Cryptocurrency is back in the news, but it is Dogecoin, not Bitcoin this time around. The initiator of the grapevine is again Elon Musk.
WHAT IS DOGECOIN?
Dogecoin is a meme-based coin which started as a gimmick. Dog is intentionally mis-spelt as ‘doge’. A meme of a Japanese canine species, Shiba Inu, went viral with his quizzical expression.
Dogecoin was launched in December, 2013 by Jackson Palmer (who is described as a skeptic-analytic observer of the cryptocurrency phenomenon) as a joke. But it gained traction when the inventor saw financial merit in the idea.
Recently, Elon Musk bought Dogecoin for his 9-month old son, while investing in Bitcoin for his company, Tesla. It appeared to be the subject of other memes on diversification of assets.
However, his recent statement that there is too much concentration in Dogecoin, and he would support the currency, if the existing owners sold what they own, has generated a fresh series of speculation. A single dogecoin address holds more than 27% of the entire supply, in 36 billion tokens.
WHERE DOES CRYPTO-CURRENCY COME FROM?
Crypto-currency is essentially technology. It is not backed by physical gold or promise by a sovereign authority, like fiat currency.
When crypto-miners earn some coins after investing in the mining infrastructure, they are not paid for it. They just hold it as an asset, and gain only when they trade it. There have been cases of millions lost, because the owner lost the cryptic key. The assets might just remain locked up in the system.
Crypto-currency is launched with an ICO – Initial Coin Offer.
WHAT IS AN INITIAL COIN OFFER ?
An individual or entity with a sound technology for mining of coins can put up a decent website, and circulate a white paper to convince investors of value creation in future.
The investors here do not become part-owners as in the case of stocks. They stand to gain by trading the coin on exchanges.
The risk is evident, and scams have occurred.
WHAT ARE REVERSE ICOs?
A reverse Initial Coin Offer is similar to an ICO. The difference is that it is launched by a well-established company, which issues crypto-assets in return for fiat currency from investors.
This has raised questions if crypto-assets should be treated as a security or currency.
More on it later, in future blogs…
WHAT ARE CRYPTOCURRENCY EXIT SCAMS?
Cryptocurrency exit scams happen when the promoter disappears with the funds, within days of launching the Initial Coin Offer (ICO).
HOW DOES A CRYPTOCURRENCY INVESTOR PROTECT HIS INTEREST?
- Do a thorough research on the team.
- A white paper is non-negotiable.
- One should study the white paper in detail. Ideally, the white paper should have complimentary resources such as financial models, legal concerns, SWOT analysis, and a roadmap for implementation.
- Track token sales during the ICO.
Red flags to watch out for
- High-decibel promotion
- Existence of a skeleton infrastructure for mining or trading, which has not been tested
- Reputation of the promoters and their backgrounds
- Promising extravagant returns
- Sub-standard language in the white paper