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Crazy for cryptos

Bitcoin. Ethereum. Ripple. Cryptocurrencies based on blockchain technology have made a lasting impression on global investors over the past year.

Take Bitcoin as a prime example. If you had invested US$1,000 in the most well-known cryptocurrency at the beginning of 2017, you would have finished the year with just over US$14,000 - a tidy 1,400% return.

Of course, the opposite is also true as the recent sharp declines in Bitcoin have highlighted; it has fallen spectacularly from a peak of US$19,000 late in 2017 to under US$6,000 in February of this year.

But what exactly are cryptocurrencies and does blockchain technology have a viable future as a form of payment?

What is blockchain?

Originally devised as a means to build Bitcoin, blockchain technology effectively creates a ledger for digital information. Perhaps Don & Alex Tapscott, authors of the book Blockchain Revolution[1] , sum it up best:

“The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”

Blockchain technology first appeared in 2008, founded by its mysterious creator Satoshi Nakamoto (many assume used as a
pseudonym), and came into practical use the following year as a core component of Bitcoin, a cryptocurrency.

The increasing popularity of Bitcoin has addressed certain grievances with traditional (“fiat”) currencies such as the US dollar or Japanese yen. Exactly how much of these currencies that are created is determined by central banks such as the US Federal Reserve or Bank of Japan.

In the age of low interest rates and large scale Quantitative Easing - where new money is effectively added to the system by central banks in an effort to boost economic growth - Bitcoin proved to be been a way for users to take back control of the creation and distribution of
money via a decentralised currency.

Proponents of Bitcoin talk about how creating it means it must be “mined” and that, like gold, there is only a finite amount of it. In this sense they’re right because the number of Bitcoin in circulation can not exceed 21 million.

More importantly Bitcoin has given users the autonomy and transparency in the creation of a form of monetary exchange - something sorely lacking with fiat currencies.

The rise of rival cryptos

Other cryptocurrencies have ridden this wave of enthusiasm for Bitcoin. Similarly startling price rises have been evident in other cryptocurrencies, such as Ethereum and Ripple. And the craze goes beyond the flurry of Initial Coin Offerings (ICOs).

Earlier this year Kodak, a digital imaging company, announced that it would be developing its own cryptocurrency (called KodakCoin). By being paid in the newly-created currency, the company hopes that
blockchain technology will help give photographers more digital rights.

It is becoming glaringly obvious that there are multiple pitfalls to bitcoin and other cryptos (in their current form) as forms of exchange. For example, if readers had taken out a mortgage on a property (and borrowed Bitcoin to do this) in January of 2017, their liabilities - and hence debt - would have ballooned by the end of last year.

Money, as we know it, thrives on its reliability that $10 today will be more or less worth $10 in a week’s or a month’s time. With Bitcoin, that’s not true. The $10 you hold in your hand today in Bitcoin could be worth $5 or $6 tomorrow or, conversely, $16 or $17. Until cryptocurrencies can replace traditional currencies as a reliable and
stable form of exchange then its widescale use will be limited.

Focus on the long term

In a similar vein to market noise when investing in stocks, ignoring the short term price movements of the cryptocurrencies is likely a wise thing to do.

That is because more exciting potential uses are coming into view for the actual application of blockchain technology, beyond just the realm of Bitcoins/Ether or whatever other cryptocurrency is “hot” right now.

Leading benefits of blockchain technology globally (2016)

cryptos 2016
Source: Credit Suisse; Greenwich Associates

Meanwhile, companies are already harnessing the power of blockchain technology for practical purposes and the benefits are applicable to all aspects of business (see above).

These can range from energy and commodities - a soybean shipment to China recently became the first commodity deal to use blockchain technology via trade settlement - to human resources functions such
as payrolls.

In Japan Sekisui House (TSE: 1928), one of the country’s leading homebuilders, announced in March of this year that it would utilise blockchain technology to execute real estate rental contracts in Tokyo. It said it would start from the summer of this year. Drastically reducing the cost and time of regular tasks, such as collecting the necessary property information, this will likely usher in a new level of efficiency in Japan’s rental market.

Readers should be aware that although the cryptocurrency craze is alluring, the actual technology that powers Bitcoin and its brethren is where the long-term potential really lies.

Announcement of Service Closure

Thank you for using the FIGS service since our launch. Regrettably, we have to announce that
we will be discontinuing our service as of the 14th of December 2018 due to certain constraints.
Please note that the during this period, the information shown on the FIGS platform is not up-to-date.