“… some of the cryptocurrency experts I’ve talked to believe that a single share of bitcoin will someday be worth over $1 million”.
Teeka Tiwari – crypto-currency expert
“I see them (crypto-currencies) as yet another speculative vehicle in the middle of a bubble that will end with a very, very messy bust.”
In a new series of posts on FI, I will be exploring the potential impact and future of series of new technologies, starting with crypto-currencies. I will be exploring whether technology can mitigate or even resolve the broader challenges of resource scarcity, which I refer to as the Limits to Growth mega-trend.
Readers, can you hear that distant but growing roar across the horizon? That is an army of suited and booted crypto-currency virgins scrambling to purchase their first bitcoin and ether in the coming months… Wall Street is going to be deflowered and fortunes will likely be made in the coming years.
Crypto-currencies have attracted a huge amount of interest in the last year with the most well known crypto, bitcoin, surging to new heights on the global exchanges. For a long time as I was a sceptic, convinced that it was a 21st century version of the tulip craze and not based on any fundamentals. However, in the last few months, I have been engrossed in this exciting new sector and am now cautiously optimistic that it has a promising future.
What are crypto-currencies? According to Wikipedia, “…a crypto currency (or crypto currency) is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions, to control the creation of additional units, and to verify the transfer of assets”. Different crypto-currencies have different uses and one is not the same as the other. Bitcoin should be considered the reserve currency of the crypto space, to be used as a store of value and as a gateway to buy lesser known cryptos like dash, ethereum classic and ripple. Think of bitcoin as digital gold.
Ethereum, which has a very efficient payment transaction time and is already being used for hundreds of apps, should be considered the Microsoft of the crypto-space. Big banks are already exploring how to integrate ethereum into their banking systems and it is already the favourite within the tech world which are major movers and shakers within the emerging crypto eco-system.
Dash, a little known crypto, is also emerging as a crypto of choice for making payments and has rocketed in value in the last few months as a result. There are hundreds of cryptos out there and the sector is at the same point in the cycle as the tech industry was in the 1990’s when Amazon, Microsoft and other tech companies were just starting to emerge.
Cryptos should be considered digital equities and as the crypto world grows, these blue-chip digital equities will grow in value. The trick is investing in the right digital equities, in other words, the Amazon, Facebook and Microsoft of the next decade.
With cryptos you can transfer them around the world through wallets beyond the control of national governments. This has already proven immensely useful for citizens of Zimbabwe or Venezuela where the economy is collapsing. The developing world has embraced the mobile phone revolution and it is probably only a matter of time before the masses discover the benefits of app based digital currencies held through their smart phones.
Even in the relatively stable developed world, putting a fraction of your net wealth into the blue-chip cryptos is worth considering should capital controls return under a Corbyn led British government in the future, as an example. For those who think such talk is absurd, I would remind you that banking holidays, capital controls and other mechanisms to control your money has already been experienced by the Cypriot people in 2013. It is no coincidence that bitcoin surged in value by 87% in 2013 after the imposition of draconian banking controls in Cyprus.
Cryptos are a natural response to the shift of our economy into the digital space and it was probably only a matter of time before a digital currency would emerge for the internet. As the digitalisation of the economy increases it is likely that cryptos will become increasingly mainstream as a means of payment in the coming years. Surveys indicate that younger consumers are interested and comfortable with the concept of using and holding digital currencies. For the digital native generation, bitcoin and other cryptos are natural extensions of their tech infused lives.
The 2008/2009 Great Recession led to a gigantic money printing exercise by the central bankers as a consequence the real value of fiat currencies like the dollar, pound and yen have continued to shrink. Whilst the doomster warnings of hyperinflation has not been realized, the year by year grind of declining living standards for the bottom 80% of the population in the developed world has led to growing populist revolts at the ballot box. Cryptos offer the possibility of escaping this vicious circle into an appreciating world of digital currencies.
Many commentators have compared cryptos to a bubble which is destined to collapse. Whilst these warnings should not be totally dismissed and at times the market has appeared bubbly and overly speculative, I have attempted to show why the crypto space is here to stay and will likely grow in the coming few years. The first wave of adopters were the tech geeks and highly adventurous individual investors and the second wave is about to break soon. These are the institutional, family office and hedge fund “smart money” which are ready to pour billions into this space.
A key catalyst for this institutional “wall of money” to invest into bitcoin and later on the smaller cryptos is the announcement by the financial firm CME Group that investors will be able to purchase bitcoin future derivatives starting from 18 December 2017. Wall Street, if they wish to invest into cryptos, require the ability to hedge against the risk by using future options as a risk management tool. The decision by CME clears the way for a second wave of investors to take their chances in the crypto sector.
The announcement by the CME Group is a game changing moment and will likely lead to the approval by the American regulator of a bitcoin etf in 2018. Anecdotally I am personally aware that wealthy clients are requesting their relationship managers to purchase hundreds of thousands of bitcoin in family offices and the clamor is growing on a literally daily basis.
It is only a matter of time before an ethereum (also known as ether) future derivative is approved, opening the way for the institutional “wall of money” to invest into the second largest crypto, ethereum. Europe already has tracker funds dedicated to ethereum and bitcoin which provides a safe and regulated way of purchasing the top two crypto currency plays and America will follow within the next 12 to 18 months.
I would finish this post with a warning. Whilst I don’t think that the crypto currency space is a purely speculative bubble, there are dangerous headwinds which could shatter the future growth of this sector next decade. Bitcoin mining alone takes up a considerable amount of electricity usage and according to the UK energy comparison site Power Compare, “…bitcoin mining is currently using more electricity than 159 individual countries.”
In the context of a likely looming oil supply shock by the end of this decade, it strikes me as unlikely that countries will continue to increase their grid usage to the manufacturing of digital currencies as prices rise, the poor struggle to heat and light their homes and power outages arise. The limits to growth megatrend, which I discussed in my article “winter is coming”, would suggest that the explosive growth in cryptos is unsustainable and will decline next decade as these supply challenges become more apparent to the world.
However, to summarise, with oil prices relatively low and a supply shock at least 18 months away, 2018 and probably 2019 will continue to see explosive returns in the crypto currency space. The medium-longer term prognosis for the crypto sector is a darker picture and it remains to be seen if John Greer’s warning of a speculative implosion of the crypto-currency sector comes true.
I will be completing my 2017 review at the end of this month and will be publishing in the New Year my 2018 forecasting predictions.
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