Since the invention of Bitcoin, the world of digital currencies has come a long way. There are now hundreds of cryptocurrencies accounting for billions of dollars in market cap. Blockchain, the revolutionary technology that underlies cryptocurrencies, has proven to be something even bigger, and is moving to other domains such as music, gaming and supply chains.
Tech and financial giants that once dismissed cryptocurrencies and blockchain are making heavy investments in the industry. Blockchain startups are raking in huge amounts of money in token sales. More opportunities lie on the horizon.
But being in its infancy, the digital coin and token industry is a very volatile space, fraught with unique complexities and risks. Fortunately, a number of projects and initiatives are emerging to create new opportunities and help speculators, enthusiasts, businesses and curious people find their way into this fast-growing domain while working around the pitfalls and barriers.
In the traditional financial market, derivatives such as options and futures contracts are the tools that protect investors, asset holders and business owners against volatility. Cryptocurrencies currently lack a derivatives market, which makes them a risky medium for business contracts that last for any amount of time, especially given their constant value fluctuations.
DCORP, a blockchain company based in Netherlands, aims to remedy the situation by creating a decentralized platform on the blockchain for trustless derivatives contracts. The derivatives exchange exists as a series of smart contracts on the Ethereum blockchain.
Participants can anonymously create options or futures contracts on the DCORP platform, accessible through the company’s website. Contract code executes autonomously on the blockchain without the need for brokers, speeding up the process and reducing third-party costs tremendously. As with everything else that is created on the blockchain, decentralized derivatives will be totally transparent and open to auditing and review.
A derivatives market can be key to stabilizing the price of cryptocurrencies and making them a reliable asset for driving business and exchanging goods. But the DCORP derivatives exchange will move beyond cryptocurrencies, and will eventually include tokens that represent fiat currencies, commodities, projects and much else.
While investing in cryptocurrency is an alluring idea, the actual dynamics governing the space make it a risky venture. Each of the available cryptocurrencies fluctuates based on different parameters, which makes it difficult to find the right investment opportunities to earn gains and avoid losses. Therefore, investing in top cryptocurrencies is an extremely complex process that requires technical, security and risk management knowledge.
In this light, a handful of cryptofunds have emerged to offer enthusiasts easier ways to invest in cryptocurrencies with fewer risks. Social trading network eToro recently launched of its cryptocurrency CopyFund, an investment instrument that covers a diversified portfolio of cryptocoins that have above $1 billion in market cap. This includes Bitcoin, Ethereum, Ripple, Ethereum Classic, Litecoin and Dash.
Like their traditional counterparts, cryptofunds provide a broad selection of investment opportunities managed by experts, while at the same time lowering investment risks and costs. Created and managed by eToro’s investment committee, the CopyFund provides a solution for those looking for a simpler way to access cryptocurrencies and a sound strategy to divide their investments wisely.
Initial Coin Offerings (ICOs) have provided companies a totally new way to fund their projects using blockchain and cryptocurrencies. In a nutshell, an ICO involves issuing a project- or company-specific token on the blockchain, which investors, potential users and supporters can purchase with cryptocurrencies.
ICOs have helped blockchain projects circumvent the traditional VC process and raise hundreds of millions of dollars. To be fair, not everything about coin offerings is bright, but many believe that they can become the investment vehicle of the future, even for non-blockchain startups. Testament to the fact are companies like famous messaging app Kik, which had previously raised a hefty amount of venture capital, but chose ICO for its latest round of funding.
However, the problem with ICOs is that creating your own crypto token requires relatively high technical knowledge and experience in developing blockchain applications.
Bancor, a Switzerland-based nonprofit foundation, wishes to democratize the creation of cryptocurrencies by providing an easy-to-use front end platform for creating custom cryptocurrencies—which it calls “smart tokens”—and wallets, as well as community features such as discussion groups, profiles and stats.
Bancor also provides its own proprietary protocol, which executes through smart contracts, programs run on the blockchain. The Bancor Protocol enables liquidity and price discovery for tokens, and conversions between different cryptotokens, cryptocurrencies and fiat currencies without the need for brokers or centralized exchanges.
One of the implications of the Bancor Protocol is that any token, such as a local currency or loyalty point, can be easily bought and sold at a predictable price from day one, without the need to cross the barriers to entry of getting listed in exchanges or generating huge trade volume. This liquidity for any token will enable the long tail of user-generated currencies to emerge, meaning anyone can now feasibly create a successful token. Naturally, not all of these user-generated assets will be successful, but the barrier to entry will be greatly reduced, opening the way for innovation around community and project currencies.
The future of blockchain and cryptocurrencies
Blockchain and cryptocurrencies are moving very fast, and will surely have an important role to play in a data-driven future where the lines between the digital and physical worlds blur and fade. Managing the risks and breaking the barriers will help more people take advantage of the benefits this exciting landscape offers. For the moment, crypto has a lot of catching up to do, but it’s getting there at an accelerating pace.
This post is part of our contributor series. The views expressed are the author's own and not necessarily shared by TNW.