Earlier this year, the price of Bitcoin fell from its all-time high of $19,783, tumbling as low as $6,200 with no indication of rising back to its former glories any time soon. As the price of Bitcoin plummeted, so did the price of most of the other 1,500+ crypto-currencies known as “alternative currencies” or “altcoins” for short. As cryptocurrencies become more popular and institutions, investors and the general population start adopting and investing in them, it is important to evaluate the entire industry with unbiased and objective eyes.
First of all, it is important to note the difference between “Cryptocurrencies” and “Blockchain”. A blockchain is a digital ledger that records transactions. It is on this ledger that Bitcoin, Ethereum and several other crypto-currencies are based. However, recording crypto-currency transactions is not the only function blockchain technology can be used for. Blockchain technology is currently being researched in the fields of crime solving, preventing voter fraud and a plethora of other uses. In fact, some of the most vocal critics of Bitcoin have stated that while they think Bitcoin and cryptocurrencies as a whole are a bubble, they believe blockchain will change the world.
Are crypto currencies a bubble?
To answer this question, we first have to define what a bubble is…. A financial bubble refers to trading of an asset (or group of assets) at a price or price range that strongly exceeds the asset’s intrinsic value. This posses a serious problem in deciding whether to classify crypto-currencies as a bubble or not, in the sense that it is difficult to determine what each currency is individually worth.
One thing is for sure: a lot of currencies are definitely overpriced, because they do currently have any real-life use cases and have grown in price based on hype and speculation alone. Which means that sooner or later, their prices are going to come plummeting down.
Cryptocurrencies are often compared to the tulip mania bubble of the 1600s, which saw the price of tulips briefly rise in price exceeding their real worth, and then crushing soon after; losing investors millions of dollars. However, I think the cryptocurrency bubble could be more appropriately compared to the dot-com Internet bubble which took place between the 1990s and the early 2000s; which saw investors bid up the prices of websites and domain names as worldwide internet adoption grew. The bubble eventually burst and several million-dollar web companies like pets.com and webvan.com collapsed. However, some companies like Amazon and ebay which were also part of the bubble survived, and rose to become some of the biggest multi-billion industries today.
Similarly, I think a lot of crypto-currencies that are being heavily invested in today are going to collapse in the coming decade, and anyone investing in them is going to be left with fool’s gold. However, the few currencies that survive the bubble burst are going to grow into multi-trillion entities that revolutionize the world. The question then remains; which currencies are going to make it and which ones are not?
Should you invest in bitcoin and other currencies?
This is a question that every prospective investor has to answer for themselves, based on their own personal attitudes towards risk and speculation. Billionaire and entrepreneur Mark Cuban advices that investors should allocate about 10% of their investment portfolio to Bitcoin or Ethereum. Other investment analysts suggest putting between 5% to 20% of your portfolio into crypto-currencies.
Whatever you do, keep in mind that you are dealing with a very volatile and new technology in its early stages of development. This is uncharted territory for everyone and no one knows where we are headed. Be sure to do due diligence and conduct your own research before putting your hard-earned money in any particular coin. Finally remember to never risk money that you wouldn’t be comfortable losing.
Consider the fact that Bitcoin is currently trading around $7,000. Meanwhile, there are people who bought it at $19,000. These people have now lost close to 64% of whatever amount they invested. If the price of Bitcoin goes lower, they stand to lose more money. On the other side of the fence, the price of a crypto-currency named “Ripple” went up by 36,018% in 2017. Which means that if you had invested just a dollar in Ripple at the start of last year, you would have had $36,018 by 31st December 2017. If you had invested $100 in Ripple at the start of last year, you would have made $3.6 million after just one year.
The table below lists the top Performing Crypto-currencies of 2017 and their percentage increase in price. This is not an invitation to invest in any of these currencies, and should be treated as informational only:
Curiously, after rising by 36,000% last year to an all-time high of $3.79, the price of Ripple has plummeted below a dollar this year and is now trading around $0.7. Which means that if you had made $3 million from ripple last year and didn’t withdraw your money before this year’s crash, your money would be down to $700,000 right now. This is how quickly you can make or lose money when investing in crypto-currencies. This journey is not for the faint of heart.
In conclusion, it is my position that Blockchain and crypto-currencies are revolutionary technologies that a decade or two from now, will have gained mass adoption and changed some of the ways we do things. Despite all the recent media attention, research has shown that a relatively small percentage of the world’s population have invested in one or more crypto-currencies. We are still in the early stage of adoption and there is a long way to go. Anyone who invests during the early stage of any new technology stands to either make it big or lose it all. Conduct your own research, trust your instincts and remember that fortune favors the brave.
By Elijah Adiasany, a graduate of the University of Professional Studies with a degree in Banking and Finance/elijahadiasany95@gmail.com
