I. Reality Check
Cryptocurrencies or the businesses behind them, and blockchain technology, seem to be on everybody’s mind today. Although the grand majority of people don’t have a clue of what it really means. Sure enough, the drive of the hype is tied to the stellar returns of this new economy to its early investors, appealing to the fantastical dreams of riches and greed of the populace.
All market movements are strongly influence (if not dictated) by psychological (mis)conceptions; and the smaller your timeframe of observation the less rational or logical behavior you’ll find. So when you have a market that’s rather new, small (relative wise), mostly unregulated by any financial authority, with its economy still in development phase, of very difficult comprehension to most people, and on top of all with the mythos of skyrocketing returns; you got yourself a recipe for more than a psychological misconception — neurosis.
The problem with neurotic speculation is that more times than fewer it harms rather than it helps in supporting an economy. Specially if this economy’s market has more inflows of a speculative nature than investments. I’m not affirming this is the case, but it seems to be…
Rest assured, it’s not all doom and gloom. On the contrary, these market inefficiencies and giant herds of ‘dumb-money’ inflows, provide great opportunities. Specially for those who comprehend the real value created by this new and smart economy, and thusly the worth of investing in it.
So, what it’s all about?
II. A Little History First
Before we try to understand cryptocurrencies or blockchain technology we should know at least a few things about the history of money.
Money was one of most important inventions of mankind towards our societal development, allowing us the storage of energy in its conversion to wealth; thus opening a plethora of possibilities. Money to be efficient and economically benign should be a unit of account, a medium of exchange, portable, durable, divisible, fungible, and (most importantly) store of value. As such gold and silver naturally found their place as money par excellence and have been so for the last couple of thousands of years.
After money came currencies, which for most might be synonyms but as we’ll see are in fact very different things. Currencies were created as receipts for money, improving the efficiency of portability and divisibility in trade, without (at least in theory) counterfeiting the other specs of money; since these receipts meant that the same amount in money was stored at a bank for the carrier of such receipt to redeem if so desired.
The problem started when the people who held the reserves of money verified that most of it was never redeemed, and thence developed (at first illegally) new accounting technics such as fractional reserve banking, which allowed them to print more currency than money in reserve. Of course, this created major inefficiencies and counterfeited the most important feature of money: the store for value. Since, if the ratio of currency to money grows exponentially, the currency is debased and inflation occurs, destroying in effect value. But something of far more greater importance happened here, currency accepted as money was being created out of thin air! Think about it…
The solution to this problem was to cancel the redeem-ability of currency into money for individuals, meaning that everyone besides states and nations were stripped of their money and confined to currency. People having thusly to trust their central bankers to ensure that their currency held some credibility by carrying a gold standard. But wait… Now it was also allowed to do fractional reserve banking onto currency! So now we have two compounded functions of exponential money devaluation and fiat currency creation. This of course didn’t take long into everyone calling a bluff on the central bankers as to their money reserves against the currency supply in the world, and they were right.
So why hasn't the monetary system completely collapsed? Well a new solution came along, with even greater dare and a with bunch of new creative accounting techniques: free floating fiat currency. In 1971, Richard Nixon understanding that the currency supply was far greater than every money in the world, and frighten that the nations around the world carrying American Dollars could redeem all of the United States gold reserves, and without a doubt crashing the whole monetary system; decided to end the gold standard system (called Bretton Woods then) and start the Dollar standard. Meaning that now all currencies in the world had as standard the Dollar which was no longer backed by any money, i.e., gold or silver. So suddenly currency created out of thin air (fiat) without any conversion into money started to be our way of storing value.
In synthesis, we now store our energy (work, time, etc) in a make believe pseudo-money called fiat currency, that keeps on being printed by the trillions and as such keeps on destroying our wealth (just look at the 95% devaluation of the Dollar in the last one hundred years). To end this trip down memory lane with a bang, what if I was to tell you that this fiat currency that gets printed is a debt interest carrying note? That is, every single Dollar or Euro that is printed by the FED or the ECB is owed to them with interest after they’ve created it from nothing(!), meaning that there is always more debt than currency. Hence the governments around the world to finance themselves issue debt that is bought with the currency created by the central banks carrying interest. Yes, you got it right, it’s mainly for this reason that taxes exist.
It surely is high time for a new system.
III. Brave New World
And there was Bitcoin. In 2009 Bitcoin was created, in what was the first glimpse over blockchain technology at work and the first cryptocurrency. Maybe best described as the first open and non-centralized digital ledger, meaning a permissionless peer-to-peer created system that gets its informational flux on the ledger’s transactions validated and effected by noncentralized agents. You might have noted that as we’ve seen above the ‘openness’ and ‘noncentralized’ parts are of particular importance to provide a contrasting alternative to the monetary paradigm of fiat currencies.
This ethos works on different dimensions, since by eliminating the risk of data being held centrally and having no appointed or trusted agents that manage that data, while keeping it serialized, coherent and unchangeable retroactively; a whole new paradigm for generated, recorded, transacted and interpreted data arises.
Why does it matter? Well, first as currency proponent has a lot better fundamentals then centralized free floating fiat currencies (CFFFCs in further references) in all aspects, since beyond answering the monopolization and security hazards, it prevents the infinite printing of currency (and thence its oversupply, i.e., preventing the destruction of stored value by means of inflation) only allowing it to be mined digitally (tokens created after computational problems been solved, thus mined tokens or coins); while also enhancing the other features of money’s profile, like exchangeability, portability, durability and divisibility.
But even more important than being an excellent alternative to the current monetary system, is that all we have described above is the foundational plane of a new economic topology. Since this foundational technology could spread its applications from currencies to new electoral systems, prediction markets, medical records, invoice systems, auctions, record labels, etc, etc, etc; the key here is that it’s not a typical disruptive technology that attacks old business models, but rather that it creates a new foundation for the existent ones, virtually supporting a complete economy.
In synthesis, we have three things at work in this ‘Brave New World’: a new technology called blockchain (1) with an alternative monetary system (2) and economic landscape (3) built on top of it. The beautiful thing about it? You can invest in all three.
IV. What Makes Cryptos Fluctuate?
The easiest and most accurate answer is the universal doxa ‘supply and demand’. Nevertheless, there are more variables that come into contention… and furthermore, there’s also multiple equations one could pick when looking at different cryptocurrencies. Since, at least in our view, we have different asset classes (if you can call it that) in a single undifferentiated market, and sometimes a blend or a hybrid of classes in one crypto.
So, at times we could be looking to a more hard-currency data driven crypto (like Bitcoin), which will have as its main tailwind popular acceptance in the digital (and ex-digital) community as standard for value storage and its exchangeability in the network. Thusly moving in a more Forexian manner; although exo-factors of the Forex market like geopolitical stability or national debt levels are not accountable (at least yet…), and instead you have hard-to-software and encoding related issues that sustain the blockchain network and assure its livelihood. In this type of cryptos having a pre-established normative as to the amount of coins or tokens that can be mined is also crucial. For if popularity grows in a capped crypto, scarcity would ensue and drive the price even higher; which is the case with Bitcoin that has its currency supply capped at 21 million coins.
With other types of cryptocurrencies, price could behave more closely to how equities move on the stock market. Here having its price fundamentals on the business they are providing, or the utility problems they are solving. Sure enough this does not exclude the drivers above described, but adds; since besides being a sort of equity stake in a business it also has convertibility as a digital currency (to be traded as such). Imagine the Dollars or Euros you hold having a convertibility into shares of a privatized and publicly traded USACORP or EUCORP.
Still there are even more delicate intricacies and complex variables when evaluating other cryptos like Ethereum, or crypto investment types like Initial Coin Offerings or ICOs. The latter being a sort of an hybrid between crowdfunding, venture capital investments and IPOs; giving investors the chance to support a project from ground zero and hopefully enjoy manyfold returns (sounding oneiric…) as it gets implemented.
Cryptocurrencies like Ethereum are in a class of their own. They are the ‘foundational plane’ in which all other ‘regions’ in a ‘topological set’ get built. In the same way a lot of cosmological schemas have a unified field called aether or ether from which everything springs, Ethereum (hence the name) is a network where other cryptocurrencies and their businesses exist. As such all the drivers of Ethereum’s 'sub-regions' come in contention with its own network and currency related issues in an Escherian manner.
Of course, all of this is anchored in our perception of relative value measured in what people are willing to pay to hold such assets, which is nothing more than a psychological state of affairs…
End