Cryptocurrencies are shining bright, but will they burn out?

On the 31st of October 2008 an unknown and very secretive developer who went by the name of Satoshi Nakamato published a research paper called “Bitcoin: A Peer-to-Peer Electronic Cash System”.  Nakamoto then went on to introduce Bitcoin as an open source code in January 2009 and Bitcoin was born. 

In December 2010, Nakamato disappeared from the project completely and to this day he remains a mystery. Gavin Andresen took over the development, and became the official creator behind this new invention: Bitcoin.    

I remember when I first came to hear about it in 2010 during the days of the early buzz, but at that time it also faced much skepticism with many analyst believing that Bitcoin was a mere fad and will amount to nothing.  I admittedly was one of the skeptics, my crystal ball clearly wasn’t working that day. 

Now as I help myself to a slice of humble pie, Bitcoin is firmly in the limelight having hit new all-time highs and as of the time of writing is trading around $2500 per coin.  The internet is rife of stories of Erik Finman, a young investor who back in 2010 invested around $1000 into Bitcoin and now has a fortune of $1.9 million.    

Now the questions being asked by many a retail investor are “what is the future of the cryptocurrency market?” and “could I become the next Eric Finman?” 

ICO’s are being bred like rabbits   

Around 20 new Initial Coin Offerings (ICO) are launched every month. A remarkable figure which has seen the cryptocurrency market expand to include over 800 of these so-called Altcoins.  An Initial Coin Offering works in a similar way to crowdfunding. It starts with publishing a white paper detailing the project and then encouraging investors to invest capital in return for tokens. Those tokens become the new cryptocurrency which is being launched.  

The lure of such of investment is that if you get in early and the venture is indeed successful, this new cryptocurrency could explode and become the new Bitcoin and the dream of being the new Eric Finman could be realized.  

But here lies the problem; although there is no doubt that the cryptocurrency market has expanded rapidly with the combined market capitalization being at $100 billion, if you look a little closer at it you will notice that most this impressive number is made of the big boys like Bitcoin which makes up 40.1% of the market capital and Ethereum which makes up 28.3%. 

So realistically could this market place big enough for 800 plus cryptocurrencies?     

Lack of supervision can lead to a lack of control   

ICOs can also present many problems. These ICOs are being attacked from all sides. These unsupervised currencies are being linked to online gambling, energy and even gun safety. There are even some obscure ICOs like the PutinCoin or Cagecoin which are promoted as coins of their namesakes although the actual people – Putin or Cage – are not behind them.   

Lack of supervision also means more possibilities of fraud which has already happened several times, and there are no regulators to protect the consumers.   

So, even though we have had recent success stories like Bancor which raised $153 million within a couple of hours, surely not all cryptocurrencies can be successful or indeed work. 

Of course, another potential danger is the market building a bubble which will eventually burst.   

History repeating itself? 

In 1848 James W. Marshall discovered gold in California.  The news of the discovery spread throughout the world and brought some 300,000 people to the sunny state looking for their fortune.    

This gold rush saw a lot of devastation to the native population as well as the environment and by the time it ended in 1855 few walked away with great wealth but most returned home with nothing. 

More recently in 1997 we saw a huge increase in investment to internet-based companies which we often called the dot-coms.  Then in 2001 this economic bubble burst, leading to many of these online companies imploding and going out of business.  Only a few managed to survive, such as eBay and Amazon.com; the few who walk away with great wealth while others end up with nothing. 

Now I am not saying the cryptocurrency market is like the California gold rush or even the dot-com bubble collapse but I can’t help but draw a parallel. 300,000 people from all over the world travelled to California dreaming they would be the next James W. Marshall and would discover gold, I wonder how many around the world are looking at this new cryptocurrency market dreaming they could achieve what Erik Finman achieved. 

The same sudden increase in internet-based companies in the late 90’s, which then led to a collapse, could be mirrored with the cryptocurrency market. In the case of a cryptocurrency bubble-collapse, Bitcoin and Ethereum would likely stay strong while all the other currencies would disappear, much like eBay and Amazon did after the dot-com bubble burst. 

Extreme volatility a real danger 

Volatility is a part of trading, however what happened to Ethereum on the 21st of June was more than your usual volatility, it was a disaster for Ethereum day traders. They altcoin collapsed from $370 per coin to 10 cents, it then bounced back.   

Although a flash crash is a part of money movement, and can happen on any market, the size of the drop and all things considered, it can be taken as an indicator to the real danger this specific market holds.   

And the future? 

I have already asked posed the question; is the market large enough to handle 800 different cryptocurrencies and counting? In my opinion the answer is no. 

I don’t believe the market needs, or has use for so many currencies.  The majors like Bitcoin, Etherrum, Litecoin and Ripple seem to be here to stay and it looks like the world is ready to embrace this new form of currency.   

Not that I think it will all be plain sailing for these major Altcoins but clearly they have been excepted by the masses.    

It is also only a matter of time till some form of regulation is imposed which will also limit the number of ICOs, so I can see the market shrinking to anywhere between 50 and 100 Cryptocurrencies.    

For now, this new market is the talk of the town but I will fall back to the old saying, “Those who shine the brightest, often burn out the quickest”. 

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James Trescothick, Senior Global Strategist, easyMarkets 

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