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… 😉

Up – Down – Crypto Bubble?

These days most digital coins are (still) going down. Did the bubble burst? I don’t think so, it is rather an adjustment, since most market rates were at all time highs. Regarding cryptocurrency and related business models I believe it is too early to speak of a bubble. That is why:

  • Bitcoin has been around for some years now. The concept was first mentioned in 2008 and published as Open Source code in January 2009 by Satoshi Nakamoto. The currency is still there and people keep trading it. More and more stores accept Bitcoin: https://www.cryptocoinsnews.com/accepts-bitcoin
  • With Ethereum not only another digital coin but a concept of smart money, contracts and applications was introduced. This is a foundation for new promising business models and has a high potential for disruption in many industries: It is a new transaction layer in the internet which allows to build in its shareholders and customers at the same time by using smart contracts.
  • Based on Ethereum new token or coin sales take place. With the initial coin offering (ICO) founders seek for world wide funding for their ideas. Many ideas will fail, a few will be successful. This is just like funding startups, but a lot easier, since investors only have to buy the new coins. Anyone can invest and anyone can lose their investment if the business does not succeed.
  • Cryptocurrencies and smart contracts will become more and more a new way to make business. But of course, this does not mean every coin or new business idea will last.  Before investing make your due diligence, be patient and also be prepared to fail.

So, there is not one big bubble, but great opportunities and also many risks to fail in the space of smart money and contracts. 

Is your cryptocurrency investment safe?

When considering Bitcoin, Ethereum or other cryptocurrencies as an investment one might be worried about the volatility or the substance of digital coins at all. Any early investor can smile: In the last few years despite of strong price changes large profits were possible. The last 12 months also showed significant value increase, but it is not a safe bet after all. You have to take some risks and do not worry too much about ups and downs e. g.:

Bitcoin market rate

https://coinmarketcap.com/currencies/bitcoin/

Ethereum market rate

https://coinmarketcap.com/currencies/ethereum/

Are my digital coins save?

Apart from volatility how secure are platforms and coin accounts? This depends on how you store your coins. With large platforms like bitcoin.dekraken.compoloniex.com or with a wallet or software client generating an account for you. Platforms have their own risks, remember the Mt. Gox hack in 2014. In theory any generated account is unique at any time. Can someone else access my account by accident? This is very unlikely, but not impossible.

Finding existing Ethereum accounts

What is the likelihood that a created Ethereum address is in use already? It is very very small:

2^160 or about 1 in 1461501637330902918203684832716283019655932542976

For more detailed information see:

http://ethereum.stackexchange.com/questions/1115/how-do-ethereum-clients-generate-unique-addresses

http://ethereum.stackexchange.com/questions/4299/account-uniqueness-guaranteed

Finding existing Bitcoin accounts

But it does not seem completely impossible to find the account of someone else. This means access by a third party can happen. The following white hat initiative works on proving this with evidence:

https://cointelegraph.com/news/ultimate-white-hat-hacker-large-bitcoin-collider-passes-1000-trillion-addresses

First existing Bitcoin accounts have been found by the Large Bitcoin Collider (LBC):

https://lbc.cryptoguru.org/trophies

The way I see it: With the so called collision access to an existing Bitcoin account has been possible. Find more discussions about this topic on reddit.com.

Conclusion

Never say never… With quantum computers to come even very unlikely events today might be a lot more probable in the future. I am not an expert just a user who would not trust today’s technology without some precaution. I guess this is always a good idea.