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It’s been a wild year for Wall Street and the investment community. The unprecedented pandemic of 2019 coronavirus disease (COVID-19) has wiped out over a third S&P 500The value was about a month earlier this year, with the benchmark index posting its 10 biggest point losses in one day and the eight biggest point gains in a single session in history in 2020.
These wild swings in stocks have been akin to a financial whiplash for investors.
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The “Big Three” of cryptocurrency are unstoppable, once again
But not all assets received the reminder that it was time to panic. Digital cryptocurrencies have been on fire since March, with the three largest digital tokens by market capitalization – bitcoin, Ethereum and Ripple – in the lead. Since the stock market bottomed on March 23, 2020, bitcoin, Ethereum, and Ripple have gained 187%, 356% and 289% respectively until prime time on November 23.
Why is interest in cryptocurrencies picking up after the 2017 price rush and bubble burst? The best guess I can offer is the continued push towards digital and cashless payments. The COVID-19 pandemic has caused consumers to question their payment choices, with cash seen as a potential harbinger of germs. As millennials and Generation Z have aged, they have grown to become a larger percentage of the consumer pool. They have been much more willing than Gen X or boomers to embrace digital payment options.
Investors are also likely excited about real-world applications for some cryptocurrencies and their underlying blockchain technology. Blockchain is the digital and decentralized ledger responsible for recording all transactions without the assistance of a third party provider. The expectation is that the blockchain can improve security through its decentralization, as well as speed up the settlement of transactions, especially international payments.
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Individual stories are also at stake. Bitcoin has become the go-to intermediary on cryptocurrency platforms for virtually all businesses. If investors want to buy tokens of something other than a large cryptocurrency, they will first need to buy bitcoin for exchange purposes.
The popularity of Bitcoin trading has been particularly evident with digital payment platforms PayPal (NASDAQ: PYPL) is Square (NYSE: SQ). In October, PayPal announced that it would be launching a new service that will allow its customers to buy, sell and hold cryptocurrency directly in their PayPal account. Meanwhile, Square has seen its revenue skyrocket thanks to the bitcoin exchange on the peer-to-peer payment platform Cash App. Square has also acquired bitcoin tokens worth around $ 50 million. Cryptocurrency stocks have skyrocketed along with digital tokens.
Another example is Ethereum’s smart contracts, which are integrated into its blockchain. These smart contracts help verify transactions and enforce contract negotiations. For example, products for a company might be automatically reordered once total sales reach a certain level if multiple parties agree. These smart contracts could completely overhaul supply chain management.
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It didn’t end well before and this time it will be no different
For millennial and inexperienced investors, cryptocurrencies like bitcoin, Ethereum and Ripple are like a dream come true. They fluctuate wildly on a regular basis and can produce triple-digit gains in a few weeks if investor sentiment behind a token is strong enough.
But we’ve seen digital tokens go vertical a few times before, and it didn’t end well for crypto investors. As I see it, cryptocurrency investors are fighting a tough battle against three very real problems.
First, at least as far as bitcoins are concerned, there is a perceived scarcity problem. Bitcoin is often seen as a direct threat to gold as a store of value and potential stock market hedge given its “cap” of 21 million mined tokens (there are currently 18.55 million tokens in circulation). The problem is that these circulating supply limits are not as tangible as gold. This is to say that we can only mine the amount of gold found on planet Earth. By comparison, programming is all that keeps the virtual bitcoin limit in place.
A second but much more concerning problem for bitcoin, Ethereum and Ripple is utility. In 2017, global gross domestic product amounted to $ 81 trillion. However, as of Monday, November 23, all circulating bitcoins had a market value of around $ 340 billion. Of that $ 340 billion, roughly 40% is held by investors and is not in circulation for payments. This essentially means that only around $ 200 billion worth of bitcoins are available for transactional purposes. Aside from the fact that only between 1% and 3% of companies accept cryptography as a form of payment (according to Matthew May, co-founder of financial company Acuity), around $ 200 billion of current supply has little chance of become mainstream.
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There is also no guarantee that crypto tokens will be needed. Branded financial services and technology companies are developing their own blockchain technology that may be able to operate with fiat currencies, thus making arbitrary digital tokens obsolete.
The third major concern here is safety. Although the blockchain is designed to better protect users’ digital assets, there have been a number of large-scale token thefts over the past decade. The problem isn’t so much that the thieves are out to get your crypto tokens, but that the Securities and Exchange Commission (SEC) can’t do much to stop it or help those affected. With most cryptocurrency exchanges and payments taking place outside the United States, the SEC has no way of taking action against these cyber criminals.
I believe what we are seeing in the cryptocurrency market is nothing more than sentiment-driven trading with no substance behind it. More than a century of investment history has shown investor sentiment is impossible to predict and can change in the blink of an eye. Ether and Ripple have already experienced extensive dips of over 90%, and bitcoin has returned well over 80% on a handful of occasions. It has happened before and it is possible that it could happen again.
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