Blockchain, Cryptocurrencies & the Shifting Paradigm
We always overestimate the benefits of technology in the short-term & underestimate it in the long-term. Technology, after all, is an iterative process which keeps on evolving on a daily, weekly & yearly basis. And this holds true for the revolutionary Blockchain technology & the Cryptocurrencies. Imagine if anybody would have known this about Google, Amazon & PayPal at the peak of the dotcom bubble & eventual bust.
Yes, a lot of IT startups of the time went down under but good viable projects like them survived and emerged as game-changers in the tech industry. Even the prolific investor Warren Buffet regrets missing the bus on investing in these big names at the time.
I guess what I am trying to say is there is an analogy between the cyclical tech shift that took place at the end of the last century and the current Blockchain/Crypto movement that is causing a major paradigm shift across different sectors of the global economy — from decentralized blockchain networks, to peer-to-peer market places, new forms of digitized payments, smart cities and a whole lot of other disruptions across the Fintech spectrum.
First of all when disruptions of this scale & magnitude happen then older models of determining price, value, tangible benefits & growth trajectory can’t be used to determine the future path of those assets or digital assets in this case.
Even the conventional methods of Regulating are not useful as we can see that the regulatory authorities around the world are having a hard time coming up with uniform measures to deal with the new technology. This, of course, calls for the adoption of RegTech (a combination of Regulation with the help of technology) by the regulatory bodies, on which I intend to do another piece soon.
Let’s look at a couple of charts to make a data-driven comparison on how Cryptocurrencies can move much higher than their current price levels. I am not going to present a “crystal ball prediction” about the prices but purely what the technicals on the chart dictate for this comparison.
We will look at the chart of the U.S. Tech Index Nasdaq to compare the dotcom bubble movement with the Crypto leader Bitcoin since most of the coins pretty much mimic its movements. For calculation purposes, we are making an assumption based on the chart that Bitcoin has created a low around the $5800 level in late June.
The charts are not to scale since we don’t have enough data for bitcoin to compare them on a weekly basis. You can see both Bitcoin (presumed bubble) & Nasdaq (dotcom bubble) peak to their highs in a similar fashion which is marked by cyclical factors like media attention, greed, enthusiasm & delusion. And similarly, the lows were preceded by denial, fear, capitulation & despair. All these emotions are typically associated with any economic cycle.
Two main takeaways from this comparison — one is that Bitcoin is following the same economic cycle like any other asset, commodity or an economy would. And secondly based on the earlier assumption of the technical chart levels, a rebound seems to be taking shape in the Crypto leader.
Keep in mind that Nasdaq has gained almost 570% from its low reached in 2002 to the current levels. Now if we apply the same formula to Bitcoin’s current assessed low of $5800 it should end up somewhere around $33000 for the next peak.
The only difference between the two charts though is the time frame in which this might be accomplished — for Nasdaq it took almost 16 years for the current peak to achieve, this might be a much shorter time frame for Bitcoin and there is where the paradigm is shifting, exponential growth over a short period of time.
Not to say that Nasdaq followed the same route with only one significant correction only in 2008–09. And for all of those who think Bitcoin is a huge bubble, here’s a little perspective on all the bubbles that exist in the financial ecosystem right now & where Bitcoins stands among them.
Before you jump to any conclusion, the bitcoin price prediction above is just based on the charts of two technology components of financial markets and is supposed to provide forward guidance & not investment advice. However, I do provide my technical analysis on the Cryptos, Forex & Stocks on Twitter & StockTwits on a daily basis if you are interested. Moving on to some of the other fundamental factors that I believe is causing this paradigm-shifting technology to go from strength to strength.
- Regulations: One of the biggest hindrances for the Cryptocurrencies in going mainstream has been the hardline approach taken by the financial regulators around the Globe against the digital coins. There are signs of toning down the FUD approach with the G20 delaying the regulatory reforms till October & easing off on the apparent threats of banning Cryptos altogether. Another very positive development in this regard has been the passing of a comprehensive regulatory framework for Crypto/Blockchain regulation by the Blockchain island of Malta which has become a hub for such activities. South Korea, one of the biggest Crypto markets in the world is hurrying towards putting regulations in place to prevent hacks & foster robust Blockchain and Cryptocurrencies growth. Japan, the second-biggest Crypto market already has some sort of regulations in place but it is in the process of streamlining it further. Needless to say that most of the countries are realizing the usefulness of the technology & digital currencies and coming out of the denial stage to explore & implement the tech rather than fighting it.
- Trading & Investment: Retail traders & investors have already been in the game with the interest peaking with the rising prices late last year. However, the sentiment has waned significantly with the Cryptos touching new lows lately. Having said that institutional investors & big players have entered the foray citing “bargain” prices. Also, Bitcoin started trading futures followed by Ethereum, but the biggest news yet would be the approval of Bitcoin ETFs for which the U.S Securities & Exchange Commission (SEC) has received five applications. The decision has been delayed until September of this year. You can imagine the capital inflow in the Crypto assets if and when it gets approved.
- Fiat backed Stable coins: One of the biggest criticisms that Cryptos have faced has been the very high volatility, unpredictability & lack of tangible value associated with them. Although the central banks are hesitant to issue their own digital currencies the growth of stable coins that are pegged to traditional fiat currencies has been on the rise lately. IBM joined hands with a U.S startup Stronghold to launch USD Stronghold backed by USD which would function on the Stellar blockchain platform. While Stasis, the Crypto Ecosystem launched its version of the stable coin EURS backed by the Euro. This signifies the growing interest & influence of the Cryptos & blockchain in the current financial system.
- Upgrades & Traditional payments: A lot of the top performing Cryptos have been upgrading their networks, systems & protocols to improve their functionality, processing & usability. This gives credence to these projects & makes them viable for the long term. Also, they are making inroads in the traditional payment systems. A recent news piece confirmed that MasterCard won a patent for speeding up Crypto payments. Although MC has been a critic of the digital coins recently they are now thinking of offering user accounts where the clients would be able to transact in Cryptocurrencies on the current system. This has come on the back of increased usage of Cryptos over fiat currencies.
- Integration: The blockchain has been welcomed & integrated into the Financial Ecosystem at a brisk pace where the banking sector has been at the forefront. The smart contract functionality of the blockchain has the ability to disrupt all the major industries & sectors of the economy since it offers efficiency, transparency & speedier execution.
- Fighting inflation: Ironical as it sounds but the volatile Cryptos have been the stabilizing factor in countries like Venezuela where hyperinflation has eroded the buying power of the local fiat currency completely. Although the government has issued a digital alternative currency backed by oil, people are using the mainstream Cryptos to buy food, etc. since it gives them a better value. Other countries facing currency troubles, economic sanctions or other financial issues are also considering moving to digital alternatives. One such glaring example is Iran which is planning to issue its own e-currency within the next 3 months.
It might be a gradual process but the Blockchain movement & Cryptocurrencies are becoming commonplace with every passing day. Who knows a few years from now we might not even remember doing business any other way.
Originally published at www.datadriveninvestor.com on July 26, 2018.