Bitcoin’s dizzying +1,300% rocket ride last year is responsible for a new wave of global cryptoasset millionaires. The trading and investment potential grasped and realised has been staggering. As have the risks.
But in the shadow of Bitcoin lie hundreds of other trading cryptos. Before though we start to trade ‘cryptos’ we need to understand what exactly we are buying as this asset class is new – bewildering so.
It’s especially important when ‘normal’ investment calculations and aids – p/e ratios, cashflow and trading updates – barely see the light of day.
Most mentions about cryptocurrencies are about their value. The underlying vehicle and their longer-term USP is rarely discussed, even in mainstream financial press pages.
Forget currency, think asset
First, it’s probably better to think about most cryptocurrencies as cryptoassets. Cryptocurrencies are not issued by central banks and are certainly not pegged to any internationally-accepted currency exchange. A cryptoasset, in contrast, is an asset unto itself.
Next, those monster valuations. There are some surprises. The first is how poorly Bitcoin performed (+1,318%) in 2017 compared to other cryptoassets. Ripple, for example was up by more than +3,600% according to crypto data provider CoinMarketcap.
Yet comparing Ripple and Bitcoin is not comparing like-with-like at all, warns Craig Parkin from Citihub Consulting.
“If you buy into a Ripple you’re buying into Ripple’s use case. You are buying shares in Ripple because you believe Ripple will become a global payments network. You’re buying because you believe in the company. If you buy Bitcoin, you believe in the currency. There is no company behind Bitcoin.”
There is also a ton of cryptoassets that have nothing at all to do with payment systems, either. “There’s a coin [cryptoasset] called Tron which is all about digital content delivery that seems to have a good use case,” says Parkin.
Big industry blockchain interest?
There’s a shed-load of applications built around blockchain technology that is now being viewed seriously from a huge range of industries. These include chain logistics operators, transport, and pharmaceutical companies, to name three. Supply chain potential looks interesting.
- “You could in theory put the whole supply chain on a block chain and you could track any computer part, say, back to its country of origin and you would know you didn’t have a counterfeited piece of equipment,” one expert told Capital
- Insurance players are looking at blockchain tech for pay-as-you-go cover
- If you go Estonia all your voting rights and interactions with government are increasingly done through a blockchain
- Blockchains could support the Internet of Things (IoT) plus smart home tech
Doesn't it feel like 1998 all over?
In other words, some uses of cryptoassets look fascinating with huge potential while others look plain silly. Like the start of the dot.com bubble in 1998, knowing what species of cryptocurrency – the next crypto-Google or crypto-Amazon – will emerge triumphant is hard work as there are no comparatives.
Now listen cryptoasset traders, there will come a day; Spice Girls in 1998: Shutterstock
Bitcoin may not win out. Despite towering valuations in early 2018 transaction speeds still are slow, costly and high in energy one crypto analyst told Capital. “And there is in-fighting amongst the Bitcoin community on how that is treated.”
There is also a scrabble by governments everywhere to catch up with cryptos, fast. A big concern is the taxation of capital gains made by crypto trading.
“As the price of Bitcoin has increased,” Joe Pindar, director of product strategy from digital security company Gemalto told Capital, “governments see they are missing much larger sums – simply because they don’t understand who is profiting from the trades.”
Joe Pindar – where is the sell-side pressure?
The rocketing valuations have also been down to limited possibilities to short cryptoassets. “This means,” Pindar says, “that at present there is only buy-side pressure, hence the rocketing price.”
But sell-side pressure is starting to be introduced which will stabilise prices, possibly bringing them down. The world’s biggest derivatives operator CME Group began trading Bitcoin futures just before Christmas 2017.
Lawrence Lundy, director of partnerships and research at Outlier Ventures, says too many cryptoassets have implementation problems that will put an early end to worldwide payment ambitions.
Many blockchains, in their role as electronic ledgers, have plenty of commercial private use now. But it’s the pubic ‘bit’ that can make transactions lethargic he says.
“Having a public ledger that everyone can view gives you a limitation of around 10 transactions a second. If you make it private, which diminishes the use of it, that’s where you get into hundreds thousands of transactions a second.” The sort of numbers more akin to a Visa or PayPal.
Lundy: expect an Ethereum upgrade
Runners and riders
Clear favourites such as Ethereum has its own blockchain so it can support its own ‘currency’. “There will,” says Lundy, “be some upgrades to the Ethereum [$1,227, up +6.4% over 24 hours at time of writing, 8 January 2018] network that will make it a lot faster but no-one knows when that will happen.”
One to watch, possibly, is Stellar says Lundy. “They are claiming to be able to step up to the mark of being a worldwide payments system, essentially.” The user case for Ripple says Lundy, “is faster transactions across the global banking network. Similar, if you like, to Swift.”
Like Craig Parkin earlier, Lundy says you are buying or trading not on Ripple’s asset value but because you believe in the bigger Ripple network. (Ripple is also a traditional proper company unlike many other crypto players.) He also cautions that, currently, early 2018, many short-term valuations look extremely, well, short-term.
Welcome to the New Frontier
Richard Ells is the founder and CEO of Electroneum, a British cryptocurrency that launched in the UK in mid-December (by the start of January 2018 Electroneum had raised around $40m) designed for mobile users and micropayments.
Ells says many ICO’s (Initial Coin Offerings) are loaded with scams. “Because many were seen to be raising large amounts of money through them, every Tom, Dick and Harry who fancied their chances at raising money for a nefarious scheme jumped on the bandwagon.”
Ells advises traders to steer clear of ERC-20 based tokens – cryptoassets designed to slot onto the Ethereum network – for the moment. “There are so many that are dodgy it’s not worth anyone pursuing.”
Richard Ells: many so-called 'cryptoassets' appear complete scams
Amongst the top 20 crypto coins in circulation – volume being key – there are major question marks against Bitcoin Cash and Bitcoin Gold, both clones of Bitcoin, some warn. Also, Ethereum Classic.
“Effectively, the Bitcoin and the Ethereum are both trying to get people to distance themselves from other assets," says Ells. His company gets frequent threats from people threatening to take his network down in exchange for Bitcoin or Ethereum.
Trading cryptos – do your research
- Bitcoin, Ripple and Ethereum are highly traded – safety in numbers
- Several big crypto names – Cardano, Dash, Neo, Monero – aren’t being traded hugely yet. Trading volumes are key but beware: volumes in $$$ don’t reveal much because of the amount of institutional money sloshing around inside them, skewing prices
- Most coins outside the top three (Bitcoin, Ethereum, Ripple) only have tens of thousands of actual people trading them. It’s not a busy space
- Check out a crypto’s social media account. How many followers do they have on Twitter and Facebook? That may suggest how many people could be willing to use the platform – potentially, at least
- Check out the team – people who don’t have much history or they’re not on LinkedIn. Some coins are run by completely anonymous teams. Also check out crypto rankings, easily found on sites such as Coinmarketcap
- Crypto regulation is inevitable and will flush out the pretenders but it will be some time in arriving