Understanding The Cryptocurrency Boom (And Its Volatility)

Tyler Durden's picture

Authored by Charles Hugh Smith via OfTwoMinds blog,

Speculative booms are often poor guides to future valuations and the maturation trajectory of a new sector.

I recently came across a December 1996 San Jose Mercury News article on tech pioneers’ attempts to carry the pre-browser Internet’s bulletin board community vibe over to the new-fangled World Wide Web.

In effect, the article is talking about social media a decade before MySpace and Facebook and 15 years before the maturation of social media.

(Apple was $25 per share in December 1996. Adjusted for splits, that’s about the cost of a cup of coffee.)

So what’s the point of digging up this ancient tech history?

-- Technology changes in ways that are difficult to predict, even to visionaries who understand present-day technologies.

-- The sources of great future fortunes are only visible in a rearview mirror.

Many of the tech and biotech companies listed in the financial pages of December 1996 no longer exist. Their industries changed, and they vanished or were bought up, often for pennies on the dollar of their heyday valuations.

Which brings us to cryptocurrencies, which entered the world with bitcoin in early 2009.

Now there are hundreds of cryptocurrencies, and a speculative boom has pushed bitcoin from around $600 a year ago to $2600 and Ethereum, another leading cryptocurrency, from around $10 last year to $370.

Where are cryptocurrencies in the evolution from new technology to speculative boom to maturation? Judging by valuation leaps from $10 to $370, the technology is clearly in the speculative boom phase.

If recent tech history is any guide, speculative boom phases are often poor guides to future valuations and the maturation trajectory of a new sector. 

Anyone remember “push” technologies circa 1997? This was the hottest thing going, and valuations of early companies went ballistic.  Then the fad passed and some new innovation became The Next Big Thing.

All of which is to say: nobody can predict the future course of cryptocurrencies, other than to say that speculative booms eventually end and technologies mature into forms that solve real business problems in uniquely cheap and robust ways no other technology can match.

So while we can’t predict the future forms of cryptocurrencies that will dominate the mature marketplace, we can predict that markets will sort the wheat from the chaff by a winnowing the entries down to those that solve real business problems (i.e. address scarcities) in ways that are cheap and robust and that cannot be solved by other technologies.

The 'Anything Goes' Speculative Boom

Technologies with potentially mass applications often spark speculative booms. The advent of radio generated a speculative boom just as heady as any recent tech frenzy.

Many people decry the current speculative frenzy in cryptocurrencies, and others warn the whole thing is a Ponzi scheme, a fad, and a bubble in which the gullible sheep are being led to slaughter.

Tribalism is running hot in the cryptocurrencies space, with promoters and detractors of the various cryptocurrencies doing battle in online forums: bitcoin is doomed by FUD (fear, uncertainty and doubt) about its warring camps, or it’s the gold standard; Ethereum is either fundamentally flawed or the platform destined to dominate, and so on.

The technological issues are thorny and obtuse to non-programmers, and the eventual utility of the many cryptocurrencies is still an open question/in development.

It’s difficult for non-experts to sort out all these claims. What’s steak and what’s sizzle?  We can’t be sure a new entrant is actually a blockchain or if its promoters are using blockchain as the selling buzzword.

Even more confusing are the debates over decentralization. One of the key advances of the bitcoin blockchain technology is its decentralized mode of operation: the blockchain is distributed on servers all over the planet, and those paying for the electricity to run those servers are paid for this service with bitcoin that is “mined” by the process of maintaining the blockchain.  No central committee organizes this process.

Critics have noted that the mining of bitcoin is now dominated by large companies in China, who act as an informal “central committee” in that they can block any changes to the protocols governing the blockchain.

Others claim that competing cryptocurrencies such as Ethereum are centrally managed, despite defenders’ claims to the contrary.

Meanwhile, fortunes are being made as speculators jump from one cryptocurrency to the next as ICOs (initial coin offerings) proliferate. Since the new coins must typically be purchased with existing cryptocurrencies, this demand has been one driver of soaring prices for Ethereum.

As if all this wasn’t confusing enough, the many differences between various cryptocurrencies are difficult to understand and assess.

While bitcoin was designed to be a currency, and nothing but a currency, other cryptocurrencies such as Ethereum are not just currencies, they are platforms for other uses of blockchain technologies, for example, the much-touted smart contracts.  This potential for applications beyond currencies is the reason why the big corporations have formed the Enterprise Ethereum Alliance (https://entethalliance.org/).

Despite the impressive credentials of the Alliance, real-world applications that are available to ordinary consumers and small enterprises using these blockchain technologies are still in development: there’s lots of sizzle but no steak yet.

Who Will The Winner(s) Be?

How can non-experts sort out what sizzle will fizzle and what sizzle will become dominant?  The short answer is: we can’t. An experienced programmer who has actually worked on the bitcoin blockchain, Ethereum and Dash (to name three leading cryptocurrencies) would be well-placed to explain the trade-offs in each (and yes, there are always trade-offs), but precious few such qualified folks are available for unbiased commentary as tribalism has snared many developers into biases that are not always advertised upfront.

So what’s a non-expert to make of this swirl of speculation, skepticism, tribalism, confusing technological claims and counterclaims and the unavoidable uncertainties of the exhilarating but dangerously speculative boom phase?

There is no way to predict the course of specific cryptocurrencies, or the potential emergence of a new cryptocurrency that leaves all the existing versions in the dust, or governments’ future actions to endorse or criminalize cryptocurrencies.  But what we can do -- now, in the present -- is analyze present-day cryptocurrencies through the filters of scarcity and utility.

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Cordeezy's picture

People think this will make them rich not necessarily wabtjbg to use it as currency

www.escapeamazon.com

Arturo's picture

Buy Moneros now nobody knows about them. Monero is what's Bitcoin should have been.

Crypto-World-Order's picture

Monero def.  has opportunity same as dash.

BaBaBouy's picture

Like Beta VS VHS ...

This tech will not hold up no matter what FANCY name you call Your Coinz...

83_vf_1100_c's picture

  to CD to DVD to key chain fob memory sticks to cloud/streaming all quite quickly.

Prisoners_dilemna's picture

"But what we can do -- now, in the present -- is analyze present-day cryptocurrencies through the filters of scarcity and utility."

 

 

 

http://moneyandstate.com/bitcoin-libertarian-introduction-used-care/

"No really, WHY is Bitcoin valuable???

At this point, skeptics should say, “okay fine, you can store and spend Bitcoins without interference, but what gives them initial value? Why do they have a price?” It’s a very good question, and even expert economists have struggled with the answer.

But really, the answer is simple. Bitcoins have value because A) they are useful and B) they are scarce. Combine those two attributes in any asset and you will discover it has a price."

playit's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.jobproplan.com

quintus.sertorius's picture

Monero is good for anonymity, but the transaction fees are high and not very fast. So far, their wallet too is quite primitive. So, if Monero survives, it will remain a niche market. In that niche market, it still competes with Zcash and Dash, who have private transactions as well.

aminorex's picture

Dash "masternodes" are all hosted on Amazon, so there Is no anonymity as the NSA records all the traffic in and out. Besides, it is a ponzi scheme.  That's what you get when the development is controlled by one scammy guy named Duffield.

 

Zcash has a 20% tax on its users that goes straight into the developer's pockets.  That's what you get when the code is developed by a corporation, including Mossad SigInt specialists.

 

Monero is very, very different.  

SILVERGEDDON's picture

Crypto currencies will be the monetary equivalent of social media's MySpace. 

5000 years later, humanity stil recognizes the value, and relevance of silver and gold as a hedge against inflation, governments, et fucking cetera.

Speculate all you want, for fun and games with money you can afford to lose.

But , stack desirable commodities if you want to live out your retirement or pass any of your heritage on to your descendants. . 

Crypto-World-Order's picture

5000 years from today there will be no humanity. Crypto Maniacs are all stacking and have been Why not? gold and silver are dirt fucking cheap.

Squid Viscous's picture

how can I short this stupidity?

seriously, is there an ETF w/ options?

this woman who visited my house, recently is now day trading these things on her laptop,

she may be the dumbest (and rudest) person I've ever met,

the crash is very near. IMO.

Manipulism's picture

Blockchain will be the ultimate tool for the technocratic elite to gain control over everything.
A wet dream.
Like saurons ring.
I stumbled across a book in german - Trendradar_2030 - from an obsure  organisation
- http://www.betterplace-lab.org/en/ -.and financed by German Federal Ministry for Economic Cooperation and Development (BMZ)

There you can read their "Visions" about the world tomorrow all in alignment with Agenda 2030. Who would have tought.
Everything will be organised with blockchain technology and you will not be able to do anything without this.Your whole live will be in a block chained.

They sell all this of cource as great innovations for the greater good of mankind but but then here are gems in this book like this:
 " If we want more globalisation, we must either give up a little democracy or a little national sovereignty. To act as if we can have all three at the same time leaves us in an unstable no-man’s land. Demo- cracy, as the multi-party process we take it to be, is counterproductive at this point in our history. "

With the large push in cryptocurrencies valuations and a lot of stories about get rich fast they will get the acceptance of this techno trough greed as motivator.
"Hey I knew a guy who know a guy who have made millions with bitchcoin. I will do it too."

Look who is by now in it and you know where the journey is going.

When your whole live depends on blockchain THEY can block your chains at any time.

aloha_snakbar's picture

Has anyone seen my Bitcoin... oh wait...nevermind...LOL...

Crypto-World-Order's picture

Got 1055 of them sitting right here old timer. 

aloha_snakbar's picture

LOL... everyone is 'old timer' to you. Ill bet you will be a *shitload* of fun when you turn 19...

Crypto-World-Order's picture

Old timer's like yourself are unaware of the potential, you are not old in age, but old in your thinking.

I_rikey_lice's picture

potential to create unlimited different crypto coins based on open source technology. Yup lots of value there.

Crypto-World-Order's picture

Sounds like you missed out big time. Dont worry, I'll let you know when the next buying opportunity aries. 

kc_kilo's picture

Well ETH is 277 right now and might sink to its 220 lows again so time to buy and dump again.

aloha_snakbar's picture

Bitch, I have forgotten more about technology than you are ever likely to know in the near term. I think the blockchain is fascinating stuff, but what part of *legal tender* confuses you? Do you think the largest criminal enterprise ever, Uncle Scam, will just stand down and say, "welcome, Bitcoin...the waters fine, come on in, brother" ? If so, you are even dumber than you appear...

Crypto-World-Order's picture

Another broke asshole who is angry he missed out ^.  Who says I live in america even? Uncle Scam is YOUR problem bitch. 

aloha_snakbar's picture

Who says I am broke, stupid? Do *broke* people have time to sit at home in the comfort of their office and wind up morons like you, to see them fly off into space? And being stupid, like you are, is no excuse for not realizing that Uncle Scam is EVERYONES problem... and further, that virtually everywhere on the planet has their own Uncle Scam in power...

Crypto-World-Order's picture

Again, uncle scam has no bearing on me or my finances whatsoever. Living in america is like living in hell. My money goes very far and fair where I live.

aloha_snakbar's picture

Uh huh...send us a post card from your fairytale quantum universe sometime...I am sure it is all skittles, unicorns and puppy dog kisses...LOL...

Crypto-World-Order's picture

Its alot better than living in america where the people like yourself are retarded, the women like niggers, and you have taxes up your ass. You like living there? Nope, Not for me. Enjoy it.

kc_kilo's picture

Man, why do you all over analyze everything? Buy the dips sell the rips and make some money, thought this was a trading site?

cricketsssssss's picture

Whatever you say, Gramps... until another Bitfinex or Mt Gox hack happens, that is. Unless of course whatever deluded quantum universe you dwell in does not allow for the intrusion of reality...

Crypto-World-Order's picture

Again dumbass, I hold ALL my shit here on a hardware wallet. There will be no Exchange hack for me. If you hold your coins on an exchange you are dumb.

I_rikey_lice's picture

You brag about trading cryptos and now you claim you have all your coins offline? 

How do you trade then?

Crypto-World-Order's picture

I store my cryptos offline. You do know you can do that right? Of course you do.

I_rikey_lice's picture

You brag about selling high and buying low though? How do you sell when they are offline?

You must keep some on the exchanges for trading right?

Crypto-World-Order's picture

I trade on exchanges never on margin, poloniex is the best one for me. Waiting for the the next pullback in ETH for another quick 25% + gain. Ive been doing this along time and never had any problems. All trades when completed go back offline.

I_rikey_lice's picture

So then you keep some cryptos online for trading?

You earlier said you keep all your shit offline on a hardware wallet.

Which is it?

 

Crypto-World-Order's picture

You have never done this before I see. Trade on poloniex with my coins, make the profits and send them back to hardware wallets. Capiche?

I_rikey_lice's picture

So you have coins online for trading then?

Are you a fucking politician? Yes or no.

Crypto-World-Order's picture

I have already told weeks ago of course you have them online trading, but when you LEAVE THEM online after trades then you are risking it. 

natronic's picture

I'm giving it a shot we'll see how it turns out in a couple of years. 

Decay is Constant's picture

Same here. My son gave me a Ledger wallet a few years ago as a gift. I HAD to play with it and bought a couple hundred worth of bitcoin. Forgot all about it until March and was surprised to see it more than double in value. Since then, bought a handful of Ether when it was at $20. Wish I would have bought as much as I could. Have some in Litecoin now.

If anything out there right now will scale to a larger number of transactions, Litecoin will. I've played with transferring between wallets. Bitcoin is way too slow to be practical. Maybe better after the upgrade. Ethereum is way faster, but unlike bitcoin is not really designed to be a currency since the number one of coins produced is not finite. Litecoin transfer from wallet to wallet is nearly instantaneous. Also, like bitcoin only a fixed number will be made. Four times as many Litecoin as bitcoin.

I don't see any of them replacing fiat real soon, but it's a fun market to learn and play with.

Bitcoin and Litecoin - fixed number of coins to be "printed". Could be used as an exchangeable currency.

Ethereum - a variable number of coins that can be exchanged but are also used as a resource (gas) to power the smart contracts and myriad other "coins" that are popping up.

Crypto-World-Order's picture

Once Charlie Lee gets ahold of some some LTC prospects in china and japan, its going to the moon. Russia is now accepting BTC in all of it's burger king's and some other fast food shit joints.

BitchesBetterRecognize's picture

Have folks noticed that every damn time the dollar drops/VIX is high, cryptos crash along with it? 

 

Crypto-World-Order's picture

The vix was high yesterday and cryptos were on cruise control .Cryptos dont folow stocks or gold. Vitalik's faked death crushed ETH last week. That being said, look for another buying opportunity this weekend

mendigo's picture

Well i am noticing that the top three currencies are moving roughly in sync.

aminorex's picture

You are just seeing the volatility of the dollar.

Iconoclast421's picture

It's not a cryptocurrency boom. EVERYTHING is as overvalued and pumped up as a $400 ETH coin. You think a share of AMZN is worth any more than a crypto coin?

Arturo's picture

The problem is you are assessing everything in fiat.

tmosley's picture

Usefulness. Both present and projected assuming the trend of adoption continues.