CRYPTOCURRENCIES – THE BIRTH PANGS OF A DISRUPTIVE TECHNOLOGY

Source: Reuters

Not unexpectedly, when new emerging technologies are concerned, the views about cryptocurrencies are polarised. Is their use a gigantic waste of energy or a revolution in the making? The term cryptocurrency is a misnomer if we assume that a currency is by definition also a store of value, but the underlying blockchain technology is free from such linguistic ambiguities.

The critics of blockchain technology often point out that the current global financial infrastructure handles millions of transactions daily, whereas blockchain is much slower and may suffer from congestions. But speed is not central to the argument for blockchain. Although scalability and efficiency are the focus of the ongoing efforts to propose new blockchain solutions, this technology should highlight transparency and safety first.

 

ICO TOKENS – RISK IN YOUR PORTFOLIO

Whilst opinions on the usefulness of the blockchain technology are divided, one could hardly claim the same for the prediction of price movements. A large correction is expected with the latest recovery from 2018 Q1’s bearish trend being just another swing in the unstable landscape of the crypto tokens. One institutional research forecasts a 90% value loss for crypto portfolios within the next 12 months. According to this study, institutional money entering crypto markets will drive the prices of tokens higher, which will make them a more attractive asset for smaller investors. When it becomes clear that many projects cannot deliver, there will be a sudden sharp decline due to panic selling.

The exact quantities of decline are a matter for speculation, but it is not unreasonable to expect a general trend that is somewhat similar to the last eruption of a disruptive technology – the dot.com bubble. This emerging market was marked by wide spreads, high volatility and lack of proper information. The chart below of NASDAQ composite is a good reflection of the development of the high-tech companies prevailing in the market that started to inflate in 1990.

NASDAQ composite

NASDAQ composite                                                              Souce: Macrotrends,com

This chart also reminds us that after the storm a lot of good is in store for the lucky survivors. Those projects that are not wiped out by the bursting of the bubble or cancelled due to legal noncompliance will find themselves in a new landscape with room to grow on a much more resilient foundation. This will mean they have found a niche for themselves where the use of blockchain is really justified. However, it will require more than just pushing traditional services to blockchain.

 

REGULATION IS NO GUARANTEE

The regulation of the crypto space should not be considered as an insurance against loss for investors. The stock market regulations did not prevent the participants from losing their investments in the dot.com bubble. The recent issuing of subpoenas to some major blockchain start-ups in the USA has been seen by some as a prelude to a clampdown on blockchain start-ups. Crypto hedge funds also came under scrutiny. In the unlikely scenario that there emerges a universal resolve to bring an end to ICOs, Bitcoin would stand out as the only cryptocurrency with no one to subpoena. This anonymity is the reason why Bitcoin should be included in a crypto portfolio.

 

SUMMARY – YES FOR MULTI-ASSET PORTFOLIOS

Disruptive technologies are accompanied by “irrational exuberance” and inflated bubbles which eventually burst and purge the landscape for those projects of genuine quality. Cryptocurrencies remain an attractive asset for institutions, especially hedge funds, where management fees are directly associated with the value of investments. In the past cryptocurrencies provided high returns while having low correlation with other assets. This feature makes them suitable for small allocations within multi-asset portfolios. The issue of liquidity also remains and one may wonder if these assets can have much greater liquidity and still retain the low correlation factor. At any rate, blockchain technology is in its infancy and a major cleansing is the most likely scenario before it enters a more mature stage. A cleansing that will bring substantial benefits to the holders of those tokens rooted in viable projects.

 

David

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