Just what is going on with cryptocurrencies? Bitcoin, the granddaddy of all cryptos, was pushing $20,000 in December 2017, before experiencing a wild ride through 2018 that saw it approach lows of $6,500. Today, it has stabilized somewhat around the $7,500 mark – but that’s quite a drop! Other major cryptos, like Ethereum and Litecoin followed a similar course. So, what happened, and is it still worth getting excited about cryptocurrencies?
To understand what is happening we need to consider three fundamental things. Firstly, the blockchain technology that underpins all cryptocurrencies, and especially the smart contract capable type used by currencies like Ethereum, has a limitless number of uses beyond cryptocurrencies themselves, meaning that we are only seeing the very beginnings of a blockchain revolution. Basically, blockchain is here to stay, despite some confused detractors trying to wish it away.
Secondly, it should be kept in mind that the vast majority of investment in cryptocurrencies has, until now, been by individuals, rather than large investment funds and institutions. This is important, because individuals are much more prone to make short-term, knee-jerk emotional decisions, hence the rapid price fluctuations. In fact, a recent study conducted by the University of Warwick concluded that the “driving force behind cryptocurrency volatility is not economic fundamentals, but plain human emotion.”
Thirdly, as the regulatory and legal status of cryptocurrencies gets clarified in more and more countries, large private and institutional investors are feeling more confident about getting in on the action. As this happens, the irrationality in the market we have seen over the past year or so, should start to diminish. Also, because of the vast buying power these investors will bring to the market, we can expect the best cryptocurrencies to start climbing again.
At the end of May, Dan Morehead, a founder of Pantera Capital Management, speaking on CNBC underlined this when he said, “All cryptocurrencies are very cheap right now,” and “Many institutions are essentially buying the rumor [of potential SEC regulations] and selling the fact… Getting invested now so that in three, four, five months when the institutional, quality-regulated custodians that we’re hearing about come online, they’ll already have their positions.”
So, don’t listen to the smug troglodytes out there who love to compare cryptocurrencies to ‘Tulip Mania’ (which, incidentally, was a largely fictitious event) or the Dot-com Bubble. Sure, with so many cryptocurrencies out there, most will fade into nothing, but among them are cryptos that may well be tomorrow’s Amazon, Facebook, or Google. Of course, the trick for everyone, whether individuals or businesses, will be backing the right horses.
Note: this article is not offering investment advice.
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