Three-part article, part 1: A future for cryptocurrency?

Part 1 of a three-part article, exploring the possibilities and the prospects of cryptocurrency (Reddcoin) as a viable long-term investment.

A future for cryptocurrency?

One of the things that seems to be a major, perhaps the major concern among people I come across here, both experienced cryptocurrency enthusiasts and newbies alike, is the idea that cryptocurrencies are some kind of flash in the pan, and that the only sensible reason to get involved is for extremely short-term trading and nothing else. Often this attitude is somewhat unconscious; it is just taken for granted.

It should be noted that this kind of thinking is actually strengthened by facts, namely the fact that there are certainly many cryptocurrency projects that are launched with the sole aim of making money immediately, meaning that the devs and anyone making up the founding team have as their goal to:

  • accumulate as much of the cryptocurrency as possible.

  • raise the market price of the cryptcurrency, perhaps by working on certain developments but often simply by creating hype.

  • sell off their accumulated cryptocurrency, often by executing a market order: selling all their coins for whatever they can get, otherwise known as a “dump”.

But there is something very important to understand about cryptocurrency: that the markets are extremely young and illiquid, and that the dynamics of these markets practically dicatates that they must be volatile. This means that whether a project has been launched by unscrupulous people for nothing more than short-term gain, or by people with a genuine interest in what they are doing as a long-term project, the markets will show similar characteristics: extreme fluctuations in price.

People with experience in stock markets will understand this point, but the majority of people involved in cryptocurrencies do not have this experience; the demographic is mostly young people and some computer-literate folks who do not understand markets but do know how to rig up a graphics card to mine cryptocurrency.

Paranioa is rife within the communities, and the common myth that circulates whenever there is a fluctuation in price is that “It’s the whales doing it on purpose!” Indeed even when there is no movement in price a common deduction is that the price is being supressed by whales. It seems that nothing can happen without it being attributed to the all-seeing, all-knowing whales, who toy with the price as they please and who always profit handsomely out of every movement.

I have news for you: the markets are much more chaotic than you think, and there are no whales out there controlling everything and laughing at us all as they blow cigar smoke rings through the holes in their heads. The truth is, the bigger they are the harder they fall, and just like smaller holders and investors, larger holders lose on a regular basis. But when they lose, it really hurts.

So it’s time to wake up and understand what you are dealing with when you decide to get involved with a cryptocurrency project. You are investing money in something that has the value characteristics of an early start-up company: extreme volatility, volatility hard-wired into its very existence and not created on purpose by a parallel universe full of Greek god-like whales who play with your destiny on a whim.

Leading nowhere?

But there are more fundamental reasons why people involved in the cryptocurrency scene seem to have such difficulty trusting projects as long-term endeavours.

Cryptocurrency is still at a very early stage, so early that it is difficult to envision how the technology might become fully established and widely adopted. But during the early days of Bitcoin the feeling was exactly the same: Bitcoins were cool, a neat little piece of technology, but in terms of value they were little more than play money. When people had mined them they gave them to other people for free, worked out agreements to swap them for pizzas, or simply forgot about them or threw them away. I think it is safe to say that practically no-one, not even the most die-hard fanatics, honestly thought that just a few years down the line one Bitcoin would be worth a thousand dollars. It is worth remembering this fact: hardly anyone believed that Bitcoin would become so valuable so quickly.

Despite the difficulty of being able to visualise how the widespread adoption of an altcoin could happen, the first major application of the blockchain, as a digital currency, is absolutely huge. This is genuine innovation: the creation of a scarce and unforgeable digital commodity, not tied to or controlled by any government or organisation, that is a store of value just like gold but also extremely convenient to use in transactions just like cash.

The Internet is now sufficiently widespread and developed for it to be able to accommodate, in fact for it to require, such scarce and valuable decentralised digital commodities. There is a definate demand for these digital commodities; as the next generation grows up in a world where the Internet is woven and integrated into every aspect of our lives this demand is going to increase exponentially due to compound factors (increase in trust as security improves, increase in usefulness as merchants adopt, increase in human beings becoming connected to the Internet, etc.).

Given that there will be growing demand for such digital commodities and currencies, it is in my opinion safe to say that there will always be multiple options available on the market. Since the start of Bitcoin a recurring point made by analysts looking towards the future is that Bitcoin may well be superceded by another cryptocurrency or by multiple cryptocurrencies. But what are the factors that determine which projects could feasibly compete with Bitcoin? This question will be looked at more closely in the following parts of this article.

Zero-sum game or wealth creation?

The second part of this article (published next week) will look at the meaning behind the concept of the “zero-sum game”, a concept often evoked as the overarching principle governing cryptocurrency markets.

With the explanation of the zero-sum game I will look at the flip-side of the coin, the opposing concept of “wealth creation”.

The final part of the article will aim to assess the Reddcoin project in the context of what we have learned in parts 1 and 2, and to come to conclusions regarding whether investing in Reddcoin now is playing a zero-sum game or laying the foundations for wealth creation.

The Reddcoin principle series!

Great Articles, indeed! One of these days I will put them on a frame as the principles of money.