They really showed up in force when Bitcoin's price saw a drop at the beginning of 2018. "The bubble is bursting," they cried. And as long as your investment time horizon is less than three months, there was every reason to panic. And panic many of those people did: as talk of cryptocurrencies swept into the mainstream, all sorts of people decided to jump in to the fray only to see quick losses--again, on a very short time line. And just as a certain segment of people started getting enthusiastic, they started getting burned. What was going on? It is easy to be confused. But then, what principles explain the movement of cryptocurrencies (beyond the basic graph of supply and demand)? These are early days for the subject, as stock-market-influenced "technical trading" concepts sit alongside new methods of analysis for a new class of assets.
The rise of blockchain technology is the story of cryptographic technologies becoming sufficiently powerful as to become a rival to centralized authority. This will have revolutionary consequences in society. Increasingly the forces of entropy and greed have undermined the legitimacy of the political elites in every country. These elites have traditionally expected to hold unchallenged sway over the national financial system, issuing fiat currency and levying taxes to be collected in that same currency. Corporations have been undermining this system by hoarding cash overseas in an attempt to avoid paying---a workaround that has proven largely effective. Now, whether or not individuals are able to design strategies of evasion like this with crypto and solve their taxes problem (further weakening the nation-state as an institution), the decentralized currency half of the problem has already been largely solved with blockchain technologies.
The value of authority is about to go down and the value of brainpower is about to go up. The gathering power of scale will be checked, and a new competitiveness will be unleashed in markets around the world.
Old assumptions about the need for authority to overcome collective action problems will be challenged.
Much of the American tech sector (and many investors overseas as well) have rushed into the space, gobbling up initial coin offerings (ICOs) for a wide variety of crypto offerings. Inevitably some of these will prove to have more value that others. Areas that new entrants compete on include technological design, the name of the creators or backers, financial considerations like how much of the crypto is held by issuers, potential business viability, how well-integrated the token is into the business plan, and regulatory considerations. A list of the most valuable cryptocurrencies already issued is available on Coinmarketcap and Yahoo Finance.
So you can hear a lot of different reasons in blogs and the press for why cryptocurrencies and blockchain might have revolutionary consequences. Some of the reasons given include:
- a decentralized but provable (speculative) store of value
- a means of value exchange to facilitate transactions
- a technological design pattern for storing consensus-driven data
- an app development platform with payments as a first class platform feature
But then you also hear big talkers like Warren Buffett (fresh from admitting that he should have bought Google instead of IBM) seeking to undermine confidence in the sector by claiming that the cryptocurrencies will all be gone in five years. Chase CEO Jamie Dimon falsely claimed that Bitcoin is a "fraud." World "leaders" at Davos 2018 sought to undermine confidence in the sector. And while many valid criticisms can be made of the specific cryptocurrencies, these attacks appear to be driven by the powerful position that the attackers occupy and a concern that new systems could underpin a more competitive financial services landscape.
The doubters have been heard, and yet relentless technological progress doesn't wait for permission to disrupt traditional markets when the value proposition becomes sufficiently compelling. While much of the last year's run-up in crypto prices has been based on hype and speculation, the search for a safe store of value around the world was the other, probably more enduring force driving the numbers.
But now for the more myopic question: will the medium term trend of steady growth in valuation continue for the cryptocurrency sector? We will all be watching.