Despite its name, the lean startup method need not be used exclusively by startups. Even a large, established company can use this method when it wants to develop a new product or redevelop an existing one. Indeed, companies such as General Electric, Qualcomm and Intuit have used the lean startup method; GE recently used it to develop a new battery for use by cell phone companies in developing countries where electricity is unreliable.
The lean startup method also differentiates itself from the traditional business model when it comes to hiring. Lean startups hire workers who are able to learn, adapt and work quickly, while traditional businesses hire workers based on experience and ability. Lean startups also use different financial reporting metrics; instead of focusing on income statements, balance sheets and cash flow statements, they focus on customer acquisition cost, lifetime customer value, customer churn rate, and how viral their product could be.
The lean startup method was developed by American entrepreneur Eric Ries, founder and CEO of the Long Term Stock Exchange (LTSE). He fully explains the method in his bestselling book, “The Lean Startup,” which has been translated into 30 languages.
The early rounds of funding for a startup company, which get their name because the first is known as Series A financing, followed by Series B financing, and so on. Alphabet rounds of financing are provided by early investors and venture capital (VC) firms, which are willing to invest in companies with limited operational histories on the hope of larger future gains. These investors will typically wait until the startup has shown some basic signs of maturity and has exhausted its initial seed capital.
BREAKING DOWN ‘Alphabet Rounds’
When a company is seeking venture capital funding, it will still have little or no revenue/cash flow, but will generally have an established business model and a clear path to a designated market segment. Venture capital firms are looking to invest with a time horizon in the five- to seven-year range, at which point they can hopefully cash out to a private equity firm or through an initial public offering of stock.
Depending on the needs of the company, a Series A round of financing may be enough to propel the company to the point at which it can stand on its own operating cash flow. If a VC firm is participating in a later round of financing – a Series C financing, for example – its potential equity stake in the company will already be diluted, and it will need strong conviction that the company will earn a solid return before committing any funds to the startup.
A slang term often used by venture capitalists to describe the process by which the founders of a startup gradually lose ownership of the company they founded. As a startup that is using venture capital for funding progresses through multiple rounds of financing, the venture capitalists providing the financing will often want more and more ownership of the company.
In other words, the founders dilute their ownership in the company in exchange for capital to grow their business.
BREAKING DOWN ‘Diluted Founders’
What percentage of the company should a founder hold onto, ideally, after the venture capitalists take their piece of the pie? There is no gold standard, but generally anything between (or above) 15-25% ownership for the founders is considered a success.
It is important to note that the trade of ownership for capital is beneficial to both venture capitalist and founder. Diluted ownership of a $500 million company is a lot more valuable than sole ownership of a $10 million company.
Slang referring to a deal in which a venture capitalist invests in a startup with the goal of a quick exit strategy. The VC takes little to no role in the management and monitoring of the startup.
BREAKING DOWN ‘Drive-By Deal’
A “drive-by VC” is a venture capitalist who does this type of deal.
Critics say a drive-by deal results in companies which are pushed towards an IPO even though they aren’t ready. All because the VC wants to get its money out.
An option pool consists of shares of stock reserved for employees of a private company. The option pool is a way of attracting talented employees to a startup company – if the employees help the company do well enough to go public, they will be compensated with stock. Employees who get into the startup early will usually receive a greater percentage of the option pool than employees who arrive later.
BREAKING DOWN ‘Option Pool’
The initial size of the option pool may decrease with subsequent rounds of funding because of investors’ ownership demands. The creation of an option pool will commonly dilute the founders’ share in the company because investors (angels and venture capitalists) often insist on it.
Venture Capital Funds
Venture capital funds are investment funds that manage the money of investors who seek private equity stakes in startup and small- to medium-sized enterprises with strong growth potential. These investments are generally characterized as high-risk/high-return opportunities. In the past, venture capital investments were only accessible to professional venture capitalists, although now accredited investors have a greater ability to take part in venture capital investments.
BREAKING DOWN ‘Venture Capital Funds’
Venture capital is a type of equity financing that gives entrepreneurial or other small companies the ability to raise funding. Venture capital funds are private equity investment vehicles that seek to invest in firms that have high-risk/high-return profiles, based on a company’s size, assets and stage of product development.
Venture capital funds differ from mutual funds and hedge funds in that they focus on a very specific type of early-stage investment. All firms that receive venture capital investments have high-growth potential, are risky and have a long investment horizon. Further, venture capital funds take a more active role in their investments by providing guidance and often holding a board seat.
Venture capital funds have portfolio returns that resemble a barbell approach to investing. Many of these funds make small bets on a wide variety of young startups, believing that at least one will achieve high growth and reward the fund with a comparatively large payout at the end. This allows the fund to mitigate the risk that some investments will fold.
The Operation of a Venture Capital Fund
Venture capital investments are considered either seed capital, early-stage capital or expansion-stage financing depending on the maturity of the business at the time of the investment. However, regardless of the investment stage, all venture capital funds operate in much the same way.
First, like all funds, venture capital funds must raise money prior to making any investments. A prospectus is given to potential investors of the fund who then commit money to that fund. All potential investors who make a commitment are called by the fund’s operators and individual investment amounts are finalized.
From there, the venture capital fund seeks private equity investments that have the potential of generating positive returns for its investors. This normally means the fund’s manager or managers review hundreds of business plans in search of potentially high-growth companies. The fund managers make investment decisions based on the prospectus and the expectations of the fund’s investors. After an investment is made, the fund charges an annual management fee of around 2%.
Investors of a venture capital fund make returns when a portfolio company exits, either in an IPO or a merger and acquisition. If a profit is made off the exit, the fund also keeps a percentage of the profits in addition to the annual management fee.
Angel investors invest in small startups or entrepreneurs. Often, angel investors are among an entrepreneur’s family and friends. The capital angel investors provide may be a one-time investment to help the business propel or an ongoing injection of money to support and carry the company through its difficult early stages.
BREAKING DOWN ‘Angel Investor’
Angel investors provide more favorable terms compared to other lenders, since they usually invest in the entrepreneur starting the business rather than the viability of the business. Angel investors are focused on helping startups take their first steps, rather than the possible profit they may get from the business. Essentially, angel investors are the opposite of venture capitalists.
Angel investors are also called informal investors, angel funders, private investors, seed investors or business angels. These are affluent individuals who inject capital for startups in exchange for ownership equity or convertible debt. Some angel investors invest through crowdfunding platforms online or build angel investor networks to pool in capital.
Origins of Angel Investors
The term “angel” came from the Broadway theater, when wealthy individuals gave money to propel theatrical productions. The term “angel investor” was first used by the University of New Hampshire’s William Wetzel, founder of the Center for Venture Research. Wetzel completed a study on how entrepreneurs gathered capital.
Who Can Be Angel Investors?
Angel investors must meet the Securities Exchange Commission’s (SEC) standards for accredited investors. To become an angel investor, one must have a minimum net worth of $1 million and an annual income of $200,000.
Source of Funding
Angel investors typically use their own money, unlike venture capitalists who take care of pooled money from many other investors and place them in a strategically managed fund.
Though angel investors usually represent individuals, the entity that actually provides the fund may be a limited liability company, a business, a trust or an investment fund, among many other kinds of vehicles.
Angel investors who seed startups that fail during their early stages lose their investments completely. This is why professional angel investors look for opportunities for a defined exit strategy, acquisitions or initial public offerings (IPOs).
The effective internal rate of returns for a successful portfolio for angel investors ranges from 20 to 30%. Though this may look good for investors and seem too expensive for entrepreneurs with early-stage businesses, cheaper sources of financing such as banks are not usually available for such business ventures. This makes angel investments perfect for entrepreneurs who are still financially struggling during the startup phase of their business.
Death Valley Curve
Death Valley Curve is a slang phrase used in venture capital to refer to the period of time from when a startup firm receives an initial capital contribution to when it begins generating revenues. During the death valley curve, additional financing is usually scarce, leaving the firm vulnerable to cash flow requirements.
BREAKING DOWN ‘Death Valley Curve’
The name “death valley” refers to the high probability that a startup firm will die off before a steady stream of revenues is established. This period of time can be represented as an actual curve on a graph that shows the decline in capital. During this phase, it may be difficult for startups to raise additional capital. When potential investors see such a decline, they may decide to not back the company. The longer a startup burns through its cash, the likelihood it may not endure as a going concern. Breaking out of the death valley curve can be a turning point towards growing beyond the startup phase.
What Leads to the Death Valley Curve
After a firm receives its first round of financing, it can experience a number of initial costs. Offices are usually procured, staff is hired and operating costs are incurred; meanwhile, the firm is not earning significant income. Other costs associated with the launch of the business that factor into the curve can include research and development of the product or service, and the cost of the product launch and bringing it to market. Even after the service or product becomes available to the customer base, the startup may continue to face costs while not generating any revenue, thus deepening the curve. For example, after a product is on a shelf or made available online, it can incur “slotting fees” from a third-party seller who wants to move inventory.
If customers do not respond to the product, the startup cannot make back the money it has already invested in coming to market. Furthermore, ongoing costs to maintain its staff and operations are still incurred while the company is trying to attract revenue. Such circumstances may befall startups regardless of whether the product is an app, a service, or a retail item.
Unless a firm can effectively manage itself through the death valley curve, it will fall victim to negative cash flows. This challenge, among others, contributes to the usually high attrition rate among startups. Scaling up to a larger operation typically requires generating enough customer demand to meet revenue needs, while also handling costs to allow the company to make new investments towards growth.
A capitalization table is a spreadsheet or table, typically for a startup or early stage venture, that shows capitalization, or ownership stakes, in a company, including equity shares, preferred shares and options, and the various prices paid by stakeholders for these securities. The table uses these details to show ownership stakes on a fully diluted basis, thereby enabling the company’s overall capital structure to be ascertained at a glance. Founders are usually listed first, followed by executives and key employees with equity stakes, then investors, such as angel investors and venture capital firms, and others who are involved in the business plan.
BREAKING DOWN ‘Capitalization Table’
A basic capitalization table lists who owns stock, warrants, options or other investments in a startup. A more complex table may also list potential new funding sources, mergers and acquisitions, public offerings, or other hypothetical transactions. Every line should add value to the business and make it more attractive to employees, investors and partners.
Creating a Capitalization Table
A capitalization table should be designed in a simple, organized manner that answers who owns which securities and which securities are outstanding. For this reason, a table for a chief executive officer (CEO) may vary from that of a chief financial officer (CFO). In most cases, the names of the security owners should be listed on the Y axis and the types of securities should be listed on the X axis. In addition, all holdings of each investor should be in one row. No other information or notes should be on the table.
Updating a Capitalization Table
Because a startup is constantly evolving, its capitalization table must be continuously updated as well. For example, selling new shares of an existing security, issuing shares of a new security, increasing the option pool or granting options to an employee all change the capitalization table. Likewise, terminating options when an employee leaves the business, letting options expire, having an investor exercise vested options, or having an investor redeem, transfer or sell shares are also instances that alter the table. Because every decision the entrepreneur makes impacts capitalization, an accurate capitalization table is necessary to make informed decisions based on the most current information. For example, when considering a new source of funding, the entrepreneur must take into account various pre-money valuations, round sizes and option pool targets, all of which are listed on the capitalization table.
Example of a Capitalization Table
In February 2016, Amedica Corporation, which creates and sells silicon nitride ceramic biomaterial for spine, hip, knee, dental and other applications, regained compliance with the NASDAQ’s minimum bid price requirement. The company also provided financial results, showing substantial growth in improving its capitalization table, capitalization and operational structure. The company expected a positive change in fourth quarter sales for 2015, finishing above its stated goal.
Krugerrand Gold Coin
DEFINITION of ‘Krugerrand Gold Coin’
A gold coin minted by the Republic of South Africa. Krugerrand gold coins contain exactly one troy ounce of gold. This coin was first minted in 1967 in order to stimulate the market for South African gold. It is considered legal tender within the country.
BREAKING DOWN ‘Krugerrand Gold Coin’
The Krugerrand is one of the more frequently traded gold coins in the world market. It was the first gold-bullion coin that was tenderable at the market value of its face gold content. Because it was not supposed to be a replacement for the currency, it is considered to be a medal coin by definition.
A mint is a primary producer of a country’s coin currency, and it has the consent of the government to manufacture coins to be used as legal tender. Along with production, the mint is also responsible for the distribution of the currency, protection of the mint’s assets and overseeing its various production facilities. The U.S. Mint was created in 1792 and is a self-funded agency. A country’s mint is not always located or even owned by the home country, such as when the San Francisco Mint produced 50-centavo silver coins for Mexico in 1906.
BREAKING DOWN ‘Mint’
The U.S. Mint has six main facilities that help produce coins for the United States. The headquarters building is in Washington, D.C., and staffers there perform administrative functions. Fort Knox, in Kentucky, serves as a storage facility for gold bullion. The mint operates a major facility in Philadelphia that produces coins for circulation, creates engravings used for coins and makes the dies that stamp images onto metal. The mint in Denver also produces coins for circulation, except these coins typically have a “D” stamped near the date to indicate “Denver.” The San Francisco facility focuses on creating special, high-quality proof sets of coins. The small facility at West Point, New York, creates special coins from silver, gold and platinum. Some coins are commemorative, which means they do not go into general circulation as normal currency.
Because the United States has a lot of people and a large economy, the U.S. Mint produces billions of coins every year. In 2015 alone, the U.S. Mint produced more than 17 billion coins for circulation at facilities in Philadelphia and Denver. More than 9.3 billion of these coins were cents, which totals $93 million in pennies. By comparison, nearly 3 billion quarters were struck for a value of $750 million.
The most popular commemorative coin, based on number of coins sold from 1982 to 2013, was the Statue of Liberty coin set from 1986 that celebrated the monument’s centennial. Consumers bought nearly 15.5 million coins out of those sets. The next most popular coin over that span was the 1982 half dollar commemorating the 250th anniversary of George Washington’s birth. All commemorative coins are legal tender for the face value, although the precious metals and collectible value of these coins usually keep prices well above face value.
David Rittenhouse, appointed by Washington, was the nation’s first director of the U.S. Mint. Throughout its history, mints also existed in Georgia, North Carolina, Nevada and Louisiana. Until 1873, the U.S. Mint reported directly to the president of the United States. As of 2016, the mint operates under the auspices of the Department of the Treasury.
Coins made from precious metals that are generally used for investment purposes. Bullion coins are usually made from gold and silver, and may also be available in platinum and palladium. Many countries have their own official bullion coins, such as the American Eagle series of coins available from the Unites States Mint, and the Canadian Maple Leaf series offered by the Royal Canadian Mint. They are typically minted in weights that are fractions of one troy ounce to fit a variety of budgets.
BREAKING DOWN ‘Bullion Coins’
Bullion coins appeal to investors who are looking for an investment that has stood the test of time as a store of value for thousands of years. The steady rise in gold prices starting in 2000 has spurred tremendous interest in bullion coins in recent years.
Bullion coins may command a premium in the market place as compared to the spot price of the underlying precious metal on global metal exchanges. This premium may be attributed to an underlying demand for bullion coins, as well as their relative liquidity, small size (which facilitates storage) and the costs involved in manufacturing and distributing them.
American Eagle gold bullion coins are among the most widely traded bullion coins in the world. These coins are minted from 22 karat gold (91.67% purity) and are available in four weights – 1/10, 1/4, 1/2 and 1 troy ounce. Other popular gold bullion coins are the Canadian Maple Leaf, South African
Krugerrands and Chinese Gold Pandas.
Digital Gold Currency – DGC
An electronic, private currency backed by gold bullion. Companies that provide digital gold currency make it possible for people to own gold and to pay each other online in gold. Digital gold provides the same protection against inflation as gold bars or certificates, but is more secure and convenient to store.
BREAKING DOWN ‘Digital Gold Currency – DGC’
Another advantage is that digital gold can be purchased in any amount, whereas bars or coins only come in predetermined amounts. Digital gold is not a viable way to pay most businesses for products and services, however.
In a digital gold currency account, account balances and transactions are denominated by weight. GoldMoney, established in 2001, is one company that offers digital gold currency.
1. To lower the value, quality or status of something or someone.
2. To lower the value (of a coin) by adding metal of inferior value.
BREAKING DOWN ‘Debasement’
In other words, debasement is the degrading of the value of something or character of someone. In the context of coins, it is the process of melting down a coin and mixing it with a lower quality metal to create additional coins of the same denomination.
A monetary system in which a government recognizes coins composed of gold or silver as legal tender. The bimetallic standard (or bimetallism) backs a unit of currency to a fixed ratio of gold and/or silver.
BREAKING DOWN ‘Bimetallic Standard’
The bimetallic standard was first used in the United States in 1792 as a means of controlling the value of money. For example, during the 18th century in the United States, one ounce of gold was equal to 15 ounces of silver. Therefore, there would be 15 times more Silver (by weight) in $10 worth of silver coins than $10 worth of gold coins. Adequate gold and silver was kept in reserves to back the paper currency. This bimetallic standard was used until the civil war, when the Resumption Act of 1875 stated that paper money could be converted to gold.
Legal tender is any official medium of payment recognized by law that can be used to extinguish a public or private debt, or meet a financial obligation. The national currency is legal tender in practically every country. A creditor is obligated to accept legal tender toward repayment of a debt. Legal tender can only be issued by the national body that is authorized to do so, such as the U.S. Treasury in the United States and the Royal Canadian Mint in Canada.
BREAKING DOWN ‘Legal Tender’
Widely accepted currencies such as the U.S. dollar and euro are accepted as legal tender in many nations, especially those where foreign currencies are in short supply. Countries with extensive business and cultural ties may also accept each other’s currencies as legal tender in limited amounts. For example, some U.S. and Canadian merchants located close to the U.S.-Canada border accept both Canadian dollars and U.S. dollars as payment for goods and services.
The popularity of cross-border and online shopping is increasing demand for more forms of legal tender; however, given official objection to such alternatives, these may still be some years away. In May 2013, the governor of Arizona vetoed a bill that would have made gold and silver coins legal tender in the state, in addition to existing U.S. currency. Bitcoin, another popular payment alternative, is a virtual online currency that can be used for a growing number of transactions but is not considered legal tender.
Crime of 1873
The Crime of 1873 was the notable omission of the standard silver dollar from the coinage law passed on February 12, 1873, and signed by President Ulysses S. Grant. This crime paved the way for the United States’ adoption of the gold standard and was highly controversial, especially for those no longer able to turn their silver into legal tender.
BREAKING DOWN ‘Crime of 1873’
History of Coinage Law and Reasons for Abandoning Silver
Coinage law oversees the coinage and legal tender that circulates in the United States and sets the standard for the relative worth of each form of tender in use. The first Coinage Act, passed in 1792, established the U.S. Mint and set the dollar as the standard unit of money.
The Coinage Act Of 1792
Regulation passed by Congress on April 2, 1792 that established the U.S. Mint. The law also established the U.S. coinage system and placed the mint at the seat of the U.S. government. The law created U.S. eagles, dollars, dismes and cents, and half-denominations of each unit; the value of each of these coins was dependent on the type (gold, silver, copper) and amount of material used to make them.
BREAKING DOWN ‘The Coinage Act Of 1792’
The Coinage Act of 1792 was more commonly known as the Mint Act. This act also created five officers of the mint, including a director, an assayer, a chief coiner, an engraver and a treasurer (not to be confused with the Secretary of the Treasury, a wholly separate entity). This act laid the foundation for the modern U.S. currency and is still in effect today, albeit with many modifications over the past two-plus centuries.
South African Reserve Bank
The South African Reserve Bank is the reserve bank of the Republic of South Africa. Its functions include the formulating and implementing of South Africa’s monetary policy, ensuring the efficiency of South Africa’s financial system and educating South Africa’s citizens about the monetary and economic situation of the country. Unlike the reserve banks of most commonwealth nations, the South African Reserve Bank has always been privately owned.
BREAKING DOWN ‘South African Reserve Bank’
The South African Reserve Bank was established in 1921 by South Africa’s parliament with the Currency and Banking Act of 1921. Prior to the establishment of the reserve bank, South Africa’s currency was handled by commercial banks. The South African Reserve Bank is governed by a board of fourteen members which include the governor, three deputy governors, three directors who are appointed by the president and seven members who represent the seven top industries in the country including agriculture, commerce and finance.
DEFINITION of ‘Bitcoin Exchange’
A bitcoin exchange is a digital marketplace where traders can buy and sell bitcoins using different fiat currencies or altcoins. A bitcoin currency exchange is an online platform that acts as an intermediary between buyers and sellers of the cryptocurrency.
The currency ticker used for bitcoin is either BTC or XBT.
BREAKING DOWN ‘Bitcoin Exchange’
Bitcoin exchange platforms match buyers with sellers. Like a traditional stock exchange, traders can opt to buy and sell bitcoin by inputting either a market order or a limit order. When a market order is selected, the trader is authorizing the exchange to trade his coins for the best available price in the online marketplace. With a limit order set, the trader directs the exchange to trade coins for a price below the current ask or above the current bid, depending on whether s/he is buying or selling.
For example, on a bitcoin exchange, three coin sellers are asking for BTC/USD 2265.75, BTC/USD 2269.55, and BTC/USD 2270.00. A trader who initiates a market order to buy bitcoins will have his order filled at the best ask price of $2265.75. If only five bitcoins are available for the best ask and 10 coins are available for $2269.55, and the trader wants to buy 10 at market, his order will be filled with 5 coins @ $2265.75 and the remaining 5 @ $2269.55.
However, a trader who thinks that he can get bitcoins for a better price could set a limit order for, say, $2260.10. If a seller matches his/her ask price with this order or sets a price below this figure, the buyer will get filled.
Online bitcoin marketplaces usually designate bitcoin participants as either makers or takers. When a buyer or seller places a limit order, the exchange places adds it to its order book until the price is matched by another trader on the opposite end of the transaction. When the price is matched, the buyer or seller who set the limit price is referred to as a maker. A taker is a trader who places a market order that immediately gets filled.
All bitcoin exchanges have transaction fees that are applied to each completed buy and sell order carried out within the exchange. The fee rate is dependent on the volume of bitcoin transactions that is conducted. For example, bitcoin exchange Poloniex has its rate ranging from 0 to 0.25%, GDAX fees range from 0 to 0.30%, Kraken’s fees range from 0 to 0.36%, and Paxful charges 1% of the amount of a sale to the seller but buyers don’t get charged.
To transact in bitcoin on an exchange, a user has to register with the exchange and go through a series of verification processes to authenticate his or her identity. Once the authentication is successful, an account is opened for the user who then has to transfer funds into this account before s/he can buy coins. Different exchanges have different payment methods that can be used for depositing funds including bank wires, direct bank transfers, credit or debit cards, bank drafts, money orders, and even gift cards. A trader who would like to withdraw money from his or her account could do so using the options provided by his exchange which could include a bank transfer, PayPal transfer, check mailing, cash delivery, bank wire, or credit card transfer.
Making deposits and withdrawals come at a price, depending on the payment method chosen to transfer funds. The higher the risk of a chargeback from a payment medium, the higher the fee. Making a bank draft or wiring money to the exchange has a lesser risk of a chargeback compared to funding your account with PayPal or a credit/debit card where the funds being transferred can be reversed and returned to the user upon his/her request to the bank.
In addition to transaction fees and funds transfer fees, traders may also be subject to currency conversion fees, depending on the currencies that are accepted by the bitcoin exchange. If a user transfers Canadian dollars to an exchange that only deals in US dollars, the bank or the exchange will convert the CAD to USD for a fee. Transacting with an exchange that accepts your local currency is the best way to avoid the FX fee.
Foreign exchange spreads are important measures when transacting in bitcoin and vary depending on how liquid the bitcoin exchange is. For example, on May 31, 2017, the best bitcoin bid and ask on Kraken, a bitcoin exchange system, was XBT/USD 2,314.07 and XBT/USD 2,317.75, respectively. Another online exchange, GDAX, had its best bid and ask period for the same time window as BTC/USD 2314.99 and BTC/USD 2319.00. Clearly, the FX spread is wider for GDAX, but may not necessarily be so at all times of the day. (Note that the Bitcoin ticker is either XBT or BTC, depending on the exchange).
Note that a bitcoin exchange is different from a bitcoin wallet. While the former offers a platform through which bitcoin buyers and sellers can transact with each other, the latter is simply a digital storage service for bitcoin holders to store their coins securely. To be more technical, bitcoin wallets store private keys which are used to authorize transactions and access the bitcoin address of a user. Most bitcoin exchanges provide bitcoin wallets for their users, but may charge a fee for this service.
Bitcoin cash is a cryptocurrency is a fork of Bitcoin Classic that was created in August 2017. Bitcoin Cash increases the size of blocks, allowing more transactions to be processed.
BREAKING DOWN ‘Bitcoin Cash’
Since its launch, Bitcoin faced pressure from community members on the topic of scalability. Specifically, that the size of blocks – set at 1 megabyte (MB), or 1,000 bytes, in 2010 – would slow down transaction processing times, thus limiting the currency’s potential, just as it was gaining in popularity. The block size limit was added to the Bitcoin code in order to prevent spam attacks on the network at a time when the value of a Bitcoins was low. By 2015, the value of Bitcoins had increased substantially and average block size had reached 600 bytes, creating a scenario in which transaction times could run into delays as more blocks reached maximum capacity.
A number of proposals have been made to deal with transaction processing over the years, often focusing on increasing block size. Because the Bitcoin code is not managed by a central authority, changes to the code require buy-in from developers and miners. This consensus-driven approach can lead to proposals taking a long time to finalize. This has resulted in groups creating separate blockchain ledgers using new standards, called a fork. Several forks, such as Bitcoin XT and Bitcoin Unlimited, failed to be adopted by a wide audience. Bitcoin Cash, launched in August 2017, is another fork from Bitcoin Classic.
Bitcoin Cash differs from Bitcoin Classic in that it increases the block size from 1 MB to 8 MB. It also removes Segregated Witness (SegWit), a proposed code adjustment designed to free up block space by removing certain parts of the transaction. The goal of Bitcoin Cash is to increase the number of transactions that can be processed, and supporters hope that this change will allow Bitcoin Cash to compete with the volume of transactions that PayPal and Visa can handle by increasing the size of blocks.
Because the computer power required to process larger blocks could price out some smaller miners, critics worry that adopting Bitcoin Cash’s approach will lead to power being concentrated in the hands of companies that can afford more and better equipment. Opponents to the fork worry that this will threaten the consensus-driven approach to Bitcoin, as a small number of companies could control Bitcoin and more readily force changes on the community in the future.
A successful hard fork for Bitcoin Cash entails surviving long enough to entice individuals and companies to use and mine the new digital currency if it is able to build substantial interest and reach critical mass. Once this point is reached, however, Bitcoin Cash may find that its success has prompted others to develop their own alternative coins, which would put the same pressure on Bitcoin Cash that it had placed on Bitcoin Classic. Since the issue of scalability tends to be at the forefront of cryptocurrency debates, developers have made increasing block size and improving transaction processing speeds their top focus areas.
A proposed upgrade to Bitcoin Core that allows larger block sizes. Bitcoin Unlimited is designed to improve transaction speed through scale.
BREAKING DOWN ‘Bitcoin Unlimited’
The development of bitcoin was jumpstarted by Satoshi Nakamoto, who published a paper in 2008 called “Bitcoin: A Peer-to-Peer Electronic Cash System”. The paper described the use of a peer-to-peer network as a solution to the problem of double-spending. The problem – that a digital currency or token can used in more than one transaction – is not found in physical currencies, as a physical bill or coin can, by its nature, only exist in one place at a single time. Since a digital currency does not exist in the physical space, using it in a transaction does not remove it from someone’s possession.
The software standard for Bitcoin developed by Nakamoto is referred to as Bitcoin or Bitcoin Core. Since its launch, a number of improvements to the software have been proposed. These proposals often focus on increasing the number of transactions that the system can handle, either by speeding up the process or by increasing the size of bitcoin blocks.
Blocks are files where bitcoin network data is permanently recorded. A block records recent bitcoin transactions, and serves a similar purpose as a ledger page or record book. Each time a block is completed it gives way to the next block in the blockchain. Blocks in Bitcoin Core are limited to one megabyte. Bitcoin Unlimited proposed that the size of blocks should be increased, and that miners – individuals and companies that provide the computing power required to maintain records of bitcoin transactions – will step up to increase capacity.
Because bitcoin is not controlled by a single entity, decisions concerning upgrades are done made through consensus. One of the primary reasons for this approach is that any organization that pushes forward with a change that other groups have not agreed to can result in bitcoin “forking”, which means that the network that runs bitcoin splits between different standards. A consensus-driven approach can, however, make it harder to tackle issues that bitcoin adoption faces.
Concern over forking is one of the reasons why Bitcoin Unlimited is not the new standard. Another concern voiced over Bitcoin Unlimited is that allowing bigger blocks could result in only miners with large processing power being profitable, while smaller miners with more limited resources will be pushed out. The concentration of capacity generation in the hands of fewer miners could increase costs. Proponents of Bitcoin Unlimited believe that moving away from the block size limit will democratize the system, as miners and node owners are free to choose how large of a block size to accept.
A fork from Bitcoin Core that proposed increasing the size of blocks. Despite early successes, Bitcoin Classic failed to be adopted by the wider bitcoin community.
BREAKING DOWN ‘Bitcoin Classic’
Bitcoin was jumpstarted by Satoshi Nakamoto, who published a paper in 2008 called “Bitcoin: A Peer-to-Peer Electronic Cash System”. The paper described the use of a peer-to-peer network as a solution to the problem of double-spending (using bitcoin for more than one transaction), with transaction details added to the end of block chains. Because of the computational power needed to attack and decode a block chain, bitcoin is able to retain a high level of security. This limited the need for transactions to go through trusted third-parties, such as financial institutions.
At the heart of bitcoin is its reference software. The software standard for bitcoin was released by Satoshi Nakamoto in 2008, and is referred to as Bitcoin or Bitcoin Core. Since its launch, a number of improvements to the software have been proposed. These proposals often focus on increasing the number of transactions that the system can handle, either by speeding up processes or by increasing the size of bitcoin blocks.
Blocks are files where bitcoin data is permanently recorded. They are created when miners – people who provide the computing power required to maintain records of bitcoin transactions – add new transaction information through a hashing algorithm. Each time a block is completed it gives way to the next block in the blockchain, with blocks in Bitcoin Core are limited to one megabyte. As the number of transactions have increased, this size limit has resulted in the development of bottlenecks that have slowed down transaction processing speeds. Bitcoin Classic sought to address this capacity issue by increasing the size of the blocks.
In 2016, Bitcoin Classic proposed increasing blockchain sizes from 1 megabyte to 2 megabytes. In effect, this would double the number of transactions that could be processed per second. The proposed increase was less aggressive than what was proposed by Bitcoin XT, which in 2015 proposed increasing the size of blocks to 8 megabytes.
Because bitcoin is not controlled by a single entity, decisions concerning changes are made through consensus. Any changes proposed have to receive substantial support from the greater bitcoin community. One of the primary reasons for this approach is that any organization that pushes forward with a change that other groups have not agreed to can result in “forking”, which means that the network that runs bitcoin splits between different standards. Ensuring that a proposal receives majority support reduces the possibility of conflicting standards being used by different bitcoin nodes and miners. Once a new standard is accepted, previous software standards become obsolete.
Despite the number of overloaded blocks and transaction fees increasing, the number of nodes using Bitcoin Classic never reached critical mass. By the end of 2016, Bitcoin Classic shifted its stance from increasing block sizes to 2 megabytes to allowing nodes and miners to set their own block sizes, a similar approach taken by Bitcoin Unlimited.
One of the world’s leading Bitcoin exchanges, launched in July of 2010. Mt. Gox allows users to buy, sell and trade Bitcoins on its exchange while offering support for U.S. dollars, euros and Canadian dollars. Members of the Mt. Gox exchange consider their Bitcoin holdings to be housed in a sort of e-wallet, allowing for quick trading of the digital currency with other traders on the exchange. Mt. Gox charges a commission for all trades executed through the exchange
BREAKING DOWN ‘Mt. Gox’
Bitcoins are a digital currency created in 2009, which allow users of Bitcoin exchanges to make payments and trades at a very low cost. Bitcoin circulation and expansion is governed by Bitcoin software and is programmed to expand as a geometric series, thus limiting the effects of monetary inflation on the virtual currency. Bitcoins are one of many virtual currencies that can be traded online by users.
A Polish-based bitcoin exchange. Bitomat was the first Bitcoin exchange in Poland to offer support for the Polish Zloty, officially going online on April 4, 2011. Using Bitomat, traders are able to make deposits into a virtual wallet, in either PLN or Bitcoins and place buy and sell orders, with the exchange acting as an escrow for the funds.
Bitomat was acquired by the Mt. Gox Bitcoin exchange in August of 2011.
BREAKING DOWN ‘Bitomat’
Bitcoins are a digital currency created in 2009, which allow users of bitcoin exchanges to make payments and trades at a very low cost. Bitcoin circulation and expansion is governed by Bitcoin software and is programmed to expand as a geometric series, thus limiting the effects of monetary inflation on the virtual currency. Bitcoins are one of many virtual currencies that can be traded online by users.
A fork from Bitcoin Core that proposed increasing the size of blocks from one megabyte to eight megabytes. Bitcoin XT gained first attention in 2015.
BREAKING DOWN ‘Bitcoin XT’
Bitcoin was started by Satoshi Nakamoto in the 2008 paper “Bitcoin: A Peer-to-Peer Electronic Cash System.” The paper described the use of a peer-to-peer network as a solution to the problem of double-spending, with transaction details added to the end of blockchains. Managing the blockchains required substantial computational power in order to maintain security.
At the heart of bitcoin is its reference software, first released by Satoshi Nakamoto in 2008. This release is referred to as Bitcoin or Bitcoin Core. Since inception, the bitcoin community has proposed a number of improvements to the software, often focusing on increasing the size of blocks in order to improve transaction speed.
Blocks are files where bitcoin data is permanently recorded. They are created when miners – people who provide the computing power required to maintain records of bitcoin transactions – add new transaction information through a hashing algorithm. Each time a block is completed it gives way to the next block in the blockchain, with blocks in Bitcoin Core are limited to one megabyte. As the number of transactions increased, this size limit resulted in the development of bottlenecks that slowed down processing speeds. Bitcoin XT sought to address this capacity issue by increasing the size of the blocks.
In 2015, Bitcoin XT proposed increasing blockchain sizes from 1 megabyte to 8 megabytes. In effect, this would increase the number of transactions that could be processed per second eightfold. After the initial block size increase, the blocks would double in size each subsequent year. This approach was considered aggressive, though did gain initial support because increasing block sizes was considered one of the primary ways to improve bitcoin transaction performance.
Because bitcoin is not controlled by a single entity, decisions concerning changes are made through consensus. Any changes proposed have to receive substantial support from the greater bitcoin community. One of the primary reasons for this approach is that any organization that pushes forward with a change that other groups have not agreed to can result in “forking”, meaning that a different standard is being used from the previous one. Ensuring that a proposal receives majority support reduces the possibility of conflicting standards being used by different bitcoin nodes and miners. Once a new standard is accepted, previous software standards become obsolete.
By early 2016, the number of nodes using Bitcoin XT began to decline. Other proposals, such as Bitcoin Classic and Bitcoin Unlimited became more popular.
A duplicate record of every confirmed Bitcoin transaction that has taken place over a peer-to-peer network. Digital copy is one of the security features of the Bitcoin platform that was implemented in order to tackle the problem of double spending.
BREAKING DOWN ‘Digital Copy’
The rise of cryptocurrencies became prominent in 2009 with the introduction of Bitcoin. One of the catalysts behind the creation of Bitcoin was the desire to operate in a currency that could not be controlled by any central authority. Unlike the U.S. dollar, which can have its value adjusted for inflationary measures by the Federal Reserve, the Bitcoin is independent of any controlling body. In fact, no one controls the Bitcoin. The Bitcoin operates through a decentralized system which means a network of independent computers worldwide communicate and transmit Bitcoin transactions and data to each other. However, transacting in digital currency using a decentralized system brought about a problem known as double spending.
Double spending occurs when a user buys from two sellers using the same Bitcoin. The double spending issue can be illustrated in the investing world with an investor Dave who has $700 in his checking account. His checking account is linked to both his investment accounts with Broker A and Broker B. When Dave completes a buy order, the funds are automatically transferred from his checking account to his investment account where the order was placed. Dave buys one stock worth $700 including the trading fee from Broker A and makes the exact same buy order of one stock with Broker B. In a situation where there is a lag in the system and transactions can be processed at the same time, both brokers will receive information that Dave has the required funds in his account, earning Dave two shares instead of one. Fortunately, spending money more than once is a risk that traditional currencies avoid through institutions like clearing houses, banks and online payment systems like PayPal that update a user’s account balances immediately a transaction occurs. In order to solve this problem in the digital currency platform, the maker of Bitcoin created a process whereby each transaction copied onto a ledger is verified by multiple Bitcoin miners distributed across networks.
Every Bitcoin transaction is recorded in a ledger known as a block chain, and then stored and copied digitally across multiple networks in the decentralized system. To prevent manipulative users from spending digital money twice, digital copies ensure that every bitcoin participant holds an encrypted digital copy of everyone’s bitcoin holdings. Bitcoin miners verify new transactions and add them to the distributed ledgers. The first miner to confirm a legitimate transaction adds it to the queue of new transactions to be included in the ledger and publishes his/her results. Other miners verify the first miner’s results before adding the transaction to the ledger queue of their digital copies. Transactions are finally and permanently recorded in the blockchain after 6 miners have confirmed that the user has the necessary funds to complete the transaction. Using the illustration above, the first miner may mark Dave’s order with Broker A as legitimate, and cancel his transaction with Broker B given his insufficient funds. If the other miners follow suit, Dave’s transaction with Broker A is finalized and recorded in the ledger. In a way, miners act as the clearing house for Bitcoin transactions.
With digital copies of Bitcoin ledgers, it is highly improbable for a transaction history to be compromised. A user who tries to manipulate a transaction on the ledger for his own gain would do so in vain as he is only able to change his own digital copy. For a transaction input to be changed on the ledger, the user will have to access everyone’s copy which may prove to be highly futile.
A Bitcoin wallet is a software program where Bitcoins are stored. To be technically accurate, Bitcoins are not stored anywhere; there is a private key (secret number) for every Bitcoin address that is saved in the Bitcoin wallet of the person who owns the balance. Bitcoin wallets facilitate sending and receiving Bitcoins and gives ownership of the Bitcoin balance to the user. The Bitcoin wallet comes in many forms; desktop, mobile, web and hardware are the four main types of wallets.
BREAKING DOWN ‘Bitcoin Wallet’
A Bitcoin wallet is also referred to as a digital Wallet. Establishing such a wallet is an important step in the process of obtaining Bitcoins. Just as Bitcoins are the digital equivalent of cash, a Bitcoin wallet is analogous to a physical wallet. But instead of storing Bitcoins literally, what is stored is a lot of relevant information like the secure private key used to access Bitcoin addresses and carry out transactions. The four main types of wallet are desktop, mobile, web and hardware.
Desktop wallets are installed on a desktop computer and provide the user with complete control over the wallet. Desktop wallets enable the user to create a Bitcoin address for sending and receiving the Bitcoins. They also allow the user to store a private key. A few known desktop wallets are Bitcoin Core, MultiBit, Armory, Hive OS X, Electrum, etc.
Mobile wallets overcome the handicap of desktop wallets, as the latter are fixed in one place. Once you run the app on your smartphone, the wallet can carry out the same functions as a desktop wallet, and help you pay directly from your mobile from anywhere. Thus a mobile wallet facilitates in making payments in physical stores by using “touch-to-pay” via NFC scanning a QR code. Bitcoin Wallet, Hive Android and Mycelium Bitcoin Wallet are few of the mobile wallets.
As for web wallets, they allow you to use Bitcoins from anywhere, on any browser or mobile. The selection of your web wallet must be done carefully since it stores your private keys online. Coinbase and Blockchain are popular web wallet providers.
The number of hardware wallets is currently very limited. These devices can hold private keys electronically and facilitate payments but are still in the development phase.
Keeping your Bitcoin wallet safe is very crucial. Some safeguards include: encrypting the wallet with a strong password, and choosing the cold storage option i.e. storing it offline.
Coinbase is a bitcoin broker that provides a platform for traders to buy and sell bitcoin with fiat money. In addition to its primary operation as a broker, Coinbase is also a bitcoin exchange and wallet provider.
BREAKING DOWN ‘Coinbase’
Coinbase was founded by Brian Armstrong and Fred Ehrsam in 2012 and has its headquarters in San Francisco, California. The platform was first launched as a digital wallet for users to store their bitcoins online, before venturing into the brokerage space where users can buy and sell bitcoins. As of 2017, Coinbase is the largest bitcoin broker in the world and serves users in 33 countries.
Any cryptocurrency trade requires a buyer and a seller. The buyer and seller need to be registered with a broker in order to carry out a transaction with each other. To ensure fair trade practices between both parties, an exchange is required to monitor all transactions. However, neither party can trade directly with the other using an exchange; that’s the purpose of a broker. Like a stock broker, Coinbase brokerage acts as an intermediary between the transactors and the exchange and provides an online system whereby buyers and sellers can conduct trades with each other, regardless of their geographical location.
The exchange platform for Coinbase is called GDAX – Global Digital Asset Exchange, formerly called Coinbase Exchange. GDAX records every transaction including volume and price levels of not only Bitcoin trades, but also Ethereum and Litecoin. GDAX allows users to quickly engage in multiple trades without having to initiate bank transfers for each trade which could be delayed for a couple of days. The cryptocurrency exchange also has margin trading as an additional feature for institutional investors.
Buyers and sellers on GDAX are referred to as either makers or takers. Makers, the users who set a limit price on their orders, usually have their limit orders added to the order book. The order book retains the order until another trader matches the price; this trader is called the taker. For example, a trader (maker) who places a sell order for 10 BTC and sets a limit price of USD 2300 will have his order stored into the GDAX order book, until a buyer (taker) creates a market order which is matched to USD 2300. Makers have no transaction costs applied to their orders, while takers are usually charged 0.25% of the trade amount.
Coinbase provides a mobile wallet and web wallet app, both of which sync with each other. By having a wallet and exchange under the same umbrella, users of Coinbase can conveniently transfer bitcoins between both platforms, which are initiated instantly and with no additional cost to the user.
While Coinbase is frequently referred to as an exchange, it is important to note that Coinbase operates more like a broker and wallet that tailors to retail and non-technical clients who want to buy, sell, and store cryptocurrency. GDAX is the exchange component of Coinbase that serves sophisticated and professional traders looking to trade digital assets.
DEFINITION of ‘Satoshi Cycle’
Satoshi Cycle is a crypto theory that denotes to a high correlation between the price of Bitcoin and internet search for Bitcoin.
The term was coined by Bitcoin expert Christopher Burniske on August 2017 when Bitcoin hit a record high.
BREAKING DOWN ‘Satoshi Cycle’
Bitcoin is a cryptocurrency that was created by Satoshi Nakamoto, and came into existence on January 2009. Towards the end of the year, the currency had an exchange rate of USDBTC 1,309.03 based off the cost of electricity required to mine one coin. Bitcoin is a virtual, intangible, decentralized digital currency, and transactions made with it cannot be reversed. The digital world accepted Bitcoin as a method of payment mostly due to its characteristic of providing some anonymity to its users.
The token symbol for Bitcoin is BTC. The value of Bitcoin has gone through significant bubbles and busts that has caused an ongoing debate in the economy about the speculative property of the coin.
While the value of Bitcoin has seen wild up and downswings since its inception, it is clear that the value of the virtual currency is tied to its relevance in the online community. Its relevance is depicted by how many individuals and businesses accept it as a payment for transactions. As of 2017, the price of one BTC is proof that the level of acceptance and adoption of the currency is increasing on a global scale, even to transactions not necessarily conducted online. As news of the rise of Bitcoin spreads, its popularity grows from the rising level of interest drawn to the currency.
The Satoshi Cycle basically states that this rising interest or curiosity in Bitcoin leads to parties running searches for Bitcoin on Google and other search engines. The increasing search hits, in turn, increases the value of Bitcoin. The more Bitcoin rises in value, the more interest in it – the more interest, the higher the price of BTC. And so, the cycle continues. In effect, the rising interest in Bitcoin would lead to increased participation in the use of the currency. The increased participation translates into a higher demand for the coin. Like the stock market which is fueled by demand, an increase in demand for Bitcoin would lead to further increase in its value.
However, critics fear that Bitcoin is simply a bubble, given that its rising value is tied to the heightened curiosity among traders, investors, and hedge funds. Christopher Burninske, after making mention of the “the virtuous Satoshi Cycle” stated that after every bubble there’s a crash. But after eight years of its disruptive entry into the digital world, no one can really state for a fact whether Bitcoin has a limited or unlimited upside trajectory.
The smallest unit of the bitcoin cryptocurrency. Satoshi is named after Satoshi Nakamoto, the creator of the protocol used in block chains and the bitcoin cryptocurrency.
BREAKING DOWN ‘Satoshi’
Unlike the physical versions of global currencies, such as the British pound or U.S. dollar, cryptocurrencies predominately exist in the digital world. Despite this difference, a cryptocurrency can be divided into smaller units, just as the pound is broken into pence and the dollar into cents. In the case of bitcoins, the smallest unit available is called the satoshi.
The satoshi unit is named after Satoshi Nakamoto, published a paper in 2008 that jumpstarted the development of the bitcoin cryptocurrency. The paper, “Bitcoin: A Peer-to-Peer Electronic Cash System”, described the use of a peer-to-peer network as a solution to the problem of double-spending. The problem – that a digital currency or token can used in more than one transaction – is not found in physical currencies, as a physical bill or coin can, by its nature, only exist in one place at a single time. Since a digital currency does not exist in the physical space, using it in a transaction does not remove it from someone’s possession.
The satoshi represents one hundred millionth of a bitcoin. Small denominations make bitcoin transactions easier to conduct transactions with. The general unit structure of bitcoins has 1 bitcoin (BTC) equivalent to 1,000 millibitcoins (mBTC), 1,000,000 microbitcoins (μBTC), or 100,000,000 satoshis. While the exact figure is unknown, it is estimated that Satoshi Nakamoto may possess 1 million bitcoins, equivalent to 100,000,000,000,000 satoshi.
While not part of a major currency pair, bitcoins can be converted to and from other currencies. Bitcoin exchanges exist in order to allow individuals to conduct transactions. This involves depositing dollars, pounds, or other supported currencies into an account in one of the exchanges, where the balance can be used to buy or sell bitcoins and ultimately convert them into other currencies. Just as with the exchange rates between established currencies, the value of bitcoins will fluctuate according to supply and demand.
While individuals may keep a penny or pence in their pockets, physical versions of cryptocurrencies like bitcoin have not become as mainstream. This is primarily for practical reasons, since the main draw of bitcoin is that it is digital and hard to counterfeit. Not having a physical presence means that bitcoins are more secure, even before the block chain technology is taken into consideration. Another reason for the lack of physical bitcoins (and santoshi) is that bitcoins are not widely-accepted in day-to-day transactions.
The name used by the unknown creator of the protocol used in the bitcoin cryptocurrency. Satoshi Nakamoto is closely-associated with Bitcoin and the Bitcoin blockchain technology.
Satoshi Nakamoto is arguably the biggest pioneer of cryptocurrency.
BREAKING DOWN ‘Satoshi Nakamoto’
Satoshi Nakamoto is considered the most enigmatic character in cryptocurrency. To date it is unclear if he or she is a single person, or if the name is a moniker used by a group. What is known is that Satoshi Nakamoto published a paper in 2008 that jumpstarted the development of cryptocurrency.
The paper, “Bitcoin: A Peer-to-Peer Electronic Cash System”, described the use of a peer-to-peer network as a solution to the problem of double-spending. The problem – that a digital currency or token can used in more than one transaction – is not found in physical currencies since a physical bill or coin can, by its nature, only exist in one place at a single time. Since a digital currency does not exist in the physical space, using it in a transaction does not remove it from someone’s possession, at least not immediately.
Solutions to combating the double-spend problem had historically involved the use of trusted, third-party intermediaries that would verify whether a digital currency had already been spent by its holder. In most cases, third parties, such as banks, can effectively handle transactions without adding significant risk. However, this trust-based model still results in uncertainty. Removing the third-party could only be accomplished by building cryptography into transactions.
Nakamoto proposed a decentralized approach to transactions, ultimately culminating in the creation of blockchains. In a blockchain, timestamps for a transaction are added to the end of previous timestamps based on proof-of-work, creating a historical record that cannot be changed. As the blockchain increases in size as the number of transactions increase, it becomes more difficult for attackers to disrupt it. The blockchain records are kept secure because the amount of computational power required to reverse them discourages small scale attacks.
Satoshi Nakamoto was involved in the early days of bitcoin, working on the first version of the software in 2009. Communication to and from Nakamoto was conducted electronically, and the lack of personal and background details meant that it was impossible to find out the actual identity of Nakamoto. Nakamoto’s involvement with bitcoin tapered off in 2011.
The inability to put a face to the name has led to significant speculation as to Nakamoto’s identity, especially as cryptocurrencies increased in number, popularity, and notoriety. While his identity has not been uncovered, it is estimated that the value of bitcoins under his control may have exceeded $1 billion in 2013.