As many readers probably already know, we have recently started populating our TradingView page. One thing that really stands out on TradingView currently is the amount of analysis done on Crypto-currencies and Bitcoin in particular. We have already given our thoughts on Bitcoin here. In today’s piece, you will understand why cryptocurrencies have a tough future ahead of them, whereas the underlying Blockchain technology has a much brighter future. Finally, we will explore a more practical way of gaining blockchain exposure.
“Well, I think it is working. There may be other currencies like it that may be even better. But in the meantime, there’s a big industry around Bitcoin. — People have made fortunes off Bitcoin, some have lost money. It is volatile, but people make money off of volatility too.” – Richard Branson
There’s a lot of hype surrounding Bitcoin, to the point where some people equate blockchain technology with Bitcoin – period. But to be honest, most analysis surrounding Bitcoin sounds quite generic, with some saying “it is the future of money” while others only talk about the “speculative bubble”.
Let’s try to confront the main arguments surrounding Bitcoin in a more professional manner.
- Is Bitcoin Overvalued? To answer this question, we would first need a way to evaluate Bitcoin. There are no future cashflows to discount – so Bitcoin really doesn’t have a fair value. But it isn’t possible to evaluate Bitcoin on a relative basis either. For example, in equities we can compare market capitalisation to the relevant company’s earnings. But for Bitcoin there is no such thing. Can we treat Bitcoin as a currency? Currency valuations are usually based on growth, interest rate or price differences between currency pairs. None of these can be determined for bitcoin. Many people hence revert to Bitcoin as a commodity like Gold or Silver, with the rationale that just like metal, it is mined in bitcoin farms and the mining process requires considerable hardware investments and electricity. However, there is no real production cost for copy a professional trader platform Bitcoin – it all depends on the Bitcoin protocol. So right now, there is no applicable framework for evaluating bitcoin if not “diffusion”. The more people use it and trade it, the more it will be worth. However, if “open interest” drops, it can lose value in a heartbeat.
- Bitcoin will become the new World Currency. In reality, no cryptocurrency is a viable substitute for government backed currencies unless it becomes adopted as legal tender. Currencies only have value when they can buy things people want or need. So long as there will be governments, alternative currencies will not be used in a widespread manner. If a company receives bitcoins as a payment, they need to pay taxes in legal tender. So there is an additional exchange rate risk – and a huge one, given the volatility of cryptocurrencies.
But the other reason why cryptocurrencies cannot be a viable substitute for current payment systems has to do with technology limits: there can only be around 7 transactions processed per second, whereas a single company like Visa processes 24.000 transactions per second. There is a lot of catching up to do.
- Bitcoin and cryptocurrencies can avoid regulation. This is a false claim as governments can just make bitcoin illegal with the stroke of a pen just like China did. The more people abandon legal tender for cryptocurrencies, the quicker regulators will step in and all libertarian dreams will be crushed. The only hurdle would be for governments to devise a global, coordinated stance. But history shows that this is has already been done (Plaza Accord, etc.). So regulation IS an issue.
- Bitcoin will challenge traditional banking. With no consumer protection, a limited transaction threshold and a growing risk of cybercrime, and the tremendous volatility, would you really park your savings in Bitcoin? A more realistic hypothesis is the coexistance of cryptocurrency payments & transfers, alongside a mainstream banking system.
“The blockchain does one thing: it replaces third-party trust with mathematical proof that something happened” – Adam Draper
While there are serious issues with cryptocurrencies, the actual underlying technology is a great achievment and has a bright future. Blockchain is to Bitcoin what a railway is to a train. But many other kinds of train can run on the same tracks.
We aren’t experts in the sector, but we seem to understand the basic advantages that blockchain technology can deliver:
- Disintermediation: no more centralized servers or authentication is necessary. This would hypothetically eliminate the need to lawyers, financial intermediaries, etc.
- Security: the cryptographic nature of the blockchain would seem more secure than traditional databases due to the hash values.
- Resilience: blockchains networks would theoretically avoid any central point of failure.
- Cost-efficiency: since transactions can be monitored in real time, and are time-stamped, any reconciliation really seems superfluous.
Quality Blockchain Exposure
In order to gain blockchain exposure, a more savy way might be to track the companies that fall into these broad categories:
- technology enablers (hardware and software companies like Intel & IBM);
- early adopters (Hitachi, RWE, SAP, etc.).
However, at the time of writing it does not appear that investing in companies for their blockchain prowess can offer any significant upside. There are still large challenges ahead (speed, regulation, integration issues/switching costs to name the most evident) which means that right here, right now, blockchain investing isn’t quite feasible.
A cursory dig into the financials of blockchain leaders like Hive or Overstock will immediately prove this point. They aren’t quite palatable to investors seeking quality exposure. But since blockchain is a reality, it might pay off to keep up to date with the leaders in the sector.
Over to You
Blockchain and cryptocurrencies are different things and have very different future prospects. We tend to believe more in the widespread application of blockchain technology, even though it’s still at the very early phases of development.
Blockchain does have the potential to disrupt and revolutionize sectors where there is significant intermediation (and the financial sector is probably at the top of the list) and might change the way the world works. Some experts are comparing blockchain to the internet in the mid-1990s. Hopefully the common sense dispensed in this article will help you discern quality blockchain candidates.
We will most likely have updates in the future over on our sister portal, auto binary signals .