Obvious upfront disclaimer: Don’t take financial advice from the internet, least of all me. And don’t sue me if you make a bad bet and lose – like I’ll point out below, this is still an extremely volatile space.
I have “mixed” opinions on cryptocurrencies. On the one hand, I’m enormously frustrated with the quasi-religious evangelism that tells people how crypto is the future of literally all money, and their pooh-poohing of simple technical concerns like “how do you scale to hundreds of millions of concurrent real-time transactions”.
Crypto as we know it today won’t replace money as we know it today. Some future optimized version of crypto might, but it will be unrecognizable as compared to the algorithms of today.
On other aspects, I’m a lot more positive – the technology behind it (blockchain) is the real revolution, and a completely new way of thinking about storing, processing and ensuring the integrity of data. New applications built on blockchain technology have enormous potential, and it’s all open-source.
The reason I put “mixed” in quotes is that these positions seem inconsistent to fans of crypto (“how can you not believe it’s the future of money if you think it’s so cool?”), which is an argument entirely on its own, and more than I want to get into right now.
So what are cryptocurrencies? As simply as I can explain it: digital gold.
A bit more complex: A shared ledger, secured by a mathematical algorithm, calculated across tens of thousands of computers which will reach consensus on whether or not a single transaction on it is authentic.
In other words – it’s impossible to forge, and it’s impossible to steal (short of actually forcing someone at gunpoint to transfer coins to you). It is possible to lose, however (as the upcoming BIP 148 hiccup might end up demonstrating), and of course it’s always possible that governments might decide to regulate or outlaw it altogether.
It’s also impossible to devalue by manipulating volume – each currency has a set upfront limit of how many coins will ever be issued, and free markets are entirely responsible for determining the value. I’m sure this is one of the more attractive aspects to the folks who deeply distrust any government, bank or other institution.
Which is where the volatility comes into it. It’s very unlikely, but it is possible at any point that one of these currencies (and there are many) could simply stop operating.
Their existence depends entirely on the network of miners (networked computers) that agree to process transactions for that currency, and at some point, regular external market forces could make some of the smaller currencies untenable.
There’s also the regulation aspect hanging over this. Apart from the obvious criminal uses of a nearly-untraceable cryptocurrency, there’s the wildly unregulated speculation going on right now.
As of today, Bitcoin alone has a USD-denominated market cap of over $40 billion. What this means in practical terms: A good couple of investors (in the hundreds-of-thousands range by now, at least) have bought Bitcoins in exchange for real money, likely in the hope that it’ll appreciate in value over time.
That’s a really big roulette wheel, and so far (for the most part) it’s paid off quite handsomely. It has a lot of the hallmarks of historical gold rushes: Someone’s found something of value, and people are tripping over each other to get in on the action.
That value, though, is likely to only ever exist in the realm of financial speculation. Bitcoin is a desirable, limited-edition asset, which in and of itself is enough to drive speculators and gamblers to it. At $40bn, you have to assume there’s a lot of interest in keeping the entire system propped up, almost entirely for its own sake.
Which is not necessarily a bad thing, and it’s why I’m optimistic about crypto. $40bn is technically a tiny market cap, compared to assets like gold ($7 trillion) – but it has proven itself over the last few years to be stable and growing.
And it can only grow. Sure, getting into Bitcoin today is hard. If you’re planning on buying hardware and setting up as a miner, you better hope you can get free electricity – otherwise you’re losing money the moment you turn that machine on.
The market can always expand, though, and this is the main reason for my optimism. Bitcoin is the largest, oldest and most well-known, but it’s by far not the only cryptocurrency that can be traded for fiat. Here’s the top 10 by market cap, as per coinmarketcap.com:
Each symbol there represents an entirely different blockchain – a different asset. And while a single currency has a set limit on the amount of coins it can produce, there’s no limit to the amount of currencies that can be set up.
Unlike gold, wine, art or land, cryptocurrencies can be forked and spun up infinitely. As an asset class, it can expand to soak up every bit of market demand. Every person in the world, theoretically, could have holdings in at least one cryptocurrency.
So why the title of this post, and why do I think it’s worth investing in? Simple: It’s still early days, and it’s still got lots of room to grow.
With the amount of interest and investment going into the underlying systems, and the value of owning some cryptocurrency (both inherent and perceived), they’re all likely to continue to grow in value over the long term.
Today, a single Bitcoin costs around $2’500. There’s no reason to believe it won’t hit $10’000 someday. The same is true of most of the currencies in that screenshot above – whatever the cost is today, there’s a good chance it’ll be a great deal higher in a few years.
My quick anecdote on this: In January I moved R800 into a local crypto exchange, then found out they wanted to do KYC processes over unencrypted email, got annoyed, asked for a refund, and was denied. So in frustration I just cut my losses and forgot about it.
Until a few days ago, when I remembered the whole saga and logged in to see if anything had changed. And one thing had: In around 5 months, my R800 investment in Litecoin had turned into R4’720.
That’s a return you’re not going to find anywhere else – which is what makes it simultaneously alluring, and incredibly risky. There could just as easily have been a crash that wiped out my R800 forever.
Which is why I started small, and would advise anyone else interested in this to do the same. I’ve got accounts on three different exchanges, and holdings in two different cryptocurrencies. Every now and then when I get a bit of spare cash left over that I can afford to save, I move some of it into (what I now consider) my cryptocurrency portfolio.
Between all that spare cash, accumulating over time, it’s added up to very decent growth. As of today, that rate is sitting around 35%, and I’ve been doing this less than a year. That’s an absolutely insane growth rate as compared to other investment options.
And it could all disappear tomorrow, leaving me with absolutely no recourse. Which is why, as tempting as it is sometimes, I’m not gonna bet the farm on this just yet.
What it is, though, is the single riskiest position across all my investments, and the one that’s most likely to yield big returns in a short space of time. I’m expecting (and somewhat hoping) that this growth trend will continue for the next few years, too.
But I’m also expecting that at some point, all the valuations might just evaporate overnight, and I would have done no better than slowly setting that cash on fire. Tempered expectations are pretty much a requirement if you’re gonna ride this roller-coaster – at least, in my experience!
Nothing in this post should be construed as financial advice. Please consult a professional before making incredibly risky investment decisions.