With all the sturm und drang about cryptocurrency in the mainstream media lately, I think it's high time for some clarity on cryptocurrency. I am not, by any means, an experienced investor and this should not be considered investment advice of any sort. I am, however, coming from the perspective of a science fiction writer, and a barely-seasoned Steemit user. And I think cryptocurrency is far more multifaceted than what the media makes it out to be.
Do You Have Skin In the Game?
Skin in the game is a simple concept. Do you have a stake in the outcome of an event? Do you risk failure while pursuing your goals? How involved are you in it, and how much relevant expertise do you have?
This is the question I find myself asking every time I see the latest round of gloom and doom from the newspapers. It seems that every other day some fresh expert goes on the news to declare Bitcoin is a bubble, cryptocurrency isn't viable, and so on and so forth. While I respect their accomplishments, the big question is: do they personally have a stake in crypto?
Recently the media trotted out a parade of businessmen, magnates and investors to discuss their thoughts on bitcoin. They may certainly be experts at making money, but if they have no skin in the game and no experience with cryptocurrency their words are just so much hot air.
Extrapolating experience in stocks, forex, bonds and other financial instruments to cryptocurrency isn't wise. It's not merely a currency; it is technology, it is a service, it is a commodity, it is so unlike anything that came before that experts are still debating over what it actually is.
The old rules don't apply to crypto. Bitcoin has been declared a bubble before at far, far lower prices than today, and Bitcoin always surges ahead to even-higher prices. After every flash crash, Bitcoin keeps coming back. That isn't typical bubble behaviour, not as the term is understood in other markets.
As far as I'm concerned, if someone doesn't have skin in the game, his advice is irrelevant. The only experts worth listening to are those with skin in the game, who have studied how crypto work -- and in the news articles I've seen, they are few and far between.
Is Bitcoin in a Bubble?
That's the big question on everyone's minds. The truth is, I don't know. I don't know enough to give an informed opinion too.
What I will say is that I've taken steps to protect myself against a bubble. Only one-fifth of my current crypto holdings are in Bitcoin. The rest of my portfolio is spread out across other, reliable crypto, notably Dash, Litecoin, and EOS. My single largest holding is actually in Steem Power.
This strategy allows me to mitigate risk while keeping skin in the game. If the price of Bitcoin crashes tomorrow, I won't lose everything. And if the price of Bitcoin keeps going up, or at least stabilizes, I have enough skin in the game to make profits. Thus, it doesn't matter to me if Bitcoin were truly in a bubble or simply enjoying a bull run of historic proportions. Either way, I won't lose everything--and have an opportunity to gain even more.
Volatility Creates Growth
The most-repeated objection I've heard to Bitcoin is that it is extremely volatile. And I agree. This is the wrong time for rookies to the crypto space to buy into Bitcoin. The same thinking goes for other cryptocurrencies as well, albeit to a much lesser degree.
Volatility carries the potential for extreme losses. But it also has the potential for extreme gains.
The Monetary Authority of Singapore warned Singaporeans that if they invest in crypto, they may stand a chance to lose all their capital. Local websites and blogs agree.
While this warning is (mostly) true, I find it extremely curious that crypto tends to trend upwards. While there are over eight hundred cryptocurrencies in existence (most of which would probably be doomed to oblivion), the value of the most well-known and well-loved coins, without exception, keep trending upwards. While prices can and will crash, crypto tends to recover its value much more quickly than, say, stocks or forex. It may take weeks or months, but recovery and bull runs will happen.
The inherent volatility of crypto means that you risk losing all the money you put into it... or will enjoy outsized gains if you hold on long enough. It's not unheard of to enjoy hundreds, even thousands-fold returns on investments now. And if there's anything I've learned from a year in crypto, it's that gains tend to be more likely and longer-lasting than losses.
But you must have skin in the game to make it happen.
Get in Early, Get in Fast
Cryptocurrency rewards early adopters. People who've been in the Bitcoin game since it was started now enjoy stupendous profits. Even if you got into crypto at the beginning of the year, if you've been hodling and accumulating until now, you'd have seen incredible gains.
Opportunity doesn't wait. If a crypto looks good and has long-term potential, get in now. If you see an opportunity to buy low, buy now. If you suspect a crypto is about to reach its peak, sell now.
Yes, dollar cost averaging is always a viable strategy, and yes, you should always be ready to accept risk. But once you've decided to act, you must act. Now. If you delay, you risk losing everything you've gained -- or not earning anything at all.
I think many cryptocurrencies, especially altcoins, are presently undervalued. With greater technological development comes higher-profile use cases and increased confidence, leading to higher demand. But this situation won't last forever. If you're confident of a decision, act now or forever regret what might have been.
Too Much Money to Fail?
Never allow yourself to think that.
Chrysler, General Motors, Enron, and Lehman Brothers were all thought to be too big to fail. Until they did.
Crypto is no different. Sure, we have bitcoin billionaires a thriving crypto development space now. But if the entire crypto space crashed tomorrow and its market cap wiped out, the world economy wouldn't even notice. No government is going to save any crypto that fails -- with the sole exception of state-backed crypto.
Thus, with our own hands, we make our future for ourselves, whether it be of glorious abundance or terrible losses.
Because the market is so fluid, you have to keep moving. You can't let yourself think that you're just parking money in a stock or bond or commodity for months and years to come, and be guaranteed a return. You have to think in terms of stability and volatility.
Fiat is stable, but its value does not grow quick, if at all. Crypto is volatile, offering the opportunity for huge gains, but you stand the risk of huge losses. The trick is to shift fiat into crypto to grow your wealth, and either jump on another fast-growing volatile crypto when it's rising or jump back off into stable fiat when the market turns against you. It's a lot easier said than done, obviously, but I find it's a useful mental heuristic.
You must keep an eye on the market every day and be prepared to move accordingly. In the crypto world, there is no such thing as too big to fail, only whether a crypto is trending upwards or downwards.
The Crypto Mutation
When thinking about what to invest next, I think it's useful to think about consumer behaviour and how people will use technology in addition to other tools like technical analysis, latest technological developments, forks and the like. After all, some cryptocurrencies don't stay currencies for long.
Bitcoin was supposed to be a cheap and easy way of moving money over the Internet. To be fair, it did quite well at that...until this year. After a spike in prices and interest, we're now experiencing incredible congestion and stupendous transaction fees. It is now vastly inferior to PayPal and other online banking services. Merchants like Steam have abandoned Bitcoin altogether -- and without merchants who will accept a currency, can something still be considered a currency?
Bitcoin's value proposition is shifting. It is now seen, for better or ill, as a store of value and an easy way to grow wealth. In the long term, I don't expect this to last.
I think there will come a time when Bitcoin becomes so expensive, and the mining fees so high, that only two kinds of people will use Bitcoin: those who bought into Bitcoin early and have been holding on it to it, and the wealthy who can afford the mining fees and don't mind the transaction times. As interest dies off, transaction times and mining fees should drop accordingly. And then Bitcoin might become a viable cryptocurrency again. But I'm not going to hold my breath.
The recent price hikes have exposed Bitcoin's core vulnerable: it is not suitable for processing high volumes of transactions. Hence the recent Bitcon hard forks and controversies over technological upgrades. I don't think Bitcoin will return to becoming a cryptocurrency anytime soon, if at all.
Ethereum is not the alternative to Bitcoin either. The Ethereum network is an open source, public, blockchain-based distributed computing platform that incorporates smart contracts and decentralised apps. The ether token pays for transaction fees and computing services on the platform. It is not meant to be used as a currency...but with the sharp rises in value recently, people want to treat it as such.
And, like Bitcoin, Ethereum isn't natively designed to rapidly process large numbers of high-value transactions. These days it is increasingly difficult to trade Ethereum thanks to the network congestion. Even worse: every token hosted on the Ethereum blockchain is at risk. For instance, these days it is almost impossible for me to use Exodus to echange ethereum assets like Aragon or Augur because they are built into the Ethereum blockchain.
There may be huge advantages to hosting a cryptocurrency token on the Ethereum blockchain -- but what happens to the Ethereum network will also affect all these tokens. Ethereum has skin in their game.
When this period of ultra-volatility is over, users will remember lost profits, delayed transactions, missed opportunities, and lack of support from governments and merchants. I suspect users who are interested in currencies (as opposed to value tokens to keep platforms going) will take their money elsewhere.
As the recent period of volatility shows, any cryptocurrency worthy of being called a currency must be able to process huge volumes of traffic at low cost and high speed. If these conditions cannot be met, they are not suitable for use as currency. They may be able to be used for other applications, but not day-to-day transactions.
Fortunately, there are several currencies today that could meet the bill. Litecoin, Dash and Monero have proven rather reliable. The Steem trinity is likewise designed from the ground-up to handle stupendous transaction volumes at blinding speeds, and I suspect EOS will demonstrate similar capabilities. Going forward, people who want to use cryptocurrency as currency would migrate to these tokens. With increased demand comes increased value, and unlike Ethereum or Blockchain, users won't have to worry about fees and delays.
If you've missed the Bitcoin spike, don't worry. Altcoin will demonstrate its full potential.
The Street Finds Its Own Uses for Things
Bitcoin may be built on blockchain, but blockchain is bigger than bitcoin. Blockchain technology has the potential to revolutionise the world.
Do you want a futures market that might predict outcomes? There's Augur. Do you need a way to securely store vast amounts of data forever? Factom. You want to anonymously send money? Monero. Decentralised cryptocurrency loans? SALT has you covered. People need a way to quickly verify their identity? Civic is for everyone.
We stand at the brink of the blockchain revolution, and we are poised to be the early adopters, the ones who can take full advantage of these incredible technologies. I think the future of blockchain is bright.
But.
The street finds its own uses for things. People always technology in ways that aren't anticipated or designed.
Bitcoin was supposed to a currency. Now it's an investment vehicle. Ethereum was meant to drive decentralised applications and smart contracts. Now it can be used as money. Dogecoin was a joke coin. Now it's famous for its charity drives.
Steemit was designed to reward content curators and creators. Who knows what it'll be tomorrow?
Crypto is the game that never ends.
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If you'd like a taste of my science fiction and fantasy offerings, check out my Dragon Award nominated novel NO GODS, ONLY DAIMONS.