I wanted to understand first hand if cryptocurrency was a legitimate investment opportunity.
For those completely new to crypto, cryptocurrency is basically a digital currency that is encrypted and stored in the blockchain, commonly referred to as coins or tokens. The blockchain is a decentralised technology that uses multiple computers to settle, and verify, transactions between parties. These transactions can be cryptocurrencies, contracts, or other information. Bitcoin is an example of a cryptocurrency.
There are over 1,500 cryptocurrencies representing a total market value of $600B USD. Bitcoin, Ethereum and Ripple represent over 60% of total valuation. At the time of publishing this value could be anywhere from 20% of current value to 500% higher, such is the volatility of the market.
On day 1 I opened accounts with Coinjar, Coinbase and Coinspot. Registrations were so busy that Cryptopia had shut down their registration pages and sites were taking over a week to verify individuals.
Having been in the game for over a week, this is my basic understanding of how cryptocurrencies work….
A company, organisation or individual creates tokens, usually on the Ethereum blockchain, which they sell via an ICO (Initial Coin Offering). These coins can be bought using other cryptocurrencies, usually Ethereum or Bitcoin. They raise these over pre-ico, and ico stages. This usually takes a couple of months. In order to entice investors these organisations publish a whitepaper, create a slick website, and usually create private channels of communication through apps such as Telegram and Whatsapp. A whitepaper is a basic word document (anywhere from 8 to 100 pages) outlining the purpose, business (or coin) model, development team, product roadmap, and funds allocation from the coin raising. These organisations will usually offer ‘bonus’ coins to early pre-ico investors in order to create early demand and impression of social proof. Once the ICO is over they are traded on various exchanges.
This is what I learned…
1. Australians are being overcharged to simply get in the game.
Australian bitcoin providers are exchanging AUD for bitcoin up to $2,000 more per bitcoin than overseas companies. How arbitrage has not cancelled this out baffles me. As someone trying to get skin in the game this painpoint is incredibly frustrating. In addition, the fees to deposit, exchange and trade are very high. The overseas operators limit your deposit ($250/week!) and don’t let you sell, meaning to cash out you will need to send to an Australian exchange
2. The lack of regulation and transparency makes investors extremely vulnerable.
At ICO stage these organisations can say anything they want. Overclaim, fraud, deception, misleading statements etc is rampant. Many ICOs have no existing platform, no business, and no reputation. You can not review their financial statements. There is no guarantee that any of the team even exist. You are simply hoping that other speculation will drive up your coin value.
Once coins become listed on an exchange founders could be dumping coins without you even knowing. In many of the chats administrators simply tell members to “HODL” (some quirky web thing on “hold”).
Organisations are not required to give coin holders any information re. organisation solvency. As a currency holder you have no rights or protection. You are simply trusting the platform and operators to eventually provide some utility for your coin. Check out the rise and fall of Bitconnect — who has been accused of being a ponzi scheme…
The ability to print coins without accountability means pump and dump, then repeat, is the easiest money a crypto founder can make. The low barriers to entry combined with zero accountability/consequences means many novice investors will lose their money to scammers.
3. The blockchain is not as fast you might expect.
Sending digital currency from wallet to wallet usually takes 15–30 minutes but can take as long as 4–8 hours, and withdrawing can take up to 48 hours. And if you make an error sending, including mixing up currency across different wallets then your funds are lost forever.
4. Twitter BS, FOMO, online rumours and made-up technical analysis drive a lot of speculation.
See for yourself, type any coin acronym with a $ prefixed and paste into twitter search.
5. Basic economics dictate that many cryptocurrencies are simply non-defensible.
Take for example the experience I had when looking at WildCrypto, with their coin ‘Wild’. ‘Wild’ is valued at $12M USD, and has been as high as $37M USD, after listing at $8M USD. Wild intend to provide an online casino using Wild coins. Currently their coins are valued at a ratio of roughly 1 to 2000 Ethereum. i.e. you can exchange 1 ethereum for 2,000 Wild coins. Wild say when they go live that customers will chip in at a price of 1:100 Ethereum. They believe that by charging that price on platform the market will simply follow — resulting in huge profits for all! This is illogical. Why would a customer ‘chip in’ Ethereum at 1 to 100 when they could buy Wild on an exchange and transfer at 1 to 2000??
6. 90% of the ICOs and existing cryptocurrencies do not have a sustainable business model.
Most do not solve a customer problem, they simply refer to ‘smart contracts’ solving everything. In the case where it does solve a customer problem in a sustainable commercial way, economics tell you that once a coin utility reaches a certain $ value it becomes attractive for new entrants to replicate the proposition therefore decreasing the market price.
7. You get to experience lots of emotion in crypto-trading!
I saw my portfolio more than halve in value within 48 hours before recovering within the next 48 hours. A typical day of trading can be like…
Blockchain will disrupt many existing businesses. And there probably will be a role for cryptocurrencies, but I think this is most likely to be sustainable under one or more of the following conditions…
1. A regulated environment — one where a currency gets a license to operate and therefore has a monopoly environment.
2. A strong network effect exists
3. There is some material barrier to entry such as a patent in the technology or utility of the currency
4. The currency has some unique utility value that saves users time, money or creates new experiences.
Personally, I think crypto will be around for the long-term but I have no idea which are likely to win. My current holdings, dare I share, are…..