Cryptocurrencies - Fad or Phase

Cryptocurrencies - Intro

There is no denying that the result of Block-Chain - Cryptocurrencies have taken the world by storm since word of the Bitcoin starting at a paltry USD0.003 in March 2010 have risen since to USD19620.77 in December of 2017.
Stories like Laszlo Hanyecz's USD110 million pizza meal in today's money (Paid 10,000 BTC in May 2010 for 2 Pizzas) and the many hilarious ex-girlfriend text and phonemail stories had captured the world's imagination.

Question: 

What are cryptocurrencies and what function do they serve?

Answer:

Cryptocurrencies are an alternative to the existing mode of transaction where centralised governmental entities control and regulate the supply of monies through policies and regulatory oversight. Extensive industries and organisational effort have been built into book-keeping to keep tabs on where and how the coinage, notes, cheques and wire transfers flow.

Question:

How do Cryptos become a medium of value transfer and a viable alternative to a system that has existed for over a millennia?

Answer:

To understand how Cryptocurrencies will fill the role of a medium of exchange, one has to understand the technology Cryptocurrencies run off - Block-Chain.

What Block-Chain does to transactions with cryptocurrencies is like what cloud computing is to your iTunes playlist. If you change what songs are in your playlist on your phone, that change is synced through the cloud to your laptop and tablet instantaneously at the same time. If you made a mistake with the delete of a song in your playlist, you will have to reverse the delete by adding that song back. This action is also synced to all your other systems that hold that playlist.
Now. to understand that in the Block-Chain context, just substitute "Playlist" for "Ledger" and "Songs" for "Transaction"... you get the idea.
This automation is meant to cut down on the transaction cost and the cost involved in monitoring the transaction system (goodbye ledger maintenance job scopes)

This article is not a detailed look into the technology but a look at the Cryptocurrency market through understanding how value is driven. With this, let me begin.

The Cryptocurrency Market

Bitcoin; Ethereum; Ripple; Bitcoin-Cash; Cardano; Stellar; Litecoin; NEO; NEM and the list goes on. According to CoinMarketCap, there are 1490 tradable crypto currencies and 8087 markets that you can do that on. As of the time of this article, the market cap is about USD551,242,429,905. Bitcoin alone accounts for 34.6% of that. In short, it is a very huge market with serious money flowing through it.

Early detractors like Jamie Dimon and Lloyd Blankfein had implied the Crypto market to be faux and destined to fail. Fact that those views had since changed does say something about what their views are to the question on if Cryptocurrencies are here to stay.

I am in the view that this is the way to the future. However, there are a few facts that cannot be ignored or glossed over.

1. The market is highly inefficient. With 8 thousand over markets trading Cryptos, you can expect pricing to be off on a few(unsynchronised) owing to the demand and supply; technological limitations and fungibility.

2. Misinformation is rife and market participants have to fact check every bit of info that comes through.

3. Participants do not adhere to best practices when executing large orders. Bad execution practices have contributed to some of the market's volatility.

4. There are 1490 Cryptocurrencies and they all claim to have better block-chain systems than the one supporting Bitcoin. Everyone invests in Cryptos that see sufficient capitalisation;is mineable; transparent and decentralised. Should a Crypto be perceived to be short of any of these characteristics, the value of the ticker could go almost to zero overnight. Investing in cryptos with capitalisation would mean new and truly good tickers will be left behind.

With the above mentioned shortcomings, it does not erase the fact that there are little to no barriers to entering the market and that anyone can get a wallet unless of course a government decides to crackdown on the cryptomarket and it's participants.

Cryptocurrency Price Drivers

So, what is keeping Cryptoprices where they are right now? It mostly stems from how investors form their expectation of the crypto's value given the characteristics; capitalisation and the supporting structure behind the crypto. 

You can still plot a price graph for cryptos but the technical rules some traders use to analyse it in reality do not telegraph the value drivers for the crypto market. 

Bitcoin Price Graph Jan 24th 2018

In the Bitcoin graph, we can tell psychological levels. It will be useful to see how far and how fast a crypto can fall or rise before it's deemed "Expensive" or "Cheap". Fibo levels appear to show support and resistance levels. That said, we know what is expensive for a crypto today can be in retrospect be dirt cheap a few weeks down the road. In short, Price action is not a value driver for cryptocurrencies.

So, what do I recommend investors look at before making the decision to buy into a crypto?
I will look at the true value drivers.

1. Research the supporting systems, platforms and network supporting the crypto. You want a Cryptocurrency that will deliver as a successful medium for value transfer. Failing which, there is no point for it's existence. This group of structures will ensure it's longevity.

2. Look to Cryptos whose producers are focused on transactional and production cost savings and are addressing what other cryptos are failing to do well. This will ensure that it stays relevant if and should your pick become the new Bitcoin.

3. Investigate the unique risk of your Crypto such as how Ripple is trying the centralisation route for a crypto. Some people think it is a good thing but others see this as a value destroyer because they think a centralised crypto is some sort of a bastardised cryptocurrency without a decentralised framework. What will move the market depends on how many of each camp is trading in the particular Cryptocurrency market.

Conclusion

The Cryptocurrency market is in a phase where the participants need to develop a level of maturity in valuing their investments as opposed to "shooting for the moon" out of sure gut feel and hubris.

Participants need to understand what drives the value of their cryptocurrency and investigate those drivers before committing to a purchase.

Technical analysis might give you an idea on where to enter and exit given the price action of the day but it should not be the main tool for your analysis because price action does not drive the Crypto's value and certainly not an indicator of it's fundamental value.

With this, I wish you all good luck and good hunting.

Charles JD Lim, CAIA