Oh, 2013. How young we all were.
When Bitcoin took off in 2013 the world felt like a different place. Cryptocurrencies were suddenly the future of currencies, with regular currencies immediately looking careworn. Silk road, the blockchain, the search for Satoshi Nakamoto, tax departments trying to grab revenue, the me-too currencies surfacing everywhere, the unlinking from federal reserves, the question of fundamentals, the Mt. Gox break in, mining for bitcoins……. It was all so new, so exciting. There was so much noise, so much action and trading and uncertainty. And beneath it all was that whisper, the whiff of that inevitable question that follows the newest and most exciting of investments.
Is this finally, truly, the new paradigm?
Or was it simply another of the millions of seeming breakthroughs that inevitably ended up being overhyped and overbought?
Fast forward to 2017, and we are all a fair bit older and wiser. The questions and struggles of the early days of cryptos have been muddled through, and a more mature picture of cryptocurrencies is emerging.
Finally we have several strong cryptocurrencies, each with a defined market presence. Bitcoin, once the only serious market leader still retains this position, but there is strong demand for its nearest rival, Ethereum. Ethereum represents a new element in the market, focussing on peer-to-peer contracts, allowing the payment to be released at the same time as the completion of the currency conditions. The difference of focus is key for the future of cryptocurrencies. For each crypto to survive they must differentiate and provide services that the other cannot. Litecoin and Ripple, numbers 3 and 4, also have distinct purposes and market niches, focussing on transaction speed and technical prowess or as a payment system. These different focuses create a more complete market, and give users varying reasons to adopt the coins, allowing the overall user numbers to grow.
The use of the blockchain has the capacity to inflate ICO’s, Initial Coin Offerings. Blockchain technology has long been touted as a significant solution for internet fraud issues. In the last year, financial institutions have begun investing in blockchain technology as a solution for trading settlements and transaction payments. ICO’s which sell tokens that can be exchanged for cryptocurrencies will push up the price of Bitcoin and Ethereum, the main currencies used to raise ICO funds.
The proliferation of ETF’s offering cryptocurrencies and mutual funds holding cryptocurrencies is a strong step towards the popularisation of cryptocurrencies as a hedge. By being unlinked from central banks, it provides a strong fundamental capacity to work effectively as a hedge. The only reason that it is not more prominent in institutional funds is the issue of volatility. At this stage it is a bit of chicken and egg scenario where increased investment by funds and institutional investors will increase the trading volumes and stabilise volatility, but institutional investors won’t jump in significantly unless there is a decrease in the volatility. This issue will likely be resolved slowly and incrementally, as more investors open small positions in cryptocurrencies, volatility will drop, prompting more investors. Eventually a critical mass of volume will occur and improve tradability to the levels of other investments.
So are cryptocurrencies the new paradigm? The answer is certainly a lot closer to yes than it was in 2013. Whilst the market overall still has some work to do, it is heading steadily in the right direction. There is still much room for speculation in the new up and coming “penny stock” versions of the cryptocurrencies along with the fabulous returns from the established ones. It is likely to be an exciting few months for the cryptocurrency world as it rides the momentum towards new heights and pushes itself further forward as the preferred transaction method of the future.
The future will probably look back to 2017 as the step just before full acceptance of cryptocurrencies.
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