James Trescothick

With more than 20 years of experience in financial service industry, James is our Senior Global Strategist and the co-producer and presenter of easyMarkets educational videos. When he is not working on educational programs or preparing webinars, you can find him with the easyMarkets team giving seminars around the world.

Over the last 30 days cryptocurrencies have been receiving a lot of attention due to the original cryptocurrency; Bitcoin. But in fact, the whole of the Altcoin market has been inundated with possible suitors and has featured in many a headline.

It all started with Bitcoin

Bitcoin which remains the leader of the pack was first released in 2009 making it the first decentralized digital currency.  At the time, it faced many a skeptic, including myself who thought it was just a fad which would soon vanish.

Like myself, I bet there are many out there now swallowing their words as we watch Bitcoin hit new all-time highs and at the time of writing is trading at around $2500 from $11 back in 2011.  With all this fanfare, I have read many articles by other analysists who say that if you had invested $1000 in Bitcoin back in 2010 you would now be a millionaire.  In fact, this did indeed happen to one young investor by the name of Erik Finman, who did exactly that and is now sitting on a fortune of $1.9 million. But headlines like this seem no different to saying, “if only you used these winning lottery numbers last week you would be a millionaire”! Hindsight is truly a beautiful thing.

With that being said, the future of the cryptocurrency market is yet to be discovered and the question is, could an investment in a cryptocurrency today, bring the same fate as that of Eric Finman’s?

Cryptocurrency market and the continuous birth of ICO’s

Currently, there are over 800 cryptocurrencies out there with the combined market capitalization at $100 billion. However, the majority of this number is made up by a handful of high-profile Altcoins with the likes of Bitcoin (which makes up 40.1% of the market cap) and Ethereum (28.3% of the cap).

Every month sees around 20 new Initial Coin Offerings (ICO).  An ICO is a method similar to crowdfunding, to release a new cryptocurrency.  The startup firm behind the new cryptocurrency attempts to raise capital by publishing a white paper which explains in detail about the project it is behind and the investor receives a token in return for the money he or she has invested.  The early investors are incentivized to buy these cyprtocoins with the hope that they will go up in value if indeed the venture is successful.

The projects of these start-up companies can vary in many different areas from energy to gun safety and there have been many a success story such as a project called Bancor which raised $153 million within a couple of hours. ICOs are proving incredibly popular as investors out there are hoping that the new cryptocurrency they get their hands on will one-day rise to the dizzying heights of Bitcoin.

Let’s not disregard the downsides of this new market

As amazing as they may sound, ICO’s still pose may problems.

First, there is the obvious possibility of the project’s failure, and this stands true for pretty much any project or investment.

Second, The ICO market being an unregulated one, it is automatically exposed to more danger of fraud. There have been many cases of these ventures being fraudulent and there is no safety blanket to fall back on.

Finally, there is the fear that the sudden boom of this marketplace is a bubble simply getting ready to burst.

Could this be another .com bubble?

Wall Street laughed its head off when one investor said back in February that Bitcoin would rise to $25,000 within the next 10 years.  But with the digital currency surging higher by 400% over the last 12 months, not many are laughing now and some are realizing that this prediction could become a reality within the given timeframe.

Though the recent success of Bitcoin and Ethereum cannot be denied, the explosion of new cryptocurrencies onto the market and with all the new ICO’s, I cannot help but see a similarity to another economic event, the dot-com bubble.

Between 1997 and 2001 there was huge investment in creating internet-based companies due to the increased usage of the Internet by businesses and consumers.   This bubble eventually burst in 2002 with many of these web-based companies either shutting down or losing a huge amount of capital.  Those who did survive this financial massacre, the likes of eBay and Amazon, have of course bounced back and are now trading way above their pre-crash stock price.  With the lust for ICO’s and the recent new high on the major Cryptos, I can’t help but feel we could see something similar. The fact of the matter is how many cryptocurrencies does the market actually need? And how many can it use? Clearly, 800 plus is an excessive number.

Extreme volatility may ruin things

And then there is the issue of extreme volatility.  A prime example of this happened on Wednesday the 21st of June when Ethereum collapsed from $317 to as low as 10 cents before bouncing back.  Now, these kinds of flash crashes can indeed happen in any market, but it was the manner of how it happened and that the drop which was so severe, that goes to show how fragile the cryptocurrency market is and how easy a sell-off across the board could cause a crash.  This really is a brand-new marketplace with no real safeguards in place.

Cryptocurrencies may indeed be the future

In conclusion, however, I firmly believe that the likes of Bitcoin, Ethereum and LiteCoin are here to stay, as the world does indeed look ready to embrace this new form of currency.  However, the number of cyber currencies out there will most probably not last.  Especially as I believe with recent events such as more ICO fraudulent claims and the amount media buzz Bitcoin is creating, it is only a matter of time until some form of regulation and control will be put into place. This, in turn, will limit the number of ICOs and the number of different cryptocurrencies.

For now, they can enjoy their time in the sun and all the admiration they are getting as only time will tell how long they will last.

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