Too often we view the world only through the filter of our experiences and make investment decisions based purely on this. When I was a teenager I read Benjamin Graham’s clunky classic “The Intelligent Investor” under the watchful eye of my grandfather, and the impression I walked away with was that fundamental investing, meaning investment based on the underlying realities of a company such as growth and assets, is the best long-term way to gain value in the stock market. Many people criticize cryptocurrencies saying they contain no fundamental value and they are purely speculative, but that is only true if you do not take the time to separate the legitimate use cases from those based on wishful thinking. The path to understanding this fundamental value in the cryptocurrency world has taken me through many twisty paths and years of learning.
The Technical Analysis Craze
I can’t blame the people who compare the rise of Bitcoin to Tulip Mania, and the claims that the price gains were purely driven by speculation fueled by YouTube chart readings. The speculative craze of investing in cryptocurrencies based on technical analysis (TA), meaning basing purchase decisions on chart movements, did push the price of Bitcoin and friends way up and then forced the market back down. The extreme negative sentiment the last couple months has kept movements for recovery down.
I grew up around astrology, and I can tell you that just like technical analysis, it can often be hard to tell if something was caused by mystical forces, or became a self-fulfilling prophecy. I’m not going quite so far as to label TA a “pseudoscience” but when I have looked in to it to try and verify patterns I haven’t found enough confirmation to make me a believer. When Bitcoin’s chart made an inverse head and shoulders pattern back in March I did some research back on the previous four years of Bitcoin chart patterns and I found inverse head and shoulders pattern had roughly 50% of the time preceded an increase, and roughly 50% of the time preceded a decrease. Thus this pattern is essentially useless. Needless to say it was not the confirmation I was looking for to buy Bitcoin again, and my pocketbook thanks me now for doing that extra legwork rather than just believing the talking heads.
Fundamental Value as a Grounding Force
Now that the market has bottomed out with FUD, the colloquial term for “fear, uncertainty and doubt,” I am hopeful more people out there are willing to start looking at it rationally and sifting the cryptocurrencies with fundamental value from those coins that are all hype. The fundamental value, though, isn’t obvious to those of us who already have relatively strong financial systems. Residents of the U.S. or Europe are used to making payments for free using credit cards or bank accounts. Sure, these transactions carry fees, but they are absorbed by banks and merchants, and we don’t see these costs. However, when transacting with cryptocurrencies the fees are paid by the consumer.
Litecoin is addressing this by working with merchants to offer a discount to consumers if they pay using cryptocurrency. Jon Moore from the Litecoin Foundation says, “typical credit card transactions for online businesses have up-front costs of around 3–4% for merchant credit card fees and another 2–3% of these transactions contain fraud where the business loses the total amount of money from the sale. Integrated Litecoin Transactions have low up-front fees for the merchant of less than 1%, plus they have no risk of credit card fraud on these charges. Most merchants can offer a 3–5% discount when factoring in both of these costs.”
This will certainly help speed adoption for e-commerce applications, but still for many consumers the complexity of opening and funding crypto accounts, and the headaches and risks of managing key codes, will likely prove a challenge. Cryptocurrency credit card companies such as Revolut and Plutushave married the convenience of spending using credit cards with the ability to make transactions in cryptocurrencies. This should help many new consumers learn to transact in cryptocurrencies as both companies are offering no fees at least for early adopters. According to Pete Panayi, Head of Marketing of Plutus, “even though there are transaction fees on our side we want to grow the user base so we will have capped the amount people can spend but charge no fees for buying or selling.”
The trend of covering transaction fees is growing due to the high valuations placed on companies with large user bases, so I would suspect we see more blockchain companies adopting this model in the near future. This will spread growth of platforms based on usage of the networks, providing fundamental value for many tokens.
The challenges of managing key codes and barriers of opening accounts won’t slow adoption rates worldwide, since other areas offer more advantages for using cryptocurrencies than the barriers to entry. This has been proven true recently in Venezuela, Turkey and Iran, where Bitcoin ownership rates have skyrocketed as the countries experienced rapid devaluation of their government-issued fiat currencies.
In many other countries it is not political strife that has created demand for cryptocurrencies, but a lack of financial and legal infrastructure. 38% of the world is still unbanked and this creates a large avenue for growth of cryptocurrencies and blockchain technology solutions.
This may seem counterintuitive at first, especially considering the small sums in many countries that people transact in, but when you consider that this is a market of two billion people it doesn’t take a large amount of savings in cryptocurrencies to make a large impact on the market. This is because the underlying tokenomics are not driven by the same economic factors that govern other investments, but instead by simple forces of supply and demand.
The fluctuations of the price of Bitcoin that we see as so dramatic and volatile can be seen as more stable to someone in South Sudan where the local currency was devalued to the point that there was a shortage in hard currency, meaning even if you had savings, you couldn’t get cash out of the bank to make transactions like buying groceries.
Panayi added, “After Brexit there was a lot of uncertainty in the banking system in the UK, and interest in cryptocurrencies as a way to bring stability.”
As more individuals have connections in countries where uncertainty is driving individuals into moving funds to cryptocurrencies there likely will be a worldwide surge in astute investors moving at least a portion of their liquid assets to the major cryptocurrencies. This will provide the fundamental growth needed to justify the speculative prices reached earlier this year and provide a new foundation for future growth.