2017 Super Trends – Cryptocurrencies
Over the past two years, bitcoin’s value has gone from two hundred and thirty two dollars per virtual coin to north of two thousand three hundred dollars as I speak. Not bad for something that doesn’t physically exist.
Bitcoin is the best known cryptocurrency and was designed as a form of digital payment which could bypass banks and allow transactions to take place directly between users. Instead of the coins (or virtual coins in this case) residing in a fixed location they reside on an open network. For a transaction to take place, it has to be verified by computers on the network and recorded in a shared ledger called a blockchain.
There are currently around sixteen million bitcoins in circulation with twenty five new bitcoins being ‘mined’ every ten minutes. But the production rate is slowly decreasing and will cease altogether in twenty twenty-four when the network will hold a total of twenty one million bitcoins. This is not some fancy marketing scam by the creators of the currency, but a genuine limitation of the complex science behind it. And that limitation has ultimately become Bitcoin’s downfall as a viable, alternative currency. The basic rules of supply and demand mean that when supply goes down and demand goes up, prices rise.
And that’s exactly what’s happened with Bitcoin. First slowly, but like a snowball gathering momentum and weight as it rolls down a hill, Bitcoin’s growth has been exponential for twenty-four solid months making it a magnet for speculators and arguably too valuable and volatile to be used in day to day transactions. Instead, it’s being viewed by investors much like Gold. An asset to hold and hoard.
But Bitcoin is not the only Cryptocurrency available. In fact, it’s not even the best performing one in recent months. Ethereum is like Bitcoin’s smarter, younger brother. Invented as recently as twenty fifteen to overcome many of the shortcomings of its older sibling, it’s take-up has skyrocketed. It’s been boosted by the formation of the Enterprise Ethereum Alliance, a collection of some of the world’s largest technology and financial companies who have committed to the ongoing development of the infrastructure and security around the currency.
The promise of worldwide dominance, however, has landed it in the same predicament as its predecessor in that everybody wants a piece. But Etherium also gives you an object lesson in the volatility of cryptocurrency pricing. You could buy one unit for fifty dollars in April, after which it monstered its way up to above four hundred dollars in mid June. As we record this in mid july, the price has halved to just under two hundred dollars. Depending on when you bought in April or June, you’re either four hundred per cent up or fifty per cent down.
Does that kind of volatility get your juices flowing or send you rushing to the smallest room in the house? Because you’ll need a strong constitution if you want to trade the cryptocurrency markets. When top currency trader Siam Kidd spoke at Elite Investor Club’s recent London event, he had an interesting twist on a strategy for taming the Wild West tendencies of this young market. He recommends owning a small amount of the top fifty cryptocurrencies and becoming your own tracker fund. That means acknowledging that you don’t know which ones will be the winners so you own them all. Well not quite all, there are hundreds out there and new ones being spawned every day.
So should you jump on board this runaway train? By all means, if you recognise it as speculation rather than investment. And that means being completely comfortable with the idea that you might lose most or all of the money you speculate with. I always feel like I’m channelling Mo Farrar when I do this but remember Uncle Graham’s Egyptian Wealth Pyramid. The wide part at the bottom is made up of safe investments like cash, precious metals and cash equivalents. The middle part is well diversified and well secured investments and the pointy end is where you have fun with start up companies, spread betting and currency speculation.
And its very much at the pointy end where cryptocurrency speculation lives. What I see a lot of people doing is going after the high risk stuff in an attempt to get rich quick while having none of the medium and low risk layers of the pyramid in place. Back where I come from we have an expression for that – fur coat and no knickers. Please don’t show a visual of that Rob!
So ride the wave if you want to. I’m an investor, not a speculator so I’m going to pass on this one. And if you bet money that you can’t afford to lose on cryptocurrencies, be very careful out there!