March 18th, 2017 | Cryptocurrencies

Cryptocurrencies

The cryptocurrency market

The cryptocurrency market, often referred to as fin-tech and originating in 2008 with the birth of bitcoin, is now a growing branch of finances. It is still a controversy whether or not digital currencies will ever displace the traditional currencies, or whether or not they even have any value at all. The idea is beautiful: a global currency which cannot be fraud in any way, cannot be produced illegally, cannot be stolen and allows for avoiding parasite institutions that only charge for counting and redistributing money, such as the whole banking system. I can smell from watching YouTube podcasts and from chatting with people interested in technology that, indeed, there is a general atmosphere of enthusiasm towards the cryptocurrency market as it has the potential to start the next technological revolution, similar to the internet twenty-five years ago.

However, even though investors from the Valley are fully aware of this new trend, they tend to invest a small portion of their assets in this market, typically around 10% as this type of investment is considered highly risky. I use to watch tons of interviews with smart and successful people on YouTube, and some time ago I found a few interesting interviews about Bitcoin. It stroke me how different the comments and the predictions were. Let’s take Bill Gates who is a major advocate of Bitcoin.

He believes that there is no other future for global finances than crypto. On the other hand, we have Warren Buffett.

Warren, in principle, believes that Bitcoin is not a currency at all, it has no value and no future. Bitcoin is just something that you either love or hate, there is no middle ground. When I first realised that these two unbelievably successful business people have such a drastically different opinions about Bitcoin, I was more than puzzled. They both had their points, but I haven’t sorted out the puzzle up until now.

The last two weeks were very hectic in the cryptocurrency market. First, the ETF for Bitcoin was rejected. Secondly, multiple public institutions attacked Bitcoin’s legal status. I had been trading Bitcoin for only a few weeks only, therefore, it was a difficult test to pass. I remember the days back in 2014 when I started trading on the Polish stock exchange, and everything was going fine until a crash just a few weeks after my entry. On the day when Putin invaded Ukraine, the whole Polish stock exchange sunk by 10% on one day. I remember that day as if it was yesterday – I guess this is how the loss-avoidance works. Back then in 2014, I was too green to realise this was a transient situation, I started panicking and making emotion-driven transactions without any control. As a result, I lost more money because of my panic, than because of the crash itself.

I took a lesson, and now, at the times of a Bitcoin’s swinging price, I did my best to stay cool. Staying cool on the currency market is hard by definition since the dynamics of the currencies are much faster and fear-driven than on regular stocks. Namely, on the stock exchange, you can typically observe over a few weeks that the trend is reversing into a descent, and it is uncommon to see rapid crashes. This gives you plenty of time to withdraw the money at the right moment. On the currency market, however, the trend can reverse at any moment. It changes like the weather in the mountains. This can mean that, in the worst case, you can peacefully fall asleep in the evening and discover that you are 50% short once you open your eyes in the morning. Ah no, sorry. In the worst case, you can wake up bankrupt.

Anyways, high risk – high profits. This simple argument ultimately convinced me to fight rather than fly. And so I stayed and tried to understand how this market functions. As I mentioned before, there was a lot of turbulence over the past two weeks, relating to the attacks on bitcoin, and the confusion among investors, which resulted in some outflow of capital towards other cryptocurrencies, commonly referred to as altcoins.

Coming back to the disagreement about Bitcoin between Bill Gates and Warren Buffett, at the first glance, it seemed to me that someone has to be wrong here. But then, at some point, enlightenment came to me. In fact, in a way, both Gates and Buffett were right, and both were wrong. Bill Gates was right to say that the future of finances lies in digital currencies. Indeed, no matter what happens to the Bitcoin variable levels of popularity, the total amount of money in the cryptocurrency market will be growing over time. However, it does not necessarily need to be a Bitcoin to take over this market. Once you look at the list of currencies available today, there are already over 700 officially listed coins, and the Bitcoin dominance on the market is decreasing (72% at the moment).

The point is: what is the difference between different currencies, from the perspective of the investor? How do determine the true value of a coin? Of course, there are practical differences in scripting and the blockchain, but who knows the details, except for the professional programmers who are a part of this community?

Regular currencies like a dollar, have a representation in the goods. The stronger the economy of the issuing country, the stronger the currency. When you are buying an American dollar, you are buying also Wall Street, American science, the American army, American petrol etc.

But what about cryptocurrencies? Yes, they are a product, as software and service, but they represent no physical property. Therefore, from the perspective of a newbie to the market, there is not that much difference between the altcoins, except for the name of the currency, and the name of the team. This is why Warren Buffett is also correct: Bitcoin is meaningless in the sense that it does not represent any real quantity, and despite the big idea behind it, it remains only numbers. For worse, it seems that everyone who has a technological background can now create a brand new currency and put it on the market in hope that the new coin will find investors and make money. As long as there is no limit put on the number of existing currencies, the market will just dilute into smaller and smaller coins.

Therefore, if one thinks of investing in the cryptocurrency market, there is no other choice but to ‘buy the whole market’: diversity resources into at least a few currencies.

Please cite as:

Bielczyk, N. (2017, March 18th). Cryptocurrencies. Retrieved from https://nataliabielczyk.com/cryptocurrencies/

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