Buy, sell or stay away from cryptocurrency?

Questions about cryptocurrencies

altcoins

These days many people wonder if they should still buy cryptocurrencies. Here are some of the questions I hear:

  1. Is is still worth investing?
  2. Will the bubble burst soon?
  3. Why have rates gone up and what is the true value of altcoins?
  4. What are the best cryptocurrencies to invest in?

There are no easy answers and reading news and fake news about the topic does not provide straightforward clarification. Anyway, it is hard to predict the future, but let me try a brief analysis:

Value

The value of anything is driven by demand, supply and benefit either provided or at least felt by someone paying a price. Take art for instance: As long as there are enough rich art lovers who are willing to pay high sums for paintings, transactions will happen. On the other hand, as long as enough people believe in a concept and accept common rules for the sake of security and stability, anything can be of value, even a piece of paper called money. Gold itself has some value because it can be used as a material, but the price is rather driven by buy and sell activities.

Belief

What does this mean for digital currencies? Obviously all of them follow the market rules for demand and supply. All of them can be used for payments more or less, but with hundreds of altcoins (https://www.worldcoinindex.com/trending/overview) and high volatility even on a daily basis even Bitcoin, the oldest and still largest cryptocurrency, does not qualify for mass market cash replacement.  One of the initial ideas, to create an anonymous payment system which is not controlled by central organisations or governments works as proof of concept, but for daily instant payments it does not make sense (yet). Value increase is mainly driven by more people buying than selling in combination with lack of alternative exciting investments. 1000% increase with altcoins in one year, no problem, so far. Can this increase continue? Yes it can, as long as demand remains large enough. This is kind of the gold effect: People believe in value and value increase, so they buy and hold more volume than others sell to make profit at lower rates.

Disruption

But there is more potential than digital money and new asset classes. Comparisons with other bubbles, especially the tulip mania in the 17th century does not prove anything for today. See also:

http://money.cnn.com/2017/12/08/investing/bitcoin-tulip-mania-bubbles-burst/index.html

https://www.theguardian.com/business/2017/dec/02/bitcoin-bubble-the-warnings-from-history

Technology is moving faster than ever and will impact society significantly in everybody’s lifetime. Today’s older adults all remember a life without Amazon, Apple, Facebook and Google. These companies are also called “the four” in a book by Scott Galloway. Today they dominate the (Western) internet world. You can add more companies to that list e. g. Alibaba, Baidu or Yandex. Current champions might be history in a few decades. Not so long ago Nokia mobile phones and Yahoo internet services were each best in class and played a major role in those market segments. I remember Microsoft managers telling me in the early 90ties that the Internet will not affect the software industry in a very relevant way. Well, doubts are fair to bring forward and not everything new will change the world for good.

But cryptocurrencies and its underlying blockchain technology will disrupt financial services and impact many business models big time.  With altcoins comes software that can interact between parties who own an unique account (an address). Smart contracts (software based contracts) offer a wide range of business setups. They help to exchange money, property, shares, or anything of value in a transparent, conflict-free way while avoiding the services of a middleman.

Find more details about Ethereum Smart Contracts: https://www.coindesk.com/information/ethereum-smart-contracts-work

A good example is an Initial Coin Offering (ICO), which works with an Ethereum based token (a software based contract) to allow anyone with internet access to become a shareholder. NO, it is not regulated; NO it is not as secure as buying shares; NO, there are no detailed laws, BUT people believe in the offered ideas and potential profits. YES, it is risky, anyone can become a venture capital investor. There is no need for business angels, lawyers or banks to do so.

Answers?

Nobody can give exact answers to the questions in the beginning of this article, but to me it seems pretty clear that cryptocurrencies and smart contracts have a future and will bring change and value. One can still be lucky speculating short term, many altcoins and ICO startups will go down and vanish and a few bigger ones, e. g. Bitcoin, Ethereum and Ripple, will remain longer. No surprise… 😉