Predict
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Predict

Show Me the Money

So many Bitcoin dreams have been dashed, is now the time to cash out?

I like to wear (not literally) the ears of my friends and colleagues (or anyone who should be so unfortunate to be within earshot) about how the crypto markets are so accelerated because they never close. So instead of the dotcom boom, bubble and bust which took several years to complete (after all Wall Street traders need time to party), the crypto one will take place at three times the speed, or even faster. Consider this, on average stock exchanges trade about 8 hours or less a day, with the weekends off, whereas the crypto markets chugging along 24 hours a day, 7 days a week and 365 days a year. So last year’s unprecedented run up in dollar values of crypto such as Bitcoin and Ethereum are an example of the crypto boom, bubble and this year we are well into the so-called “trough of disillusionment.”

An old saying holds that markets are ruled by either greed or fear and while greed once governed cryptocurrencies, we’ve seen relatively stable (by crypto standards) dollar values of crypto for the past few months (an eternity on the crypto timeline) — scarcely the stuff of panic. What we do need to bear in mind is that cryptocurrencies are unlike any other currency or asset class which you or I have ever witnessed before in our lifetimes. With every other asset class, there are market forces which constantly manipulate price — as well as a buyer or last resort. With cryptocurrencies, no such buyer of last resort exists, in other words, the price of cryptocurrencies (specifically Bitcoin) come as close to possible as being freely determined by the market (supply and demand). And since we know that the supply of cryptocurrencies such as Bitcoin are essentially fixed, as long as demand doesn’t taper off, there should technically be a “minimum price.”

Contrary to popular belief, the rumors of crypto’s death have been greatly exaggerated.

Which goes some way to explaining why the top two cryptocurrencies such as Bitcoin and Ethereum have not crashed to zero — contrary to naysayers who have labelled them as “worthless.” So far at least, there does seem to be a price low enough where investors (or speculators) are willing to take a bet that cryptocurrencies are undervalued at certain prices. And while economists define a currency as something that can be at once a medium of exchange, a store of value and a unit of account — these same economists argue that the lack of adoption and loads of volatility means that cryptocurrencies satisfy none of those criteria. Here I would argue the answer is “yet.”

Many of the economists, traders and investors (especially those who have seen success in their investments from other instruments) are understandably suspicious of an all new asset class. Often, they approach new technology with the mentality of, “I made my fortune on [insert suitably archaic investment vehicle], this cryptocurrency thing is a scam.” All the while ignoring the work that continues to be done behind the scenes to improve the technology that is the blockchain and that is cryptocurrencies. Observation of the cryptoscape as it “is,” provides us scant clues as to where it could “be.” It’s a bit like looking at the internet in 1996 and predicting that one day we’d all be on Instagram or Facebook or watching livestreams. Hindsight as they say is 20–20.

Facebook — hard to have predicted this phenomena in 1996.

So where does that leave us?

There are some reasons to take a positive-biased approach towards cryptocurrencies.

  1. Just like in the dotcom boom, bubble and bust, cryptocurrencies have already gone through a similar cycle in a relatively compressed time frame already — thanks in large part to ICOs and I for one am glad that that’s finally over. This allows us to get on with the serious work of delivering on our promises.
  2. Unlike the dotcom era, there are greater tools for transparency. The development of the blockchain can be witnessed live to anyone willing to devote the time and effort to do so. GitHub as a global code repository allows investors the opportunity to do due diligence on their projects and Reddit, although it is also a rich source of conspiracy theories, has sufficient breadth of freedom for anyone diligent enough to suss out the fact from fiction.
  3. The development of cryptocurrencies and the blockchain is decentralized just like the development of the world wide web (WWW). And here I draw the distinction between the world wide web and the internet, the protocol which the WWW sits on. Because the “internet” and going “online” that most you and I are familiar with are the web layer applications and websites which sit atop the internet protocol. The blockchain also sits atop the internet protocol, but in itself is also developing myriad new protocols (Ethereum is an example of a protocol, but there are countless others). And it is in this decentralized development (just as in the internet) that we will ultimately see the Great Leap Forward (a quote from Chairman Mao Zedong of China) — where the next Google and the next Facebook will be born.

Naturally, this doesn’t mean that all cryptocurrencies will do well, but given the sheer amount of human capital and resources being invested into the space, the decentralized nature of development (it’s a global thing if nothing else) and the coming building of the infrastructure that will support the growth and adoption of cryptocurrencies, there are sufficient reasons to call it “cautiously optimistic.”

Money is soooo distracting.

Money is distracting. The same way money distracted us from the underlying fundamentals during the last dotcom bust, disillusioned an entire generation of would-be dotcom entrepreneurs. Today internet companies such as Amazon and Google with no physical resources (excluding data centers), no machinery, no plant and no equipment wield an outsized influence in the American and the global economy — something that would have been hard to predict in 2001 after the dotcom bubble burst. In the cryptosphere that’s where we are now.

Investors looking to make a quick buck from crypto may be disappointed, but for those willing to put in the work in this space for the long run, the rewards will come.

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Patrick Tan

Patrick Tan

CEO & General Counsel of Novum Alpha, a quantitative digital asset trading firm with regulated funds catering to accredited and institutional investors.

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