Cryptocurrency: Get on Board? Or a Future Shipwreck?

Cryptocurrency: Why I’m a Cynical Bull

In 2017, I made one of my personal goals to be a much more active investor. My moment of realisation came when one of my ISAs matured and the interest was, quite frankly, insulting. With the recent rise in inflation, it’s safe to say that putting money in the banks means you are passively losing money. It’s time to act.

All my friends will know from my constant evangelising that I’ve become hugely interested in cryptocurrency. I have begun investing a small part of my net worth into altcoins (an amount I am willing to risk losing).

I must admit, this isn’t the first time that I’ve messed around with cryptocurrency. Back in 2013, I read a Guardian article about the ‘Dark Web’ and was wholly intrigued by this prospect. A place of total anonymity? An online black market? It was every curious and rebellious teenager’s dream abode.

I downloaded Tor and bought a few Bitcoins at £8 a coin. I chose to spend it on some exotic Moroccan hashish. If I had kept those Bitcoins in my bank, they would be worth roughly £2,500. Worst of all, it didn’t even arrive. Stupid teenage me.

To be fair, I probably don’t feel as bad as the early-adopter in Florida who traded 10,000 Bitcoins for a pizza. In today’s money (BTC >£1,000), that means he paid over £10 million for a pizza. For that price, he could buy:

770,000 Large Domino’s Pizzas

20,000 Pizza GoGo Premium Pizzas

6,406 Most Expensive Pizzas in the World

(Basically, he could have chosen being rich and obese according to this comparison)

Unfortunately, this bad experience with the dark web put me off of cryptocurrency. I, along with many others, associated it with the seedy parts of the internet. A place where you could buy a hitman. A place where you had to cover your laptop camera with sellotape in case some stranger managed to hack you. A true technological-anarchist utopia, I felt too inexperienced to navigate it without getting into trouble, so steered clear for good.

Fast-forward to 2014 and I stumbled across a Youtube series about a new currency called ‘Ethereum’. With a name that sounded like a mineral you would mine in an online game, I was once again intrigued. The creator of this currency was a skeletal young man, no older than myself, who truly shone the aura of a modern day savant. I would soon find out his name was Vitalik Buterin.

Unfortunately, once again, I didn’t fully gauge the size of the opportunity of this currency. At the time, it was £2–3 per ETH. However, It wasn’t until I saw it pop up again in an article and noted its reasonable price in comparison to BTC that I decided to make my first crypto investment.

Since March 2017, the price has grown 300%. I have exposed enough capital to it to reap some small benefits, but nothing more than I am willing to lose. The world of cryptocurrency is extremely volatile, with daily price changes of 20% commonplace. If you can’t take seeing your capital drop hugely day-to-day, then steer clear of crypto. Buy bonds instead.

While my personal objective is to hold the currency long-term based on bullish sentiment that ETH has a far greater application than BTC (which I will cover in another article), I cannot avoid my own cynicism in that this bears all the characteristics of a spectacular bubble that is waiting to burst.

How could cryptocurrency be classed as a bubble?

A ‘bubble’ is essentially a surge in an asset price which far outweighs its fundamentals and is often driven by speculation and rumour. It can be any form of asset, whether it be equities, commodities, or, in this case, cryptocurrencies. Here’s the definition of a ‘bubble’ from Investopedia:

A bubble is an economic cycle characterized by rapid escalation of asset prices followed by a contraction. It is created by a surge in asset prices unwarranted by the fundamentals of the asset and driven by exuberant market behavior. When no more investors are willing to buy at the elevated price, a massive selloff occurs, causing the bubble to deflate.

As an industry that is less than a decade old and extremely technically complex in its applications, very few people truly understand the fundamental drivers of value in this sector. The Ethereum price has grown by about 30% in 3 days, yet there is very little transparency as to why this has occurred. Ethereum bulls on forums have a blind faith in the technology ‘hodl, hodl, hodl’ they constantly preach, without much apparent cyncism.

Much of it seems to be the age old FOMO (Fear Of Missing Out) from investors, particularly Bitcoiners reducing their positions, before any future ETH price rises.

A lot of the current price hikes appear to derive from rumours which suggest that some of the biggest companies in the world (Google, JP Morgan, Spotify) are going to soon announce that they are going to use the Ethereum blockchain. If these do happen, then the price will again shoot up hugely. If they don’t, and investors are disappointed, then the price will drop massively.

ICOs seem to be the main area of Ethereum speculation. Companies are offering crypto-tokens on the Ethereum blockchain without any form of due diligence available to investors (which is something I believe a company needs to provide). Every week a new company announces an ICO while providing a high-level mission statement about saving the world using dApps, when the truth is it could easily be a scam due to the lack of transparency and accountability. It seems that there have already been a few examples of companies raising millions of dollars via token sales, then soon disappearing off the face of the earth. I’m going to post about ICOs soon. They are the most interesting part of Ethereum, but also the most speculative currently.

While I am still bullish on cryptocurrencies (I just increased my position) I still feel its worth having a healthy dose of cynicism. The price growth I’ve experienced in Ethereum in just over a month has outweighed any traditional market sector. While it’s great to be a part of, the rapidity of growth seems to show signs of a bubble.

The developments over the forthcoming year will be very interesting to see. Is the current price growth sustainable? Will the announcements meet investor expectations? Will governments seek to regulate the currency? Will there be any new alt-coins? So many questions…

I will be posting about ICOs and other alt-coins soon, so do subscribe.