There has been tremendous upward volatility in cryptocurrencies over the past month.
The largest blockchain based cryptocurrency, Bitcoin, is trading over $2,100 with a market cap over $35 billion.
Ripple, a cryptocurrency seeking to lower the cost and increase the speed of international fund transfers is up to a market capitalization of nearly $13 billion with a price of $.33.
Ripple has been trading places with Ethereum as the second largest cryptocurrency. As of writing, Ethereum is up to a market capitalization over $15 billion making it the second largest cryptocurrency by market capitalization. The price is over $165 per coin.
A variety of other coins like DASH and Litecoin have also risen considerably over the past month.
Purists will despise Ripple for its adoption by large banks but it has a clear use case and the archaic international money transfer technology that is currently used by banks is ripe for replacement.
I own some Bitcoin, DASH, Ripple and Ethereum. I’m considering reducing my exposure to Bitcoin and taking some profits.
I remain skeptical of Bitcoin and I’m long term bearish on the currently largest cryptocurrency.
I consider Bitcoin an almost a purely speculative play because of the non-trivial technological issues with Bitcoin: including slow transaction speed, lack of privacy and scalability problems.
I also think the fact that Bitcoin has no non-monetary use is a problem for reasons I’ve previously described.
I think now is closer to being a good time to sell cryptocurrencies rather than buy them. The various cryptocurrencies could of course go even higher. For someone interested in purchasing crypto, waiting for a pullback or at least dollar cost averaging could be a good approach.
I’ve written about why I dislike cryptocurrencies. Everything I’ve written there is an accurate conveyance of my views.
However, today I’d like to write about why I like cryptocurrencies (and blockchain technology). I don’t see these views as contradictory, simply pragmatic.
If you aren’t already familiar with terms like blockchain, cryptocurrency or Bitcoin check out this explanation: What is Bitcoin?
Let me give you an example to illustrate why it doesn’t really matter if there are things I dislike about cryptocurrencies. If you know a lot about art this won’t work. Lets say I created the following piece of artwork. Say it’s something I painted when I was in seventh grade.
I try to sell it. How much do you think it would go for?
I’m guessing somewhere between nothing and a few bucks. Personally I don’t think it is very good. I don’t like it that much. The paint and canvas could be purchased for a few dollars but they might be worth more unused.
But guess what, it’s actually a Pablo Picasso painting called “Femme Assise” and someone paid $63.7 Million for it in 2016.
I don’t particularly care for this piece of art but people are willing to spend millions for it. So If I knew a lot about art and spotted an original Picasso at a garage sale for $20 I would buy it knowing I could sell it to someone else for much higher.
Just because I don’t particularly like much of Picasso’s artwork doesn’t mean it isn’t highly valued by other people. Just because I think there are fundamental flaws with cryptocurrencies that prevent it from being a good long term store of value doesn’t mean they won’t rise in price–at least in the short to medium term.
Whenever money is pouring into a sector or industry that is an opportunity for profit. And so I view cryptocurrencies as a speculation rather than an investment. But given all of that there are several things I like about cryptocurrencies.
1) Cryptocurrencies are great for Speculation and Trading
On 28 April 2013 the market cap of all cryptocurrencies was $1.59 billion. It’s currently nearly $28 billion.
That is a tremendous inflow of money in a period of just four years. Cryptocurrencies are a rapidly growing market and it’s easy to pick a winner when everything is going up, wether it is stocks or cryptocurrencies.
The price of cryptocurrencies also tends to fluctuate dramatically and that sort of volatility is great for trading.
2) Cryptocurrencies aren’t Controlled by the Government
I’m sure some people go into government because they want to do good and make a positive change in the world.
However, on the whole government, at least in the United States, seems to mainly work to perpetuate itself. One way the US government has been able to stay in power is by going into debt and printing money.
This has resulted in a significant devaluation of US dollars.
While I think most cryptocurrencies are fairly centrally controlled the people in control of these cryptocurrencies have motivation to work for the long term good of the currency and technology since there are hundreds of other cryptocurrencies out there that people could easily adopt instead.
I think the inspiration and popularity of cryptocurrencies is at least in part due to this reckless government spending which is itself inflation and the cause of price inflation.
Many (but not all) of the cryptocurrencies including the largest, Bitcoin, are designed to be deflationary in nature.
3) Potential Widespread Adoption
A cryptocurrency or blockchain technology could be widely adopted as a replacement for one or more parts of the legacy financial system.
A Replacement for Dollars or Euros or Yen…Etc
While billions of dollars have flown into cryptocurrencies over the past several years there still isn’t widespread adoption by consumers. You don’t go into the local quick mart to pay for gasoline with DASH or Bitcoin. Amazon.com doesn’t accept Monero or Zcash as payment.
Spending dollars online and in the brick and mortal world using technology like Paypal or simply a credit card works great. The technology for spending fiat currency is mature and works fine in most use cases.
An Outside Catalyst
For some reason the average consumer in America (and perhaps people around the world too) doesn’t really about inflation, at least not directly. They care their rent goes up each year and things are getting more expensive, but they don’t think about the cause of rising prices (other than unfairly blaming “greedy business owners”).
Right now inflation is “only” 2-8% per year. Even though that represents a tremendous loss of purchasing power over time it is low enough that people aren’t really concerned about it. As long as price inflation is relatively low and stable I think people will continue to use government issued fiat currency.
But if inflation really started to take off (as I think it will some day) I anticipate the appeal and adoption of cryptocurrencies would take off as well and with it the price.
Weakest Elements of the Legacy Financial System
However international wire transfers are rather slow and somewhat expensive. And I’m not aware of an online cash-like payment system that existed before Bitcoin. So international settlements and online cash-like transactions are two areas within the legacy financial system that leave room for cryptocurrencies and blockchain technology to step in as a superior alternative.
Blockchain technology like Ripple, which has been sponsored by numerous large banks around the world, could very well replace certain elements of the international financial system.
Cryptocurrencies like Zcash and DASH, which are better than Bitcoin when it comes to speed and privacy, could very well gain large marketshare as a way to make cashlike transactions online.
4) Blockchain technology
In addition international settlements there are a variety of other applications for which Blockchain technology, one of the fundamental technologies behind cryptocurrencies, could be transformative. Areas like stock ownership, smart contracts, digital voting, and cloud storage could be revolutionized by blockchain and cryptocurrencies.
Cryptocurrencies and Blockchain Technology
I don’t see these technologies going anywhere. They could very well revolutionize many sectors in the financial world.
For all the reasons I’ve listed before, I don’t know that buying into a cryptocurrency is going to be a good long term store of value.
However, the technology itself is powerful and there is the potential for profit if one makes some daring (and correct) speculations.