Beginning of Investment in Cryptocurrency, Becoming a Holder
A myriad of people flocked to invest in cryptocurrencies during the peak of the bull run in 2017. However, less than one year later a bear market quickly set in causing many bitcoin and altcoin investors to pull out over time. Many blockchain projects spent enormous amounts of time in tackling lawsuits brought forth by investors and government entities around the world. As a reaction, innocent investors who entered this market envisioning a promising future fell victim to market circumstances out of their control.
Was the future promised by many cryptocurrency projects just an illusion? No one is certain, when we look at the anger and disappointment expressed by many investors objectively, it can be attributed to an ‘overconfidence bias’. In other words, the fundamentals of the projects have never changed. Nevertheless, lots of cryptocurrency communities (usually Telegram groups) are filled with complaints and despair related to money invested, promised development deliverables, and other promises made by these promising startups.
However, there are also holders who have not been swayed by market events. Even in 2020, investors are flocking to telegram communities and placing a huge amount of trust in the projects they made investments. These investors listen to take part in conversations and stay up to date on the news provided by the companies promising to deliver cutting edge blockchain platforms.
I suddenly started wondering, “Is the purpose of cryptocurrency investment just to gain profit through various trading methods after the initial investment, or is there anything else they are looking forward to?” What are the true intentions of these cryptocurrency investors?”
History of investment
The very first investment by humanity started when Hammurabi law (around BC 1700) provided a legal framework for investment by establishing rights of debtor and creditor, land, provision of collateral. This was the genesis of the investment.
Nowadays, the easiest way for someone to dip their toe into financial investments in the stock market. Until the early 1900s, anyone that wanted to buy a stock or bond was perceived as a speculator, as opposed to nowadays where stocks and bonds are now recognized as one of the most basic methods of investment through which one can expect a return. Naturally, a lot of traditional stock investors or those who have experience investing in stocks gravitated towards cryptocurrencies.
The Difference Between Investment in Cryptocurrency and Stock
Basically, stock investment means pursuance of capital revenue (dividend, interest, rental income) and investment revenue(obtaining margin). However, cryptocurrencies are similar to the commodities market where fluctuation width is not predefined like foreign currency/raw material or foreign currency market like FX margin, with rampant uncertainty and high risk.
Notwithstanding that, there are various elements that draw people to cryptocurrency investment. First of all, it’s almost impossible for a general individual to communicate one on one with the company which issued stocks when they make an investment in stocks. However, cryptocurrency allows close communication with the blockchain project, the main entity of the business. Not only before ICO through the community, but it’s also possible to express one’s opinion through multiple communication channels. It even gives a feeling that one is growing together with the project as its part. It may differ according to the ecosystem, but one may make a proposal through congress network after mainnet or become a project partner by receiving a certain amount of subsidy after obtaining approval by voting if one has a good business idea.
Economics of Cryptocurrency, What Do We Need to Focus on
The economy can be divided mainly into the real economy and the financial economy. The real economy embraces economic activities ranging from the production of commodities, services, distribution, and consumption. While the opposite of this is the financial economy which encompasses the fiat currency market and the stock market. Therefore, when we adopt this to the blockchain market, it can be said that cryptocurrency projects have a real economy represented by the blockchain’s mainnet & ecosystem manifested at the time of ICO. In addition to this, the financial economy in which one can use and transact through its own cryptocurrency in concerned project network’. Of course, it still remains as an issue if it can be circulated as an official currency and perceived as an asset, we should take notice of the fact that strategic viewpoint which embraces both real economy and financial economy is needed.
From the perspective of the investor, this is the problem the cryptocurrency industry should set out to solve. Ever since 2017 when the cryptocurrency industry showed explosive growth, there has not been a real product or service that can use a coin or its ecosystem, Currently, only the ‘financial economy’ has produced use cases and it has developed freakishly with its participants only being people with the intent on winning the cryptocurrency lottery. Both experts and investors are aware that the way the cryptocurrency financial economy developed was unstable and led to the negative perception surrounding cryptocurrencies.
John Maynard Keynes the renowned economist from the UK, insisted that finance can have a negative influence on the real economy when financial gains come from the money the financial cycle and not from the momentum of the industrial cycle.
Therefore, cryptocurrency projects that do not have a ‘real economy’ benefit cannot help avoid being labeled as low quality and a potentially dishonest project which only contribute to preexisting money in financial circulation through over the counter transaction or transaction in exchange.
Why Did They Start Investment in Cryptocurrency
There are holders who started making investments only in hopes of making it big. However, most of the investors are those who joined the market rumors and speculation that they could earn extravagant sums of money or stories of anecdotal stories where a friend of a friend earned a fortune. These speculations and rumors led investors to believe that the possibility of hitting the jackpot was almost guaranteed after simply reading a white paper and participating in an ICO. It’s great if an investor has at least read a white paper, but there are a lot of investors who chose to ignore the white paper and failed to do their own due diligence. Some would even say that was the most common investment strategy taken in 2017. At this point, as cryptocurrency holders, we need to realize the reality of the industry and reshape the state of things.
Believe it or not, almost all investments turn into a losing game from the perspective of a financial behavior study. Nevertheless, people make ‘investment’. There are mainly two viewpoints on this.
Scholars have long since argued that investment is not for the pursuit of one’s personal profit but of socio-cultural choice. Substantialists believe that economy is organically connected with different social institutions like law, politics, culture, religion, relative, etc. Therefore, to understand the economy, one has to approach all areas of society as a whole, since it can not sustain by itself detached from society, but formed and run by the society which makes people to ‘invest’ in macro viewpoint. Polanyi named it “The Economy as Instituted Process”(Polanyi 1958: 122) and it seems to make sense as all civilized modern humans belong to institutions.
Second, the perspective of individualized rationality believing ‘I will succeed no matter how other people turn out’. In fact, this resonates way more. To put it simply, the reason I invest is to earn money. The positive and reasonable thought that one will succeed leads people to make an initial investment. However, since a series of such individual activities influence the economy as if ‘invisible hand(Adam Smith)’, above the first perspective is also compelling.
But do you believe you will always earn when you make an investment? It is very likely that most of the people and in most cases, you will lose money due to the following reasons.
1)‘I will succeed’: Bias of Overconfidence
As the investment amount increases, so does trust in the decision someone has made. In other words, the bias of overconfidence starts to become a real thing. This refers to the tendency of thinking highly of oneself as “above average”(Taller 2009: 59) and rating the risk lower than it actually is.
2) ‘Look, what I said was right’: Irrational Confirmation Bias
One tends to collect only advantageous information that upholds one’s bias selectively. A psychological incentive like ‘positive evaluation on one’s investment capability, positive prospect on profitability, confidence in one’s ability to control’ increase the risk and lead investors to lose. Self-enhancing investment conviction is occurring even now while you are reading this.
3) Lack of Price Traction Power
This is the problem of which scale is impossible for an individual investor to solve. For example, we can think about stocks. If an institutional investor buys a stock, the price rises, while if he/she sells the stock, this price falls. However, if an individual investor buys a stock, the price falls, while if he/she sells the stock, the price rises. This is because the individual investor lacks power or has no power to tow the price.
Therefore, the standard of ‘rationality’ is still ambitious related to ‘investment’, but we believe each of us acts as a rational investor who acts on the basis of rationality individually set and maximize proceeds from the sale. However, that is only the thought of themselves.
Community Pursuing a Common goal
Most cryptocurrency investors invest in many projects in exchange besides ICO. Compared to those who started cryptocurrency investment at the exchange, those who invested during an ICO are believed to show more loyalty, loyalty from the perspective of the project operator, but breaking even from the perspective of an investor to that project. However, investment in exchange should not be disregarded. When we look at the transaction amount reaching the number of trillions of dollars in exchanges, it’s easy to vividly envision the desire of individual investors solely focused on profit. However, we should not define them as mere speculators. Even if they made investment aiming at just gaining sales margin, they are still in the same boat with the project.
We can clearly understand group psychology of investors by having a look at group study about two-dimensional humans in the political economy(Cohen 1982). Cohen perceived humans as having two dimensions of being political and symbolic. In other words, investor psychology can be ascertained with the dialectical relation between the power system of ‘society versus I’ and the symbolic system of ‘I belonging to the certain group’.
Investors living under the institution of 21-century market capitalism are political humans who fiercely compete for their profit by selling and buying ‘token and coin’, resources of the cryptocurrency market, facing myriads of individual investors, institute, groups in virtual space called cryptocurrency market 24 hours a day.
At the same time, they are symbolic human belonging to certain groups. They belong to a bigger group of the cryptocurrency market in common while sharing common group cultures and beliefs to form a unique group identity by trading a certain coin or token in certain exchanges. In other words, they are strengthening the group spirit of ‘successful investment’ exchanging trust while sharing a common group identity.
‘We invested in the same project. You and I are comrades and we are the one with the project’
Change in Perspective on Cryptocurrency Investment
With the passage of time, there came a change in cryptocurrency investment. Institute investors who did not consider investing in cryptocurrency equalizing it with uncertainty just 1–2 years ago are now actively involved in cryptocurrency investment. According to Fidelity Digital Asset Report(2020), 36% of 774 US and Europe institute investors revealed that they are currently making an investment in digital assets including bitcoin and those institutes were more prevalent in Europe(45%) than the US(27%). Among them, more than 25% revealed that they possess bitcoin and 11% said they are currently investing in Ethereum.
The main reasons institute investors invest in cryptocurrency are ‘the fact that it does not correlate much with other asset groups (36%), innovativeness(34%), potential(33%) among others. 40% of respondents said cryptocurrency is ‘alternative asset’ while 20% said ‘digital asset is an independent asset group’ which reflected changed status of cryptocurrency.
There was a change even in investment size. According to the study of cryptocurrency investment size by Sharespost(2019), more than 30% of investors’ investment size exceeds $25,000, and 20% possessed Ethereum of which amount exceeds $25,000 which showed that proportion of cryptocurrency among investment portfolio has increased.
Alehandro Ortiz, analyst of Stock Post reacted as follows.
“Although the cryptocurrency winter has not come to an end, recent studies show that people’s perception of the future of cryptocurrency and blockchain technology is changing positively”
What Cryptocurrency Holders Want
According to annual report on Jan. 2020 by Bitwise, lots of financial planners out of 415 assessed that bitcoin is now on board uptrend. 64% of respondents that until the year 2025, the value of bitcoin will rise, while those who expected the cryptocurrency market will plummet recorded 8%.
Following institute investors, financial planners start to perceive cryptocurrency and it marks a symbolic milestone. Their trading enables us to project the direction cryptocurrency will take while it is hard to say that cryptocurrency has come under the official financial sector. Therefore, what cryptocurrency holders are waiting for can be the following two.
First, advancing into the official financial sector by being recognized as an asset with currency value
Second, active introduction and diffusion of blockchain technology.
While the general public equalized blockchain with cryptocurrency, global conglomerates have introduced blockchain in their area. Since the virtues of blockchain are transparency and security, many companies in the field of finance or which have large scale distribution channels have already introduced or in the process of introducing the blockchain. In fact, it is difficult for consumers to be aware of this and they do not necessarily need to know about it. Even though most people do not know the fine details of how the internet works, people still have the ability to use the internet on a daily basis and blockchain will follow suit.
In short, what hundreds of thousands of cryptocurrency investors want is simple. That is ‘profit’. However, to realize this two prerequisites mentioned above should be fulfilled. In other words, they want to profit in one-dimension but in high level, they want to lift the status of cryptocurrency and the prevalence of technology to use it. It is obvious since this will feed into profit as well.
Problems to Overcome
However, still there are many problems which we should overcome. First of all, high volatility is a daunting problem. According to Fidelity digital asset report(2020), more than half of the respondents (53%) selected ‘high volatility’ as the foremost obstacle in adopting digital assets. It was followed by ‘concern on market manipulation(47%)’, lack of fundamental to assess the value(45%), and many others.
In addition, a digital currency which many countries try to introduce recently is another threat to cryptocurrency. In fact, in a broader sense, digital currency includes electronic currency, cryptocurrency, virtual currency, but what issues digital currency is the nation which ensures low volatility and which will replace existing paperback. These make a huge difference.
According to a survey conducted by UK The Economist, UK news magazine, and crypto.com, a crypto-asset company in 2020 on 3,000 virtual asset investors worldwide, 38% of respondents perceived investment in cryptocurrency risky while 54% expressed trust on digital currency. It manifest the trend in which more people are switching to pursue stability rather than high return based on high volatility.
Therefore, it is important to catch such market change and ‘what public really want’ and react shrewdly to that. Although cryptocurrency is still attractive, people’s minds may suddenly flip into ‘more stable, more certain alternative’ if it comes out.
The project cryptocurrency holders want
Cryptocurrency was born with entirely new paradigm of decentralization as substitute to a centralized financial system. Many people were fascinated by it, but it is too early to say that it replaces current finance. However, there is a steady increase in the number of people who make an investment with confidence in the future of blockchain and cryptocurrency, and more and more people are acknowledging the cryptocurrency as ‘intangible asset’ which increase public confidence on it.
The new transformation is always progressive, but we can not entirely ignore conservatism of existing order. It’s impossible to suddenly replace the existing financial system and currency which has been handed down for the time of more than 200 years after the industrial revolution. Therefore, the most reasonable strategy is not confronting existing institution, authority but advancing in tandem with them so that existing financial sector recognize cryptocurrency as ‘asset’ and absorb it in their system.
Then what kind of project do cryptocurrency investors want?
The project that gives high returns? The project that keeps the promise in the white paper? Or project which contributes to the lives of humanity with advanced technology? In fact, it is difficult to find a project which upholds the fundamental value of decentralization, scalability without a dent in speed and capacity, and perfect security safe from hacking or fraud.
Ethereum aimed at ‘network open to everyone’ but due to this, faced the problem of slowing speed and constrained scalability. Other projects including EOS which pursue POS also can not be called the blockchain we dreamt of because it has failed to realize decentralization while trying to optimize the speed by restricting a number of nodes.
Meanwhile, there are many projects which try to optimize both decentralization and scalability. Universe has a maximum of 25 block validators(partner companies) in order to allow all partners to produce blocks equally. In addition, it adopted POA in which block is produced in the way of round-robin. In order to increase reliability, a certain degree of shares of validators are staked. In another case, BOSAGORA solves the problem of scalability with the second layer and solves these problems by establishing governance consist of congress members who can participate in the discussion and decision making of the project.
As mentioned earlier, cryptocurrency investor also aims at obtaining ‘profit’ just like a general stock investor. However, if there is holder who has held either coin or token from the time of ICO until now, we can say that holder has a different viewpoint from others. These people have an expectation that the project they choose and invested in will succeed and change the world. This is later connected with pride through which the holder gains energy to lead a happy daily life because they want to demonstrate that their choice was right in the upcoming future. Of course, the final goal is ‘profit’. No one makes an investment without expecting a profit.
Now it is the turn of a cryptocurrency project. Cryptocurrency project fulfills the desires of the investors, giving back profit, symbolizing itself as expectation, pride, and sole entity to realize all of these. Still there are many obstacles to overcome but I sincerely hope a successful project emerges by growing together with holders and weathering all the difficulties.
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