The last ten days have marked a wild end to the craziest year in the short history of cryptocurrency. Hype and mainstream media attention have grown with every new all-time high as Bitcoin went from $1000 in January to $10,000 on November 28. The price has soared since breaking the $10,000 psychological barrier, hitting highs above $18,000.
Even the most optimistic long-term holders are beginning to fear this rally is unsustainable. In the past, all-time highs have always been followed by a sustained dip. The current exponential rise in Bitcoin’s price defies all logic.
The next ten days will see things become even more interesting with the much-hyped introduction of Bitcoin futures by two major exchanges. CBOE Group will allow Wall Street futures trading from December 10, with CME Group following suit on December 18.
Much of Bitcoin’s growth over the past year has been fuelled by ordinary new investors getting swept up in the hype surrounding its growth. The recent surge has been different.
One of the central features of Bitcoin is the existence of an open ledger of transactions that anyone can view. The transactions that have been taking place recently are mostly transferring thousands of Bitcoin at a time, with many taking place for tens of thousands. To put that in perspective, 1000 Bitcoin is currently around $16,665,000, and transactions above 10,000 BTC are worth hundreds of millions of dollars.
This has had a big knock-on effect for those holding smaller sums. While the value of Bitcoin has increased, its utility value has seriously diminished. Transaction fees are often now twice what they were a week ago. Transaction fees are paid to Bitcoin miners to authorize transactions, and users are able to set their own transaction fee to bid for authorization. Users looking to move small amounts are increasingly finding that its impossible to propose a transaction fee high enough to get their transfer approved.
It’s clear that big money is pouring into Bitcoin at an unprecedent rate as CBOE and CME prepare to offer the first Bitcoin futures. This is unlikely to be coincidental.
There is a growing fear that big-time investors, or ‘whales’, are buying huge sums of Bitcoin with the intention of shorting it once trading begins on Bitcoin futures. If these whales then sell their Bitcoin at a loss, the price will plummet and they can make a huge return through shorting the crash.
The past year has been an insane time for anyone with an interest in Bitcoin. The next few weeks might see things get even wilder.
The current boom in Bitcoin and other cryptocurrencies is bringing an emerging technology ever close to the financial mainstream. Governments around the world are looking closely at how cryptocurrency and blockchain technology could be incorporated into existing financial infrastructure.
The white paper mentions the use of bank notes has declined in Canada over the past two decades relative to the country’s GDP. It mentions that in countries which are closer to becoming truly cashless, such as Sweden, central banks may soon be forced to take an active stance on whether to issue digital currency.
However, the paper notes that in Canada’s case, it would be undesirable for digital currency to completely replace banknotes. Canada is a large country with huge swathes of sparsely-populated land. A total switch to digital currency would be more feasible in countries with populations concentrated in large urban centers, such as most of Europe, along with East Asian countries like Japan and South Korea.
In Canada’s case, banknotes will still be necessary to conduct transactions in isolated rural areas with limited internet access. Interestingly, the paper envisions people in these areas using United States banknotes if Canada was to completely replace Canadian banknotes with digital currency.
The paper also shoots down a few of the proposed effects of a switch to digital currency. It concludes that digital currency is unlikely to affect the central bank’s ability to manipulate interest rates. It is also unlikely to be any more or less desirable for use in criminal activity than hard currency.
Concerns over enabling criminal activity would mean that digital currency would be unlikely to provide full anonymity. However, the paper dismisses the idea that digital currency would make it easier to track how money is being used and effectively cut off funding from criminal enterprises.
Another often-touted benefit of cryptocurrency is that allows those without bank accounts to easily store money and make transactions. This is could have a big effect in developing countries, but the paper mentions that very few people are excluded from the banking system in developed countries such as Canada.
The vision of digital currency outlined in the paper is one that blends the formula established by Bitcoin with parts of the existing banking system. Citizens would be able to store their digital currency in banks or withdraw it from ATMs and send it to smartphone-based wallets.
The biggest benefit of digital currency would be in its use as a form of everyday payment. Using digital currency would be cheaper than either bank cards or hard currency. This would lead to other knock-on benefits, such as reducing the barrier of cost for new firms and business ventures. The introduction of digital currency could therefore stimulate the economy by making it easier to start a business.
The paper concludes by recommending a cautious introduction of digital currency, followed by a period of learning through trial and error. As with all things in the emerging cryptocurrency space, the paper is unable to draw firm conclusions as to best practice as the idea of digital currency is completely untested.
Venezuela’s President recently announced the introduction of digital currency, but he was mocked by political opponents for providing no clear details on how this could be achieved. Venezuela is already at the forefront of cryptocurrency adoption, with hyperinflation making existing cryptocurrencies more attractive than the value-losing Venezuelan Bolivar.
It is likely we will see more governments experiment with digital currency over the next few years. The Canadian Central Bank’s white paper hasn’t provided a fully-fledged blueprint for a future digital currency, but it has provided another indication of the hugely disruptive potential of blockchain and distributed ledger technology.
Bitcoin has drawn a huge amount of hype, with some investors making incredible profits from it. The price has varied wildly since its launch, with each new peak followed by an immediate dip in value. At the press time, Bitcoin is trading at $16,382 level, according to the Coinbase. While some are convinced this digital currency has still yet to reach its maximum value, others feel like Bitcoin is a bubble comparable to the 17th Century Dutch mania for tulips or the 1990s craze for Ty Beanie Babies.
JP Morgan CEO, Jamie Dimon, is one of many Bitcoin skeptics, declaring the cryptocurrency a fraud and a bubble that was sure to burst sooner or later. So far, he has been wrong. However, if you agree with Dimon and think that Bitcoin’s value is sure to collapse at some point, here’s how to make money shorting Bitcoin.
The most straightforward way to short Bitcoin is through buying derivatives. This is a relatively new concept in the world of cryptocurrency and there are few options for doing it at present. However, these options look set to increase as Bitcoin’s ever-increasing hype leads to more skeptics looking to short it.
The only current option for doing this is through Hong Kong’s Bitmex exchange. Traders can buy a “put option” through Bitmex to sell Bitcoin at peak pricing. If the price then decreases, traders will make a profit on the put option.
For big-time investors, major investment banks will draw up a contract for shorting almost anything. The obvious drawback is that firms such as Goldman Sachs won’t negotiate these kinds of deals with anyone who walks in off the street.
If you think cutting a deal with a major investment bank is beyond you, you could always turn to a traditional bookmaker. Like investment banks, bookmakers will allow a bet to be placed on almost anything. You might not get fantastic odds on a long-term bet on Bitcoin’s value dropping but it might be worth placing a bet if you’re convinced cryptocurrency is destined to fail.
3. Buy Bitcoin on Margin
Some Bitcoin exchanges allow users to trade Bitcoin on margin. This functionality is intended to allow users to bet on the cryptocurrency’s long-term success, but it can easily be tweaked to allow for shorting Bitcoin.
Using an exchange such as GDAX or Kraken, Bitcoins can be sold on margin. The deal will be completed later when the value has hopefully decreased.
The main drawback of this strategy is that it only allows for short-term selling on margin. Through GDAX, margin positions can only be left open for a maximum of 27 days. Of course, if the price of Bitcoin increases during this time, the user is liable for the new higher price.
Through GDAX, this option only really exists for big-time investors, with a minimum of $5 million required for margin trading. Kraken is a better option for most traders, as it doesn’t have this steep financial barrier to margin trading.
4. Short Bitcoin-Connected Shares
While directly shorting cryptocurrency is currently fairly difficult, there are ways to indirectly bet against Bitcoin.
The Bitcoin Investment Trust currently trades on pink-sheet Over the Counter (OTC) markets, allowing investors to profit from Bitcoin’s success without negotiating the complicated technical aspects of buying Bitcoin directly. Shorting their stock is difficult, however, as most major brokerages don’t allow investors to short pink sheet stocks.
As with options for trading in Bitcoin derivatives, options for shorting Bitcoin investment groups will likely increase in the near-future. The Winklevoss twins had an application for a Bitcoin exchange-traded fund rejected by the SEC in March 2017. While that attempt failed, it’s probable that other similar ventures will attempt to get licensed.
Another option would be to bet against publicly-traded companies that are heavily invested in Bitcoin’s success. For example, chip-maker Nividia is one of the biggest firms supplying Bitcoin miners with the tools they need to generate the cryptocurrency.
5. Bet Against Bitcoin Believers Directly
An unorthodox option for shorting Bitcoin would be to make direct one-to-one bets against the cryptocurrency’s biggest supporters. Tracking down Bitcoin supporters is easy, with many forums dedicated to dissecting the latest crypto news and trends. Making a bet is less easy and requires a degree of trust.
That doesn’t necessarily mean you need to trust the other person to honor the bet. Other blockchain-based cryptocurrencies make it possible to set up a wager that will automatically pay one party if the conditions of the bet have been satisfied.
The Ethereum blockchain platform has been generating a lot of buzz through allowing for the creation of “smart contracts.” Smart contracts automatically transfer funds from one party to another when the pre-set conditions of a deal have been met.
This option requires some technical knowledge of using Ethereum and setting up smart contracts. If this can be done, using smart contracts to make direct one-to-one bets may be the best way to bet against Bitcoin’s continued success.
It’s worth remembering that Bitcoin is still less than a decade old and most people are still completely clueless about exactly what this technology is and what it’s capable of. It’s an open question whether Bitcoin and other cryptocurrencies have any inherent value or whether they’re products of investor hysteria, just like Dutch tulips and Ty Beanie Babies.
If you’re convinced that Bitcoin is a bubble, you might feel a bit like a character from The Big Short, completely confused as to how so many people seem oblivious to the financial implosion waiting around the corner. In The Big Short, a huge amount of effort is put into shorting the American sub-prime mortgage bubble and a few people get very rich as a result. Finding a way to bet against Bitcoin might just be equally as rewarding.
THE FINE PRINT: This material is for informational purposes only and should not be construed as investment advice. It is not a recommendation of any particular strategy or investment product. Our views and opinions expressed in any online content are current at the time of publication and are subject to change. All investment involves risk, including the loss of principal.
MonaCoin is a relic from the early days of cryptocurrency, when spending 10,000 BTC on two pizzas seemed like a reasonable investment. As with a lot of early alt-coins, MonaCoin was little more than a clone coin with a cute character slapped on it. Suddenly, this cute character has made MonaCoin attractive enough to jump 3000% in value.
Since its launch in December 2013, MonaCoin has spent most of its existence with a sub-$1 million market cap. Today, MonaCoin’s market cap is closing in on $1 billion.
As with most minor alt-coins, there have been spikes before. One noteworthy bump came in August 2014. At a time when Bitcoin’s involvement with the Silk Road and other darkweb sites was generating negative headlines, a Japanese news show did a positive piece on this minor alt-coin. MonaCoin leapt from $0.10 to $0.84 almost overnight. But the bump was short-lived and the drop-off came immediately. A few months later, MonaCoin was back at $0.10 with a sub-$500,000 market cap.
The current spike is different in both magnitude and duration. To put this in perspective, IOTA’s sudden rise to $3.80 has made it the most hyped coin since Ethereum. At the beginning of November, IOTA was trading at $0.33, meaning its value has increased by around 1151%. MonaCoin has produced more than double IOTA’s return on investment.
There are two main reasons for the sudden rise of MonaCoin. While other novelty coins such as DogeCoin are more or less dead, cat-referencing cat is in vogue right now. CryptoKitties has surprised many by becoming the first big viral success on the Ethereum platform. The most sought-after kitties on this cat-breeding game are being sold for thousands of dollars’ worth of Ethereum. CryptoKitties is so popular that congestion from the game is seriously slowing down the Ethereum network. In this climate, backing a coin on the basis of its cuteness doesn’t seem quite so ridiculous.
The second reason is the most important one. In its home country of Japan, MonaCoin has gone mainstream.
MonaCoin is a Litecoin clone that was based on a cat meme that frequently appeared on the Japanese 2chan message board. It’s actually faster than Litecoin, another factor which has helped its sudden mass-adoption.
Japan is embracing cryptocurrency in a big way. Many stores are accepting payment in cryptocurrency and Zaif has set up a network of crypto ATMs across the country. The two coins chosen for inclusion in both most stores’ payment options and Zaif’s ATMs are Bitcoin and MonaCoin.
MonaCoin’s utility value as a currency wouldn’t be enough to make it stand out if it in a completely free market, but its status in Japan has granted it an enormous captive market of consumers who are enthusiastic about cryptocurrency. MonaCoin may not be a ground-breaking piece of technical wizardry like IOTA, but it doesn’t have to be. With the Japanese market cornered, MonaCoin just has to be more useful than Bitcoin for making payments.
MonaCoin’s market cap has been rising all year. It began 2017 with a market cap of little more than $1 million. MonaCoin’s market cap hit $11 million in May, $20 million in June, and $40 million in July. The wildest growth has come in the last few months, with the market cap hitting $80 million in mid-October and surpassing $250 million just two days later.
At a time when cutting-edge coins like IOTA are surging in value, MonaCoin is proof that technical advancement isn’t the only determiner of a coin’s success. It’s sudden surge to an almost $1 billion market cap is a perfect storm of corporate partnership, branding, and speculation.
The incredible speed and volatility of cryptocurrency was on full display over the past few days with IOTA. At the start of November, IOTA was a relatively obscure coin that was trading at around $0.38. Today, its value is closing in on $5.
While there’s nothing unusual about minor cryptocurrencies experiencing huge spikes in their valuation, IOTA is exploding in a way that could only really be compared to Ethereum. IOTA has just leapfrogged veterans Litecoin and Dash to become the fifth largest cryptocurrency by market cap. And there’s no indication that it’s stopping there.
Fees and scaling limitations are by far the biggest barrier to Bitcoin ever becoming the digital currency it was originally envisioned as. As the blockchain ledger recording Bitcoin transactions grows ever larger, speed decreases as each Bitcoin transaction requires total verification of the entire blockchain.
The verification process for Bitcoin is conducted by miners who require a fee each time a transaction is processed. Bitcoin users are able to specify the fee they are willing to pay when making a transaction, which creates a bidding war when the network is congested. Miners obviously opt to verify the highest-paying transactions first, so the more popular Bitcoin becomes, the less likely it is that Bitcoin can ever be used for everyday purchases.
Centralization is happening inadvertently with Bitcoin, with power becoming concentrated in powerful mining firms who essentially control whether transactions get verified. Centralization is one of the central criticisms of other emerging cryptocurrencies like Neo, which operate a small number of nodes that could conceivably be taken out by any manner of digital or real-world catastrophes.
The first reason for IOTA’s sudden success is that it’s seemingly solved all these issues with the Tangle. The Tangle moves beyond blockchain to execute all transactions peer-to-peer, without any transaction fees. Instead of miners validating transactions on the ledger as with Bitcoin, verification is built into the ledger itself. The more popular IOTA becomes, the more widespread the transaction-verifying Tangle. Where scaling and network congestion hamstrings Bitcoin and Ethereum, IOTA actually becomes faster the more people use it.
The second reason is that the Tangle has got some major tech players very excited. It’s no coincidence that IOTA’s explosion in value followed an announcement of a partnership with Microsoft. Microsoft are very proactive in the cryptocurrency space. They recently launched a development contest with Neo and they are one of the main players in the Ethereum Enterprise Alliance. The company responsible for making PCs user-friendly fared poorly in the smartphone space, with Windows Phone never coming close to rivalling Android or iPhone’s market share. Microsoft are keen to be at the front of the pack when it comes to the rapidly-evolving world of blockchain and cryptocurrency.
The third reason is speculation at its wildest. The cryptocurrency market is a hyper-charged version of the stock market where a slight bearish trend can become hysteria within hours. All-time highs generate headlines which generate speculation which generates more headlines, and the price starts increasing exponentially purely because the price is increasing exponentially.
How far can IOTA climb?
Speculation is still at the heart of all cryptocurrency investments and we may still be years from seeing the technology behind IOTA being used to its full potential. However, if it fulfils even a fraction of that potential, there’s almost no limit to how big IOTA can get.
While Bitcoin is increasingly referred to as digital gold, IOTA is positioning itself as the crypto equivalent of a major energy conglomerate. Central to IOTA’s potential is the idea that data is the oil of the digital economy. To take this metaphor to its logical conclusion, IOTA may have just invented the internal combustion engine.
IOTA’s combination of secure data transfer and zero transaction fees enable the sharing and monetization of data on a grand scale. IOTA’s vision is of a near-future in which data is freely and instantly amalgamated from smart devices connected to the Internet of Things.
We are already living in the early years of the data age, with an incredible amount of information on all of us existing on the internet and in the databases of the myriad companies we interact with every day. As IOTA points out on its website, 99% of the data that is currently generated is lost due to there being no real way to sync-up the data generated by every internet-connected device. The Tangle makes it easy for companies to automate the sharing and selling of this data.
Before Microsoft got on board, IOTA had already announced partnerships with Cisco Systems, Samsung, and Volkswagen. Its easy to see why the Tangle’s game-changing utilization of data would be incredibly interesting to major companies like this.
The suddenness of IOTA is surprising even by cryptocurrency’s crazy standards. The majority of trading volume is currently being conducted through Bitfinex and Binance. Korea’s largest exchange, Bithumb, will be adding IOTA soon, which could cause the value to rise even higher.
Cryptocurrency is so new, and IOTA is so different to every other player in the space, that there really is no guide by which to predict its future. The spikes and dips that have marked Bitcoin’s ascension can be plotted against trends experienced by other markets and technologies, allowing somewhat-educated guesses to be made about its future direction. But when something moves as suddenly as IOTA, all bets are off. The price could continue to sky-rocket or it could collapse tomorrow. The more speculation mounts, the more unpredictable things become.
But IOTA is undoubtedly an incredibly interesting project with almost unlimited potential.
With the price of Bitcoin seeming resilient above $11,000, you could be forgiven for thinking that the notoriously volatile king of cryptocurrency has never been in a stronger position. However, as Bitcoin closes out an incredible 2017 with a final surge in value, it’s continued bearish outlook against the US dollar masks strong indications that Bitcoin is quickly losing its lustre.
The growth of Bitcoin has sparked mainstream interest in a cryptocurrency space that was considered a niche financial novelty a year ago. The interest has spilled over into all other cryptocurrencies and you’d have difficult finding a coin that didn’t provide a wild return on investment over the past twelve months. But heading into 2018, Bitcoin is rapidly losing its market dominance.
Bitcoin spent the first few months of 2017 consistently accounting for more than 85% of cryptocurrency’s total market cap. This began dropping in March and hit a low of 37.78% on June 20.
Bitcoin regained some ground when its value began surging in October. There were a few days in early November when Bitcoin was back above 60% of cryptocurrency’s market cap, but it looks to be heading into 2018 at closer to 50%.
Why Declining Market Share is Bad for Brand Bitcoin
This is bad for Bitcoin because its current success largely hinges on its brand name value. The headline-generating speculative frenzy surrounding Bitcoin has made it a household name. Most people probably still couldn’t tell you what the blockchain is, but they could tell you that they wished they’d poured their life savings into Bitcoin before the price shot up.
Bitcoin has achieved this brand recognition largely by virtue of being the first of its kind. But there is almost nothing that Bitcoin can do that other cryptocurrencies aren’t already doing much better.
If you want to make quick payments with minimal transaction fees, you’re better off using Ripple or Litecoin. If you want anonymity, go for Monero or Zcash. If you’d like to make a speculative bet on the revolutionary potential of blockchain-enabled technology, then Ethereum, Neo and IOTA are all much more attractive propositions.
But what Bitcoin has more of than any of these other cryptocurrencies is brand recognition. The value of brand recognition should not be underestimated, especially when it comes to finance. Many people would be reluctant to place their life savings in an online-only bank, even if it promised to be better in every way than a bank on the high street. Even if the online bank’s website displayed guarantees from government-approved financial authorities, many people would be reluctant to trust them with their hard-earned cash.
Amid incredible price volatility and repeated warnings from big-time financial players that it’s nothing but a bubble and/or scam, it might seem strange to talk about Bitcoin being a trusted and reputable asset. But in the wild world of cryptocurrency, that’s exactly what Bitcoin is. However, one big crash could destroy the trust that’s been placed in Brand Bitcoin.
Bitcoin has already weathered big crashes before, most notably in 2013, when its value dropped from around $1000 to $500 and then kept on falling, eventually bottoming out at around $200 in 2015. But during this entire time span, Bitcoin’s market share never spent more than a few days below 80%.
If you look at a chart of Bitcoin’s market share since it was first launched, you’ll see years spent hovering between 80% and 90% market dominance, then a sudden extreme drop-off in the first few months of 2017.
The Outlook for Brand Bitcoin
While Bitcoin’s share of the cryptocurrency market has declined over the past year, its dollar value and market capitalization have skyrocketed. Bitcoin might be competing in a much more crowded marketplace than it was a year ago, but it’s also gone from being a big fish in a small pond to the biggest beast in a rapidly-expanding ocean.
But cracks are already showing in the resilience of Brand Bitcoin. Breakaways like Bitcoin Gold and Bitcoin Cash have proved hugely controversial because of their potential to dilute the brand. Many long-term Bitcoin-holders have petitioned cryptocurrency exchanges to list Bitcoin Cash as Bcash to reduce the potential for brand confusion.
At the same time, cryptocurrency’s unstoppable march into the financial mainstream has seen projects like Ethereum and IOTA accumulate a lot more media coverage.
Bitcoin is still the intermediary of choice when moving funds between fiat and cryptocurrencies and its success is therefore inextricably linked with that of all other cryptocurrencies. But this situation may not last forever. Major exchanges such as Coinbase already allow Ethereum to be purchased directly with fiat currency. As the space develops, more coins could gain the same level of legitimacy and fungibility.
Bitcoin is still the king of cryptocurrency because of the self-sustaining legitimacy that being at the top gives it. But if its dollar value and market capitalization ever slip from the top spot, it might be a death sentence.
You don’t have to have been monitoring cryptocurrency developments for more than a few months to have seen the same pattern play out with Bitcoin half a dozen times. A new all-time high is reached, the price creeps up higher, then it falls back at a rate that would be considered catastrophic with traditional investments.
As the insane growth in Bitcoin’s value continues, these peaks and rollbacks are becoming evermore dramatic. Just take a look at the milestones and rollbacks that Bitcoin’s US dollar value went through last week. On Sunday November 26, Bitcoin exceeded $9000 for the first ever time. On Tuesday November 28, it broke $10,000. By Wednesday, it had hit above $11,500. On Thursday, it dropped back to almost $9,500 – a loss of more than 17%. As I write this a week on from the $9000 all-time high, Bitcoin is sitting at a new all-time high of $11,800. At the press time Bitcoin is trading at $11,150 level.
It’s clear from this that it’s impossible to know with any certainty what Bitcoin is really worth. In any other market, a 17% drop would trigger panic-selling and a complete collapse in confidence. To put that figure in perspective, Black Monday in 1987 triggered one of the greatest stock market crises in history. The stock market’s value fell 22% in three days and people thought the sky was caving in. If the value of Bitcoin fell 22% tomorrow, it would be considered a minor blip that would be forgotten about a week later.
As the mania and hype of speculation around cryptocurrency gathers pace, it’s tempting to think of this new asset class as being completely immune to the economic maxims that govern other investments. And while it’s true that the speed and volatility of cryptocurrency markets far outstrips any other form of investment, conventional wisdom can still be applied.
Investing in Undervalued Assets
The gulf in opinions on Bitcoin’s true value is enormous. For every economic expert proclaiming Bitcoin a bubble built on nothing but hype, there’s a true believer who sees a revolutionary new technology that is still massively underpriced.
Because cryptocurrency is so new, it’s impossible to know with any certainty which of these groups will eventually be proven correct. However, there are many projects within the cryptocurrency sphere which appear relatively undervalued.
In the stock market, a company is said to be undervalued if its market capitalization is less than the value of its assets. In theory, this is relatively simple to work out. All publicly traded companies are required to publish in-depth financial reports each year. If these reports show that the company’s profit-generating capabilities exceed its market cap, then the company is probably undervalued.
A good practical example of this theory is the fall in BP’s share price following the July 2010 Deepwater Horizon oil spill in the Gulf of Mexico. This catastrophic event was both an environmental and public relations disaster. BP’s share price halved immediately following the oil spill, plummeting from approximately $60 to $30 in a single day. The price has never since surpassed the pre-oil spill highs and BP has suffered seemingly permanent reputational damage, but the market reaction to the oil spill represented a fantastic opportunity for savvy investors.
Despite the reputational hit and the eventual tens of billions BP were forced to pay in fines, its share price a day after the oil spill was massively undervalued. BP was still a global energy giant with a huge amount of infrastructure and profit-generating capabilities. If you’d bought at the bottom of the dip, your $30 BP shares would’ve been worth almost $49 by March 2011. 61% price appreciation over eight months might seem meagre by cryptocurrency’s otherworldly standards, but for most forms of investment, that’s an insane return.
Finding Undervalued Assets in the Cryptocurrency Marketplace
Sifting through the plethora of alt-coins and tokens now available on cryptocurrency exchanges can make playing the stock market look like a breeze. While publicly traded companies issue detailed annual accounts, most cryptocurrencies are backed only by a white paper outlining bold and unproven strategies for future growth. However, the rewards for taking a chance on an undervalued crypto asset can be enormous.
Bitcoin will likely hit $12,000 before 2017 ends and could in all probability climb even higher, marking a roughly 1200% appreciation in value over the course of the year. But there are other players within the cryptocurrency market who’ve experienced even greater growth.
Ethereum is the most prominent, beginning the year at $8 and recently hitting an all-time high just shy of $520, meaning an almost 6500% increase in value.
Neo began 2017 valued at less than 15 cents. In August, its value surpassed $48 – a 32,000% rise. Ripple began the year trading at a fraction of a cent – $0.006396, to be precise. It’s all-time high of a little less than 37 cents in May represents growth of almost 57,700%.
Sorting the Undervalued from the Completely Worthless
Undervalued doesn’t mean ‘cheap’. In fact, the value of a single unit of a cryptocurrency is an almost completely meaningless figure.
Think of the way different fiat currencies are denominated. Ten US dollars is worth roughly the same as a thousand Japanese Yen, which is worth about 10,000 Korean Won.
There are about 16.7 million Bitcoin currently in existence, with a maximum of 21 million that can ever be mined. While the supply of Bitcoin will increase until it hits that 21 million limit, other cryptocurrencies work on the exact opposite principle. Ripple was launched with 100 billion XRP already in existence. Every transaction conducted using Ripple destroys a little XRP and reduces the supply. The relative US dollar value of one unit of BTC and XRP is therefore a completely meaningless metric for comparing the two.
Imagine that Company A’s share price is $100 and Company B’s share price is $10. Its tempting to think Company A is by far the more valuable of the two, but now throw in the consideration that each of Company A’s shares represent 10% of the whole company while Company B’s shares represent 0.01%. Company A therefore has a market capitalization of $1000 while Company B’s market capitalization is $1 million.
Market capitalization is the main metric for determining the worth of a cryptocurrency. A single unit of Dash is currently valued at just over $789 compared to roughly $0.26 for Ripple’s XRP, but Dash has a market cap of around $6 billion while Ripple’s market cap is over $10 billion.
The surest metric of finding an undervalued cryptocurrency is therefore finding a cryptocurrency with an overly low market cap.
As already mentioned, this is difficult in an emerging area where the biggest bargains are those with potentially revolutionary ideas that have yet to establish themselves. This is where hype comes in – projects like Ethereum and Neo generated a lot of buzz before their value went stratospheric. If you find a buzzworthy coin with a $5 million market cap, there’s a chance that coin might be about to go supernova.
A Final Word of Warning
Investing in something that’s as unproven long-term as cryptocurrency is inherently risky. Investing in emerging coins with no track record is potentially far riskier than investing in the volatile established names like Bitcoin.
The less investors backing a coin, the easier it is for its price and market cap to be manipulated. While cryptocurrency exchanges are beginning to make efforts to stamp out pump and dump schemes that send the value and market cap of worthless alt-coins skyrocketing, there are still scores of coins which see a 500% jump in their valuation one day and become completely worthless the next.
At the same time, legitimate projects which are just getting started are far more vulnerable to ‘fear and doubt’ (FUD) campaigns, where alarmist and often groundless articles appear online throwing doubt on the project and suppressing its value.
The truth is that absolutely nothing in the world of cryptocurrency is certain. However, if you’re kicking yourself for missing out on the meteoric rise of Bitcoin and other established cryptocurrencies, you can take solace in the fact that are still a lot more moonshot projects waiting to be explode within the wild and unpredictable cryptocurrency marketplace.
As Bitcoin edges ever closer to the financial mainstream, it moves further away from the original vision of a frictionless global currency.
The surge in demand for Bitcoin has led to ever-increasing transaction costs, while the ballooning size of the blockchain leads to ever-slower transaction times. The meteoric rise in Bitcoin’s value means people now laugh at early attempts to use it as a legitimate form of currency, such as the notorious 10,000 BTC payment for two Papa John’s pizzas that would today be worth $117 million.
Those two pepperoni pizzas become even more ludicrously expensive if you’re living outside the United States.
Severe economic crises and hyperinflation have made Venezuela and Zimbabwe interesting test cases for mass adoption of cryptocurrency, with the result so far being a localized premium on cryptocurrency investment.
South Korea is the world’s largest per-capita cryptocurrency marketplace, but high demand has led to what local investors unaffectionately term the Kimchi Premium on cryptocurrency exchange values.
Anyone who’s purchased cryptocurrency using a relatively smaller currency than US Dollars – for example, British Pound Sterling – knows that lower liquidity in the local cryptocurrency marketplace leads to higher prices.
And while US investors typically enjoy the lowest prices, they’re barred from many ICOs and cryptocurrency exchanges due to fears surrounding regulation from the SEC.
QUOINE: Adding Liquidity to the Global Cryptocurrency Marketplace
The Japanese fintech firm QUOINE (pronounced ‘coin’) has an appropriately revolutionary approach to the problem of the regional splintering of the cryptocurrency marketplace. They aim to make transactions between all currencies equal.
QUOINE’s QUOINEX platform proclaims itself the world’s most advanced cryptocurrency exchange. It allows trading from any fiat currency to any cryptocurrency without fees.
QUOINE aren’t the first entity to identify the potential benefits of blockchain-enabled frictionless currency transfers. Ripple have already made a lot of headway by offering instant international transfers to major financial institutions. But while Ripple is essentially a B2B platform servicing transactions between established financial heavyweights, QUOINE aims to fully democratize the global cryptocurrency marketplace and offer a similarly fluid experience to the masses.
The potential marketplace for QUOINEX is huge. If it can capture even a fraction of those affected by regional variations in the cryptocurrency marketplace, the potential for growth is enormous.
QASH: The First Government-Approved ICO
QUOINE’s ambitions extend to issuing its own token for facilitating frictionless international financial transactions. The Japanese government has taken a progressive stance on cryptocurrency and the QASH token is the first initial coin offering (ICO) to be fully regulated by a national government.
The initial offering of 350 million tokens at a cost of 0.001 ETH a piece raised $100 million, with the total supply snapped up in just three days. QASH is now being rolled out across a variety of currency exchanges. It is already available on Bitfinex, with Binance and CEX trading coming soon.
A lot of those who got in on the ICO have already tuned a healthy profit. The ICO’s ETH value was the equivalent of around 29 US cents per token, which immediately rose to around 50 cents upon hitting the first cryptocurrency exchanges on November 21. Prices peaked at $1.48 when QASH was added to Bitfinex on November 29. The mass sell-off from early investors looking to turn a quick profit has since seen the price fall to around 96.5 cents.
QASH’s Long-Term Potential Value
QUOINEX undoubtedly has enormous potential to be a major cryptocurrency exchange. It has a slick and well-designed interface that inspires confidence in the team behind the project, but the heralded full fiat currency support has yet to be realized. While anyone can make exchanges on QUOINEX using most major cryptocurrencies, fiat support is currently limited to Japanese Yen, US Dollars, Australian Dollars, and Indonesian Rupiah. The potential is there but the userbase is small and long-term viability has yet to be proven.
As for the QASH token itself, it’s important to note that the fates of QASH and QUOINEX are not necessarily intertwined. There are many similar emerging examples within the cryptocurrency space of potentially revolutionary uses of blockchain technology that are attached to a coin without being dependent on it. The major financial institutions making Ripple-powered transactions don’t necessarily guarantee success for XRP, just as the Neo team’s Onchain project could bring largescale blockchain functionality to Chinese regional governance without affecting the fortunes of the Neo coin.
But association with a heavily-hyped product and an established fintech team have so far proven good indicators of a cryptocurrency’s future success. QASH is getting a lot of people excited with its bold vision for future growth. There is big talk of QASH aiming to be a top five or even top three cryptocurrency.
For a coin that’s just launched and has yet to hit many cryptocurrency exchanges, QASH is making a lot of headway. With 350 million coins in circulation following the ICO and a current valuation of around 96.5 cents per coin, it has an approximate market cap of $338 million.
An additional 450 million coins will be released over the next 5 years, meaning 80% of QASH’s total 1 billion coins will be on the market while 20% remain locked away. Five years is of course an incredibly long time in a field as new and volatile as cryptocurrency and it is impossible to predict whether QASH will still be well-regarded that far into the future. But QASH is currently a new coin with a huge buzz developing around it.
Bitcoin has exploded in value over the last year, making gains of around 1000%. While Bitcoin has dominated the headlines, Ethereum has posted even crazier returns, with a rise in value of almost 5000 percent. Both Bitcoin and Ethereum futures will be available on Wall Street in 2018,likely bringing an even greater surge in value.
Bitcoin’s incredible rise throughout 2017 will undoubtedly go down in history. Beginning the year at around $1,000 and closing it at about $11,300, Bitcoin’s insane surge in value will feature in history and economics textbooks for generations. Whether 2017 represents the end of the beginning or the beginning of the end for Bitcoin remains to be seen, but there’s an excellent chance that the textbooks of the future will mention Bitcoin in the introduction to a chapter on Ethereum.
With all the hype and news articles surrounding Bitcoin’s march to a $11,000 valuation, many people would probably be shocked to realize that Ethereum’s growth in 2017 was even more impressive. The second most popular cryptocurrency began 2017 trading at around $8 and enters 2018 at closer to $500. So while Bitcoin experienced 1,000% growth in 2017, Ethereum’s increase was approximately +5,000%.
The next year will see both Bitcoin and Ethereum futures traded on Wall Street. Many predict that this will attract even more investment into the cryptocurrency sphere and push values up even higher. But even the most optimistic cryptocurrency investors are cautious, as a substantial downswing could follow a surge in value. The central question that most long-term cryptocurrency watchers are asking is whether that downswing will represent the bursting of a bubble or a momentary dip before reaching new all-time highs.
The billionaire guru of speculative investment, Warren Buffet, famously said that it’s only when the tide goes out that you can tell who’s been swimming naked. When times are good, and prices are shooting skyward, everybody looks like a genius and every innovation seems revolutionary. Until the bull run ends, nobody can be sure whether cryptocurrencies such as Bitcoin and Ethereum are worth what people are paying for them.
If you want to make an educated guess on what the future holds for Bitcoin and Ethereum, you need to understand their past and purpose.
Bitcoin: From a Borderless Currency to Digital Gold
Bitcoin was created by an anonymous entity using the pseudonym Satoshi Nakamoto in 2009. The original intention was to use blockchain distributed ledger technology to create a borderless currency that was beyond the control of central governments. Bitcoin’s early popularity came as a medium of exchange on the dark web, where it enabled the buying and selling of illegal goods without requiring users to link their purchases to their bank account.
Scandals such as the US government crackdown on dark web marketplaces and the theft of more than $450 million worth of Bitcoin from the Mt. Gox exchange crushed Bitcoin’s reputation and destroyed its value in those early years. After peaking at above $1,000 in late 2013, the Mt. Gox debacle sent Bitcoin into a four-year depression. The value plummeted to almost $200 during this time and didn’t reach $1,000 again in 2017.
It’s interesting to note that Bitcoin’s earlier rise to $1,000 was based on its utility as a medium of exchange. Alongside the dark web activity, bars and cafes appeared in tech-savvy cities such as Tokyo and Berlin which accepted payment in Bitcoin. But as Bitcoin’s popularity grew, slow transaction times and high fees made it an extremely inconvenient method of paying for everyday purchases.
Many other cryptocurrencies have appeared which solve Bitcoin’s problems and are far more useful as a form of payment. Attempts have been made to overcome Bitcoin’s fundamental flaws by forking it into new currencies such as Bitcoin Cash and Bitcoin Gold. The Bitcoin community widely rejected these efforts as the innovator of cryptocurrency has found a new role.
Today, many people refer to Bitcoin as digital gold. Just like precious metals, Bitcoin has a limited supply. While the whole concept of “mining” Bitcoin is a reference to gold, it was never originally intended to function primarily as a store of value. However, as the true Bitcoin believers’ slogan “Just Hodl It” shows, a store of value is just what Bitcoin has become. And so the question is no longer whether Bitcoin is a viable form of currency, but whether it has a future as a long-term store of value.
Ethereum: Bitcoin 2.0
Almost as soon as Bitcoin launched, imitators began popping up. Early efforts such as the Kanye West-referencing Coinye and the canine-themed Doge Coin were little more than Bitcoin clones with a novelty value. But the blockchain technology underpinning Bitcoin had the potential to offer so much more.
Vitalik Buterin was a programmer and Bitcoin Magazine writer who saw the potential that Bitcoin and blockchain offered. If only it could be made possible to program applications on top of Bitcoin, the possibilities were almost endless. Buterin proposed building a programming language on top of Bitcoin to make this possible. When Bitcoin’s core developers failed to agree over the specifics, he decided to go his own way.
In 2014, Ethereum launched. With Ethereum, Buterin had created a cryptocurrency with built-in utility value.
Bitcoin works through a decentralized ledger known as the blockchain. Transactions are recorded to the blockchain, a database housed in a vast number of locations, all of them synced with one another so that no transaction anywhere is approved until recorded to the entirety of the blockchain.
Ethereum goes one step further with the introduction of smart contracts. The terms of an agreement are recorded on the blockchain and then executed once you meet the conditions. For example, you could agree to pay for a delivery of some products. Once they’re on record as being delivered to their destination, the sender automatically receives payment.
In practice, the potential for smart contracts is almost limitless. From self-executing electricity grids to completely anonymous and incorruptible voting in elections, smart contracts take blockchain tech to a level that could completely revolutionize society.
Ethereum vs. Bitcoin: Is the World Big Enough for the Both of Them?
The future for the two most prominent cryptocurrencies doesn’t need to be a zero-sum game. It is entirely reasonable for Ethereum’s smart contracts to reach their full revolutionary potential while Bitcoin’s value matches gold as a long-term store of value.
But the evolution from Bitcoin to Ethereum is an interesting counterpoint to the many arguments that have been made claiming cryptocurrency is a bubble waiting to burst. Those who see cryptocurrency as a giant bubble often point to a few well-worn examples.
The first is the original bubble, 17th Century Dutch tulip mania. During this time, the value of tulips surged in the Netherlands, causing people to buy as many tulip bulbs as possible. Tulip investors figured that the prices would continue increasing forever. At the height of the craze, a single tulip was worth more than a house. Of course, the tulips had no utility value and were only worth something while people believed their value would increase. As soon as the price started to dip, it crashed completely. Tulip mania made a few millionaires and then scores of destitute late investors.
The second often-used example is the late-1990s’ dot-com bubble. Just like cryptocurrency, people saw the internet as a revolutionary new technology that would change almost every aspect of daily life. While this prediction has proved true, the early movers weren’t necessarily those with the most long-term success. Most of the companies involved in the dot-com bubble went bust, taking an incredible amount of investors’ money with them.
So are Bitcoin and Ethereum part of a cryptocurrency bubble?
With regards to tulip mania, they are part of a bubble if they’re proven to have no utility value – if, as Warren Buffet would say, their backers are swimming without clothes on. This argument can only be sustained long-term in the case of Bitcoin’s new role as a store of value, but Ethereum’s smart contracts seem to make it unlikely that this is the case.
As for the dot-com bubble, it could be true that both these cryptocurrencies have come along before the world is indeed ready for them. An excellent example of the original dot-com bubble is Webvan. Webvan offered grocery deliveries through its website. While this idea was apparently a good one, it came too soon to be successful. Today, every major supermarket provides online deliveries. When Webvan went bust in 2001, there just weren’t enough internet users to make the idea successful.
Another similar example comes from social media. In 2005, Rupert Murdoch’s News Corporation paid $580 million for the world’s most popular social network, Myspace. That seemed like a forward-thinking piece of business at the time, but history has proved it to be a catastrophically wrong decision.
Facebook, launched in 2004, quickly overtook Myspace and became the world’s number-one social network. Myspace promptly became a graveyard of abandoned profile pages as users fled to a new and improved social media platform. In 2011, News International sold Myspace for $11 million. In six years, their investment had lost $569 million.
So could Ethereum be the Facebook to Bitcoin’s Myspace? Or are they both about to be usurped be an entirely new form of cryptocurrency?
Nobody knows the answer to these questions, just as nobody could’ve known for sure that both Ethereum and Bitcoin would explode in value during 2017. But if you want to make an educated guess on what the future holds for these cryptocurrencies, its essential you understand where they come from.
Ripple is revolutionizing international finance by making it possible to transfer money around the world within seconds. Ripple’s innovative use of blockchain technology has excited major financial institutions such as American Express and Standard Chartered. By bridging the gap between Bitcoin and traditional finance, Ripple has also become a figure of hate for many within the world of cryptocurrency.
With all the hype surrounding cryptocurrencies these days, surprisingly little mainstream media attention has been focused on Ripple. This is despite Ripple having a market cap of almost $10 billion, making it the fourth largest cryptocurrency after Bitcoin, Bitcoin Cash and Ethereum. Ripple’s market cap is more than double that of Dash and Litecoin and around four times larger than Monero and Neo.
Ripple is also much more stable than most cryptocurrencies. While it has seen some huge swings in its valuation, Ripple experiences far less volatility than almost any other cryptocurrency.
A recent gathering of representatives from the IMF and central banks around the world at New York’s Carnegie Hall shows how seriously big finance is taking Ripple. During this event, Ripple CEO Brad Garlinghouse declared that Ripple was at the forefront of the development of the “Internet of Value,” where money moves as seamlessly across borders as data.
Ripple’s connection to major financial institutions is part of the reason it’s hated by many in the cryptocurrency world. Many of Bitcoin’s early adopters are hardcore libertarians who see crypto as the ultimate escape from government and corporate control of financial markets. They see Ripple as an existential threat to everything that Bitcoin stands for.
But Bitcoin is no longer the rebellious outsider it was a few years ago. Until recently, Bitcoin’s primary function was facilitating sales of illegal goods on the dark net. Governments have since gotten a lot better at tracing Bitcoin payments. Cryptocurrencies such as Monero offer much stronger anonymity and are now much more likely to be used for transactions of questionable legality. Big money has already moved into cryptocurrency. This trend will only grow as Bitcoin futures begin trading on Wall Street.
Ripple isn’t an alternative to Bitcoin. Ripple is instead a tool that massively increases Bitcoin’s usefulness as a form of currency. It has been designed with the purpose of moving and converting money as easily and cheaply as possible. Its natural customers are therefore big banks.
A Bridge Between Blockchain and Fiat
In its earliest form, Ripple predates the creation of Bitcoin by several years. It was first conceived in 2004 by Ryan Fugger, a Canadian web developer with experience working for a local currency exchange. Early iterations of Ripple found little success, but the project and team expanded quickly once Bitcoin had shown the possibility of blockchain and distributed ledger technology to facilitate financial transactions.
While it operates on similar underlying principles to Bitcoin, Ripple was expressly intended to be different than Bitcoin in several important ways. Transactions on the Ripple network are verified by consensus in a similar way to Bitcoin’s proposed Segwit2x hard fork. Scarcity is built into Ripple in a way that is almost opposite to Bitcoin. Where Bitcoin is mined with increasing difficulty until 21 million coins are in circulation, Ripple was launched with all one hundred billion XRP in circulation. Every time a transaction is conducted, a small amount of XRP is destroyed forever.
The most important difference between Ripple and most alt-coins is that Ripple is intended to supplement rather than supplant Bitcoin. Ripple is designed to facilitate the transfer of any currency, from US Dollars and Euros to Bitcoin and Ethereum. It can even be used to transfer token-like items such as air miles. One of the biggest problems facing Bitcoin is a slowdown in transaction speeds as network activity increases. Ripple overcomes this problem by allowing instant transfer of Bitcoin over its network.
While much of the attention online focuses on Ripple’s connection to Bitcoin and other cryptocurrencies, Ripple’s effect on transfers of fiat currency is likely to be even more revolutionary. Bitcoin transfers are slow compared to other cryptocurrencies but they are lightening-quick compared to traditional international payments, which can take as much as a week to clear. Ripple reduces typical wait times of around four days to just four seconds.
The Future of International Finance
Ripple is at the forefront of technological development in the incredibly lucrative cross-border payment space. The deep connections between Ripple and major financial institutions mean it is likely to retain its enviable position as the bridge between the brave new world of cryptocurrency and the staid old world of traditional finance.
Whenever cryptocurrency skeptics cast doubt on the long-term potential of something within the blockchain space, they typically point to a lack of real utility underlying the value of digital assets. However, it’s clear that central banks and major financial institutions recognize Ripple has incredible utility value. Within four seconds, money can be sent from a bank in New York to a bank in London, Frankfurt or Hong Kong. In the past, this type of transfer might have taken four days to complete.
Ripple, therefore, has the potential to massively increase the ease and speed of global trade. Its connection to Bitcoin and cryptocurrencies lends the space both utility and legitimacy. There is no longer any question of whether Ripple has the potential to shake up the world of finance. The only question is just how quickly the Ripple revolution is going to take place.
"There is no longer any question of whether Ripple has the potential to shake up the world of finance. The only question is just how quickly the Ripple revolution is going to take place." https://t.co/I9UxSWyDKn via @niche_hunt