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Throughout that calendar year, the technology-heavy NASDAQ grew from 2,192 points to 4,069 points, a one-year return of 85.6%.1 At the time, investing in tech companies seemed like a no-brainer. In fact, the rise of the NASDAQ wasn’t even a one-year blip. From December 31, 1996, to December 31, 1999, the Index rose 215%.
Source: Bloomberg. Price-only returns in US dollars.
In hindsight, it feels obvious that those returns could not last. A few months later, the NASDAQ started the painful decline that would eventually be known as the dot-com bubble
Fast-forward 20 years. Despite the NASDAQ losing 75% in the early 2000s, it seems obvious now that we should have bought and held Google and Amazon. With their incredible global reach and network effects, these early web powerhouses seem unlikely to ever be dethroned from the top of their industries.
But hindsight is cruel and deceptive.
In 1999, the search engine beating up its competitors and gaining network effects was not Google. It was a little company named Yahoo! (exclamatory emphasis theirs). However, despite its dominance during the roaring dot-com frenzy, Yahoo! controlled only 20% of the search market,3 nowhere near Google’s current domination of more than 90% of global search.4
We do not recognize it now, but the competitive landscape at the time was fierce and frenetic. Yahoo!’s competitors included Altavista, AOL Search, Ask Jeeves, Excite, Gurunet, Google, HotBot, Infoseek, Inktomi, Lycos, MSN Search and Webcrawler, among others. The market to help people find information on the internet was growing fast, with competitors showing up and fading away. The future dominance of Google was far from certain, and it would take almost four more years before clear signs of Google’s supremacy would materialize.3
Today, as the insanity of crypto, Bitcoin and Web3 captures the news, it’s hard not to draw parallels. In technological revolutions, the pattern of frenzy, collapse and ultimate winners plays out over and over, as Carlota Perez pointed out in her 2003 book Technological Revolutions and Financial Capital.5
Who knew the dot-com bubble would lead to computers in our pockets?
Source: Perez C. Technological Revolutions and Financial Capital, Cheltenham: Edward Elgar, 2003.
As we have seen many times before, picking the ultimate winners while in the middle of the frenzy is incredibly difficult. Consequently, foreseeing the eventual use for and benefits of this technology is even harder. Who knew that the dot-com bubble would lead to computers in our pockets and sharing cars with strangers instead of taking taxis?
However, if this is the next technological revolution, there is a chance that crypto developments will touch our lives the way Google and Amazon have. It seems prudent, then, to spend some time educating ourselves. With that in mind, over the next two pages, we provide terms, definitions and context to help our clients get started.
While we are all in the midst of learning about this burgeoning area of technological change, we are happy to help you in any way we can. Whether you are curious, confused or complacent about cryptocurrencies, reach out to us. We would love to hear your thoughts.
Cryptocurrencies Are All Over the News. But What Are They? — Mercer Edmonton webinar (video)
Cryptocurrency
Cryptocurrencies function like cash on the internet. Secured via cryptography, they enable the safe transfer of monetary value from one user to another.10,11
Bitcoin
The original cryptocurrency, bitcoin provided the code, cryptography and incentives for people to safely, securely and instantly create and send money in a digital format and without the need for a trusted third party (i.e., bank) to verify the transactions.
Blockchain
A type of database that records all transactions that occur on a network, a blockchain is transparent, searchable, verifiable, decentralized, shareable and tamper-proof. A batch of transactions make up a block, and several blocks make up a chain. Blockchain is one of the innovations empowering Bitcoin.10,11,12
Mining
Mining is the process by which new bitcoins are created and verified. Mining adds new blocks to the blockchain, making the history of bitcoin transactions hard to modify while adding security and transparency to the process.10,13
Decentralization
Decentralization refers to a system that is not owned or controlled by a single entity, such as a government, bank or company. Instead, the product or service is run and maintained using the computing power contributed by a global network of participants. Since decentralized services do not rely on a centralized authority, they possess several benefits, including censorship resistance, increased security, and resistance to hacking and manipulation.14
Fiat currency
Fiat currency is government-issued currency backed by the government that issued it. The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government. Most modern paper currencies are fiat currencies.15
Smart contract
A smart contract is a piece of computer code that runs on secure blockchains and automatically executes the details of the contract if and when the conditions of the contract are satisfied. There is no need for a person or company to authorize the transaction.10
Ether
The second-largest cryptocurrency, built on the Ethereum blockchain, created a few innovations, such as integrating smart contracts. This enabled other programs like cryptocurrencies, non-fungible tokens (NFTs) and even mortgages to be built on top of Ethereum.10
DeFi
Short for decentralized finance, DeFi refers to apps that use smart contracts to execute transactions without traditional financial intermediaries such as banks.
Wallet
As with real-world currency, cryptoassets can be held in a software wallet. Hot wallets are online and always connected to the internet and provide the convenience and potential issues that come with connectedness. Cold wallets are not connected to the internet. This can make them secure from hackers and other threats, but they are less convenient for transactions.
Public and private keys
Functioning like an address or bank account number, keys are long strings of characters generated when users create a new wallet. A public key identifies where a crypto transfer should be sent, and a private key proves ownership of the wallet.10
1 Data via Bloomberg. Price-only returns in US dollars.
2 Bloomberg. Price-only returns in US dollars
3 “Most Popular Search Engines 1999 - 2019 | Who’s At The Top?,” uploaded by DataFix, January 6, 2020, available at https://www.youtube.com/watch?v=wUNsxByGjNw.
4 Statcounter. “Search Engine Market Share Worldwide,” November 2021, available at https://gs.statcounter.com/search-engine-market-share. Oberlo. “Search Engine Market Share in 2021,” June 2021, available at https://www.oberlo.com/statistics/search-engine-market-share.
5 Wilson F. “The Carlota Perez Framework,” AVC.com, February 8, 2015, available at https://avc.com/2015/02/the-carlota-perez-framework/.
6 Hart R. “Ether and Bitcoin Surge Towards Record Highs as Crypto Market Passes $3 Trillion,” Forbes, November 8, 2021.
7 The Investment Funds Institute of Canada. “IFIC Monthly Investment Fund Statistics – October 2021,” November 22, 2021, available at https://www.ific.ca/wp-content/ themes/ific-new/util/downloads_new.php?id=26776&lang=en_CA.
8 Coinbase. “About Coinbase,” available at https://www.coinbase.com/about, accessed December 13, 2021.
9 CoinMarketCap. “Cryptocurrency Prices, Charts and Market Capitalizations,” available at https://coinmarketcap.com, accessed December 13, 2021.
10 Hu Charlotte. “A Beginner’s Guide to How Cryptocurrencies Work,” Popular Science, November 15, 2021, available at https://www.popsci.com/technology/beginners-guide-tocryptocurrency/? utm_source=pocket&utm_medium=email&utm_campaign=pockethits.
11 Tapscott A. Digital Asset Revolution, December 2021, available at https://www.blockchainresearchinstitute.org/project/digital-asset-revolution/.
12 Won S. “How Advisors Are Managing Crypto Funds as Client Interest Grows,” The Globe and Mail, November 23, 2021, available at https://www.theglobeandmail.com/investing/globeadvisor/ advisor-etfs/article-how-advisors-are-managing-crypto-etfs-as-client-interest-grows.
13 Bitcoin. “Mining,” available at https://developer.bitcoin.org/devguide/mining.html.
14 CryptoDefinitions. “Decentralized,” available at https://cryptodefinitions.com/dictionary/decentralized/.
15 Chen J. “Fiat Money?,” Investopedia, October 26, 2021, available at https://www.investopedia.com/terms/f/fiatmoney.asp.
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