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This is the second post in a three-part series featuring our blog competition winners from Michigan State University. The author of today's post is Xiyou Xu.

The emergence of cryptocurrencies has shaken up the economic establishments around the world. In fact, the phenomenon of such virtual currencies is thoroughly studied by the economists to understand how they impact the global financial system. As a result, such cryptocurrencies like Bitcoin have been examined regarding contrast to existing physical alternatives, and various experts have responded to its uprising.

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Venezuela is in the midst of a political and economic disaster and has faced hyperinflation, an increasingly worthless physical currency, and heightening food and medicine shortages. Recently, Venezuela has turned to blockchain, and the cryptocurrency boom as a potential method to fund its debt and develop a stable currency. The Petro and Petro Gold have the potential to replace the bolivar, which was the countries primary currency in the past.

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Blockchain is a platform where transactions are recorded.  It is an open source available for all parties involved. Participants in each transaction generally have their own ledger; however, Blockchain serves as a shared ledger. It eliminates the need for intermediaries in transactions and reduces the paper process, increasing efficiencies and lowering costs. Blockchain is known for being a platform on which Bitcoin and other cryptocurrencies trade, however, it is not limited to that.It can track all sorts of data in a structured format.

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Initial Coin Offerings, or ICO’s, are a new and quickly growing way for startups to raise capital. Despite being a relatively new phenomenon the total value of ICO’s has been proliferating with nearly $1.5 billion dollars being raised since the start of the year. That value seems outlandish when compared to the mere $256 million of funding that was raised in the entirety of 2016.

While the value of ICO’s has grown nearly six-fold in the past year, many people are still in the dark regarding the new trend that is sweeping investors and startups across the globe. Essentially, ICO’s are a cross between more traditional IPO’s and crowdfunding. During and ICO a company issues “coins”, or digital tokens, similar to the popular cryptocurrencies bitcoin and Ethereum. Investors can then purchase these coins and conceivably can use them to purchase a good or service from the company at some point in the future. The value of these coins will theoretically increase in value, as long as others continue to invest. An important distinction between IPO’s and ICO’s is that investors in an ICO do not receive equity in the company and don’t really have anything tangible behind their investment besides a promise for the ability to be able to purchase a good or service from the company in the future. A second differentiator between traditional methods of raising capital and ICO’s is the amount of regulation. Given that the concept of an ICO is so new, the space is largely unregulated allowing companies to prepare for and launch in ICO in a matter of weeks as compared to the months it takes for companies to clear regulatory approval for IPO’s.

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Let’s start with a quick overview of what a cryptocurrency is.  It is a digital currency and is known for its unique feature, in that it is not issued by any central authority, therefore, cannot be controlled and manipulated by any government. Bitcoin is one of the oldest and most popular cryptocurrencies. It, as well as the other cryptocurrencies, are stored and transferred on Blockchain – a peer-to-peer network that validates and records all transaction and is considered to be the ledger for all cryptocurrency transactions. This network eliminates the need for a middle man (financial institutions), however, there are miners who validate the transactions through a process called “mining” and are rewarded free bitcoins for their work. It is important to know that Blockchain’s uses are not limited to just cryptocurrencies and many industries are discovering how they could take advantage of this ledger system. For the sake of simplicity, I will be focusing primarily on one cryptocurrency, Bitcoin, as there are more than 900.