Are Cryptocurrencies like Litecoin, Bitcoin and Ethereum in big trouble? It is impossible to predict the future but note these dangers.
Both Ethereum and Bitcoin have been on a rollercoaster ride this year, rising in dramatic fashion, suffering losses, then recovering to respectable levels. Scalability appears to be at the heart of the issue.
Ethereum prices, for instance, tumbled from $400 to $240 before climbing back to $330. Almost simultaneously investors carved out 25% of Bitcoin’s market capitalization, driving BTC prices from $3,000 to $2,260. While Bitcoin eventually bounced back to $2,565, the gyrations left many investors uncertain about the future of cryptocurrencies.
I would argue this pattern – hope, followed by disappointment, followed by redemption – is perfectly in line with the history of technological evolution. One has to look no further than Gartner’s famous model of the Hype Cycle to see its truth.
For the uninitiated, here is a brief summary of the Hype Cycle:
- Excitement. Each emerging technology has a moment when it enters the zeitgeist. At this point the technology is usually untested, yet it achieves a furious climb in popularity. Expectations rip past reality.
- Disappointment. The gallop comes to an abrupt halt as investors grow weary of hollow promises and failed experiments. Popularity, along with investment value, plummets as quickly as it rose.
- Carnage. Natural selection shows its verve in this stage. Those that adapt, seek durable business models, and learn from past mistakes have a chance at survival. The rest are consigned to the dustbin of history.
- Redemption. As second and third iterations emerge, their use cases become clearer. Growth is now a slower process, but one that actually generates real value.
- Success. The technology is fully formed and functional. It permeates its addressable market, delivers tangible results, and reaches maturity.
This sequence is littered throughout the pages of history. In fact, it is applicable to the technology sector as a whole. The frantic pace of investment in the late 1990s reflected an excitement in digital technology, yet it ultimately collapsed in what we now call the Dot Com Crisis.
The disappointment of that period taught both investors and founders to approach their roles more soberly than they had done previously. The lesson was learned, as the chart below bears out:
Chart Courtesy of Stockcharts.com
As is evident from the sharp peak in 2000, digital technologies have exhibited the very phenomenon that digital currencies are now undergoing.
I would suggest that Bitcoin and Ethereum are in the midst of Stage 2; that earlier volatility in prices reflected burgeoning disappointment; and that maybe the price correction was an attempt to exorcise the worst elements of the cryptocurrency industry.
With this in mind, it is difficult to believe that the worst has passed for both Bitcoin and Ethereum. There are still questionable initial coin offerings slated across the coming months, and consolidation has yet to take place.
Will Bitcoin And Ethereum Survive?
For Ethereum, the downward pressures of disappointment were compounded by a flash crash and an internet hoax claiming Ethereum’s founder had died. He did not. The relief that caused may have singlehandedly sparked a rally in Ethereum, however it is not sufficient enough to propel ETH prices through Stages 3 and 4. Only fundamental strength can do that.
Does Ethereum have what it takes?
I certainly believe it does, especially because the majority of ICOs and applications were birthed on the Ethereum platform. Even if those ICOs or applications don’t survive, the very fact that Ethereum was established as a foundation for the rest of the industry should give it some support.
Moreover, Ethereum has practical-use cases that could sustain the platform.
There is a consortium of energy companies that found 200 use-cases for blockchain. That consortium begun working with Ethereum recently, so I think there is reasonable hope it will survive the coming purge. (Source: “Energy Sector Turns to Ethereum to Test Blockchain,” Coindesk, May 30, 2017.)
Bitcoin is a little trickier, because its success or failure has always rested with its grand ambition of becoming a global currency. The degree of political risk wrapped up in that ambition is incalculable, and is beyond my powers of analysis.
Only central banks can decide its fate now.
Disclosure: This guest post was written by Gaurav S. Iyer, security analyst for Profit Confidential. He advocates for commonsense, buy-and-hold investing. You can find his daily investment ideas and commentary at ProfitConfidential.com