Hi again. This is the third part in our ongoing series on how to trade better and determine intelligent investments in cryptocurrency for the future.
- In part 1 I talked about the importance of selling enough to make back your principle investment i.e. if you buy something at $300 and it rises to $600 in value, sell $300 to eliminate all future risk of personal loss e.g. if that asset falls to $150 in value after (which can happen easily since suchvolatility is very common in cryptocurrency). In cryptocurrency trading/investments a 100% return of investment should always prompt you to consider selling 1/2 your stack.
- In part 2 I talked about the psychology behind fear of missing out; i.e. the dangers of buying during a sudden rise in an asset’s price and how to make the most of such rallies whilst minimising the risks involved in joining them.
In part 3 I will now discuss Cryptocurrency valuations, price metrics and identifying coins of value, worth holding:
What makes a coin worth holding: The value proposition
What makes anything worth holding? How much of themselves is a person willing to put into it – that’s how much.
Cryptocurrency is largely driven by faith. It is a speculative enterprise i.e. people mostly put money into cryptocurrencies believing they will go up in value in the future; their plan to sell at a higher price when it does.
Currently most cryptocurrencies serve no function than being currencies in themselves. Unfortunately these currencies are largely not recognised by governments, most institutional investors or companies are legitimate stores of value or legitimate currencies of transaction. As such legislation and rules around the world regarding them vary considerably and are often absent.
There are very few cryptocurrencies that have legitimised backing, are insured or supported by enterprises that are insured for their loss and essentially there is little to protect you if you lose money through them.
So why do people bother putting money into cryptocurrencies it in the first place?
- Well some of them do have a good use or potential for good use beyond speculation.
If the present and future value of a cryptocurrency is driven purely by speculation then you are essentially gambling by putting your money to buy that coin and joining the pool of other gamblers who are doing so. You are essentially joining a ponzi scheme and waiting game hoping you’ve gotten in early enough and convinced enough people to buy more of the asset you hold at slightly higher prices until a price is reached that you can cash out at (or until that thing becomes so big that everyone starts using it as their store of value).
This type of dynamic essentially underpins the mentality of most investments and trades i.e. buy low and sell high. I’d like to add buy early for investors since buying during a low in an already established asset may be setting yourself up for being forced to sell at a lower low later (especially if you don’t understand the fundamentals of that asset).
If however the present or future value of a cryptocurrency is driven by some service other than speculation which can attract and drive fiat currency into it’s ecosystem then it is potentially valuable.
I.e. will people actually use their USD/Yuan/Euro/GBP/Yen/INR etc to actually purchase the coin in question to do something useful with it (other than gamble on it’s future price).
There are some cryptocurrencies which satisfy this criteria:
It is not a currency, it is a remittance system and store of value. It has a reputation increasingly to being seen as a digital version of gold.
- It is similar to gold but unlike gold it has no direct physical presence. Gold and is mainly a store of value (rather than it’s use in jewellery, cosmetics, therapeutics or electronics which forms a minority of it’s market cap) but Gold’s physical properties make it vulnerable to seizure, taxation and legislation. Gold also has storage fee’s and is difficult to transport; it’s speculative value as a store of value is derived from faith in it and it’s cultural history.
- Unlike gold, Bitcoin is comparatively extremely easy to transport in very large quantities, very easily over short spaces of time. It has sufficient money (USD, Euro, Yuan, Yen, INR etc) to give it decent liquidity i.e. enough people are using it now that if you bought $10,000 worth of bitcoin today, chances are good (that because enough people are also transacting bitcoin at less, simillar and greater quantities) you could sell it somewhere else straight away for $10,000.
- Because of these reasons Bitcoin’s price also fluctuates in a manner similar to Gold i.e. conditions which create global or regional economic or geopolitical uncertainty favor an increase in it’s price whilst conditions which favor global or regional economic stability and growth favor a drop in it’s price.
- Bitcoin however is too slow to be a useful currency. It takes 10 minutes for a transaction to be processed and can take an hour for said transaction to be cleared. Obviously if you were waiting to buy a pint of milk from the local shop, you wouldn’t do it with Bitcoin because you’d be waiting around a very long time for it to clear. However for much larger transactions where you might not want to wait days (e.g. bank transfers) but can afford to wait a few hours, Bitcoin is surprisingly versatile.
Bitcoin has the cultural and historical advantage of being the first cryptocurrency. It is also still the largest cryptocurrency by a long way with the largest marketcap i.e. price per bitcoin [$952 as of writing] x the number of bitcoin in circulation [16,074,687] which is $15.3 billion. Compare to it’s next biggest competitor Ethereum which has a marketcap of $700 million (i.e. only 4.57% of Bitcoin’s).
- Gold in contrast has a market cap of $6.8 trillion i.e $6800 billion i.e. Bitcoin has a market cap that is only 0.22% of Gold!
- The upside to this is that if more people feel that Bitcoin is a legitimate alternative to gold, demand for Bitcoin will surge and since the Bitcoin supply is relatively limited, it’s price will shoot up massively – There is a big chunk of money waiting to be gained by eating into the Gold market cap!
- If you believe Bitcoin could replace Gold as a more portable, cultural store of value then invest in it. However I warn you there are problems because the software behind bitcoin needs significant upgrades to support increased transaction loads without breaking and due to various reasons (mostly self interest among people who profit from producing Bitcoin) this is being significantly delayed and possibly not happening. I am uncertain if Bitcoin will continue to remain a viable investment in the long term if it does not address these issues.
Bitcoin’s value proposition is that it is a store of value. It may not be able to sustain this without significant upgrades to it’s underlying software.
Bitcoin does not have anonymity inherently built into it’s software. Therefore if you buy and sell Bitcoin especially on cryptocurrency exchanges (where user registration is required), it is possible to trace whom Bitcoin is being transferred from and to.
- In contrast Monero is fully anonymous. You cannot see whom Monero is sent from and to, nor can you see how much Monero has been sent.
- It has good liquidity, is actively trading and is gaining increasing recognition and respect from cryptocurrency enthusiasts.
- Obviously this is useful if you wish to transact in things you do not wish seen!
- Otherwise it essentially has many properties similar to Bitcoin.
For this reason I see Monero as Bitcoin + anonymity. I.e. it’s value proposition is as store of hidden wealth. I also believe it does not have the issues that bitcoin does namely, same level of mainstream recognition, spotlight of regulatory awareness and developers do seem to be more focused on achieving better scalability and transaction times (it already does 10-20 minute verification time vs bitcoins 1 hour) which gives it better potential as a currency presently compared to Bitcoin.
- Although there are a lot of illegitimate uses for private transactions and value storage, there is a far bigger global market for legitimate, fully secure and anonymous transactions for large existing financial institutions (e.g. investment banks and the international services that provide settlement between them).
- This sort of market cap dwarfs gold. However this type of up-scaled usability will not occur until the transaction verification times are much faster (nanoseconds) and the protocol is enhanced to cope with much larger transactions volumes and frequency at that speed; We are a long way off that.
I do believe fiat stored in Bitcoin will gradually transfer into Monero boosting it’s value. I am not sure Monero though can presently bring fresh fiat currency (USD, Yuan etc) into it’s ecosystem beyond outsider speculation in future price.
- However it’s value went up massively when the largest current darknet markets (a type of anonymous marketplace where illegal goods and services are often traded) Alphabay and Oasis announced their endorsement and use of Monero. This has given Monero a first mover advantage and attract scores of speculators into it’s ecosystem.
- This is also where it’s major present use case and value proposition is; in the settlement of anonymous transactions on darknet markets and a potential successor to Bitcoin. Darknet markets are what drew fiat money into Bitcoin and helped make it the store of value it is now.
- If those darknet markets crash, XMR’s value could still go down considerably (until it matures and gains a larger market cap)… and it did when when Oasis market disappeared along with it’s customers money.
It is not unique in it’s function or potential value proposition. My warning about holding Monero for the long term is that it has competition for it’s function not just from Bitcoin itself but from other anonymous coins such as Zcash, DASH (which provides instantaneous settlement) and SDC. Perhaps more importantly, Ethereum (ETH) is now planning to implement optional anonymity (via zSNARKs) in it’s transaction network; if it does when combined with Ethereum’s own functionality and well defined development roadmap (that will likely several second verification times in late 2017) would render XMR potentially redundant.
- The other issue I currently have with Monero is that it uses Proof of Work (PoW) algorithm which increases it’s transaction verification times, and encourages constant selling on creation (with formation of mining cartels and subsequent minority led development and price manipulation) rather than accumulation and holding.
- This is in direct contrast to the Proof of Stake (PoS) or PoS/PoW hybrid model of coin creation. The differences will be elaborated later (and more thoroughly in a separate article but essentially I believe PoS encourages holding rather than selling leading to better price stability, reduced volatility, gradual increase in value over time and better resistance to price manipulation (including leveraged short selling) by day traders.
- Indeed if Monero switched to PoS or hybrid PoW/PoS it would eliminate almost all the issues I currently have with it (by making it a more stable store of value); incidentally I have similar issues with Bitcoin.
The first cryptocurrency which was built with the specific intent of incorporating ‘smart contracts’ into it’s platform.
- Simplified, smart contracts allow for much more sophisticated settlement systems and formulae than simple transfer to and from orders and in the future provide the means through which access to these services and indeed services themselves can exist solely on the Ethereum blockhain.
- If we work on the premise that blockchains (the technology that underlies most cryptocurrencies) whose entirety of verification is distributed across multiple computers around the world are inherently more secure, stable and harder to take down or maliciously alter than traditional centralised databases, then there is obvious value to institutions who may wish to use such systems to improve the existing security of their services.
- More importantly smart contracts allow for trustless settlements i.e. settlements which do not necessarily require third party verification. This means that it could remove the need (and thus expense) of middlemen in a number of existing financial and non-financial real world settlement systems.
- It has extremely good developer support and a growing base of large companies (e.g. JP Morgan, Santander, Microsoft) willing to support it or using it. It is also functional and versatile with a clear development roadmap that includes PoS (a system that I believe encourages a gradually increasing or otherwise stable price), improved scalability and most importantly sub-second transaction times.
- There are also services already being built on top of Ethereum scheduled for launch by mid 2017 which in themselves could draw fiat currency into the Ethereum ecosystem (although this may take a few years for the effect to become fully apparent and some or indeed all of them may not succeed).
- As such in it’s present form it’s price is a speculative figure derived from the above potential.
The value proposition for Ethereum is that it allows for complex, trustless settlement systems to be built on it. This is a huge deal because the scope of applications is wide and although the technology needs to mature (to support greater transaction volume, frequency and more secure functionality) the sheer amount of fiat such a platform could attract through conversion of traditional centralised settlement and contract services to more secure decentralised platforms is very huge.
- This is such that many blockchains such as Hyperledger, Lisk, Counterparty, Rootstock, Tezos and Synereo are being built to try and compete with Ethereum.
- Additionally in late 2017, Etherum plans to switch to PoS from Proof of Work mining (the means through which the Ethereum blockchain is verified and new Ethereum is minted to Proof of Stake which in my opinion will make Ethereum an amazing store of value.
PARTICL (PART) (formerly Shadowcash SDC)
The value proposition is a double escrow, fully anonymous, decentralised privacy platform which incorporates private chat, private marketplace and secure, trustless private settlement system into one platform that is fully integrated into it’s own blockchain.
- There is no other blockchain that is attempting to do this right now (there are some non-anonymous decentralised marketplaces).
- If Particl launches it’s marketplace and it’s marketplace becomes active, it will generate revenue and draw fiat money direct into the Particl ecosystem.
- This will give it something that many cryptocurrencies currently do not actually have: A valuation fully independent of speculation. At this point Particl will have a basic calculable and true intrinsic value measurable in the amount of fiat currency (USD, Yuan, Euro etc) flowing through and stored in it. To the financially trained it will have a real P/E ratio.
Particl has multiple features that make it an excellent store of value: Low coin supply, potential for great demand, near instantaneous transaction verification times, ability to earn interest for simply holding it.
- Indeed one of the biggest immediate factors that made me switch to Particl was using their devs previous Umbra client for Shaodwcash to store and stake my SDC which allows me to earn effective interest on my holdings by leaving the Umbra software running on my laptop.
- Since the Particl network is verified via Proof of stake (PoS) rather than Proof of Work (PoW); doing this does not use up valuable CPU/GPU resources on my 3 year old laptop (which I would have to if I attempted to mine Monero or Ethereum via their current PoW algorithms) allowing me to continue using my laptop for work and gaming. I am not penalised for having a slow computer. I am instead rewarded for holding my SDC to verify it’s network rather than wasting computing time and electricity to mine and sell it.
- I mentioned a major issue I had with Monero was it’s usability and the difficult usability of darknet markets in general.
Particl is incredibly easy to use and is heavily focused on usability. This is absolutely essential to it’s end users: customers who seek convenient easy and speedy secure anonymous transaction. This will be a dream come true for traditional users of darknet markets.
To explain why lets elaborate on traditional darknet markets where in order to transact anonymously you have to:
1. Download the TOR browser.
2. Learn how to use it.
3. Buy XMR or Bitcoin.
4. Learn how to transact with these coins *safely* (yes this is still an issue with XMR in spite of it's built in privacy).
5. Learn how to and where to find reliable secure darknet markets.
6. Create accounts on these markets to access them *and*
7. Have faith that the websites and the highly centralised (and thus much more vulnerable) servers hosting those markets you use will not get shut down, not disappear with your money and not betray your transaction details and potentially identities to the authorities should they be infiltrated by them.
Whereas with Particl’s market place this process will become:
1. Download the Particl client.
2. Buy some PART on an exchange and transfer it to your Umbra client.
3. Browse the Particl marketplace and transact securely, safely and anonymously.
- That’s pretty convenient by comparison.
- Unlike traditional darknet markets, Particl does not exist on a centralised server but rather utilities the blockchain technology to exist simultaneously as a whole on all the computers supporting it. This makes it inherently more secure against traditional forms of cyber attacks and account hacks that apply to traditional web based services.
- Never underestimate the effect of convenience and security in bringing more people (and fiat currency) into cryptocurrency. PART could be a big gateway through which this happens.
- Indeed the Particl roadmap includes mobile stakable clients and other features designed for it’s easy and widespread distribution and use.
- I believe because of this Particl could create a paradigm shift in the way anonymous transactions and settlements occur.
In summary I think Particl can be a very useful application as a privacy platform for private communications and transactions.
- In it’s simplest form it is an index fund of certain cryptocurrencies i.e. it represents several million dollars worth of USD and Euro that have been converted into a mixture of Bitcoin, Ethereum, Monero, Dash, Maidsafecoin among a few others. The value of this portfolio will fluctuate and it’s composition will periodically change depending on whether the coins it represent fail to or achieve certain criteria.
- It will also incorporates a fund management platform that is to say in layman’s terms, it will be an air B&B of investment advisors and fund managers in cryptocurrency.
Those two points constitute it’s value proposition. By nature of the way it works it has an easily identifiable P/E ratio based on the amount used to create the fund ($10.5 million) against the current value of that fund based on it’s
- If you believe the total marketcap (total valuation) of crptocurrency is going to boom through 2017 and the next few years (and it has massive room to do so given the marketcap and limitations of Gold along with emergent non-speculative usability of certain cryptocurrencies) then ICN is possibly a very good token to buy and simply hold.
- The price of ICN is currently $0.33. Based on it’s initial valuation of $0.14 per token this would give it an approximate P/E ratio of 2.36. This is falsely assuming the total fiat value of the index has stayed static.
- In reality the ICN index has increased 30% in value so as of writing it’s true P/E ratio is ($0.33 / (0.14*1.3)) = 1.81.
- Compared to other currencies where the intrinsic P/E ratio is infinity this is incredible and represents amazing value for money even when compared against traditional stocks (e.g. GOOG shares as of writing have a P/E ratio of 33).
- So for absolute beginners, the risk averse and long term investors, ICN may be the safest and most profitable token to invest in over the long term.
- Risks to be aware of are the possibility of regulation restricting or banning the ICN token, a general decline in cryptocurrency marketcap and poor performance in multiple coins composing the ICN index which would bring the value of ICN down significantly.
The first rule in investing or trading in a given cryptocoin is deciding if it has a value proposition:
1. *Can it draw fiat currency (USD, Euro, Yuan etc) in such a way as to give it a valuation that is fully independent of pure speculation?*
2. *Is it unique?*
3. *Is it rare?* A limited supply with a low or negative inflation rate will lead to increasing price as demand goes up.
4. Are there significant risks associated with the value proposition?
- Many cryptocurrencies on the market are both rare and unique but have no viable non-speculative way of drawing fresh fiat into their ecosystem: I believe these coins are potentiallly more prone to failure in the long term.
- Many coins attempt to pass off their value proposition as rarity alone. This is not a unique feature; don’t be fooled by one’s that claim this either; it is the most common scam in cryptocurrency.
- The emergence of regulation in cryptocurrencies is an inevitability that will occur as it’s popularity and marketcap grows. Be very aware of the sorts of regulations that could be applied to the cryptocurrencies you invest or trade (including regional and international bans) in and consider carefully the impact of those regulations on that currency’s marketcap and price!
- There are certain other cryptocurrencies and tokens I haven’t mentioned. Mainly due to time and also because I have some reservations about them. I would however encourage you to look at tokens such as Augur (REP), Dash (DASH), Digix (DGD), Waves (WAVES), Factom (FCT), BlockCDN which I believe have interesting value propositions (and thus real long term value) and compare them against other tokens such as eBitz, Xaurum, Potcoin, onecoin and Nav (which have a number of red flags).
In the next article I will cover lesson 3b: Price metrics and valuations. It will be much shorter I promise but equally informative and we will cover topics such as price determination, impact of speculation, price manipulation, whales and their impact and the impact of bitcoin on the entire cryptocurrency ecosystem!
1. Crypto-Currency Market Capitalizations, https://coinmarketcap.com/, Last Checked 30/01/2017
2. What is the value of all the Gold in the world? http://onlygold.com/Info/All-The-Gold-In-The-World.asp, Last Checked 30/01/2017.
3. ICONOMI Cryptocurrencies Index (ICNX) 21 December 2016 Rebalancing, https://medium.com/iconominet/iconomi-cryptocurrencies-index-icnx-21-december-2016-rebalancing-transformation-into-iconomi-8e31e48493ab#.sptgljv1c
4. ICNx trend chart, https://medium.com/iconominet/iconomi-cryptocurrencies-index-icnx-30-november-2016-monthly-rebalancing-update-3402866243d9#.kw7g4fqcd, Last updated 30th Nov 2017
5. Shadowcash (SDC) - The billion dollar baby!, https://medium.com/@paradox_/shadowcash-sdc-the-billion-dollar-baby-6b86f0660739#.ypz9yme5a, Last updated 16 August 2016.