Cryptocurrencies are in a bubble and regulators could burst this at a whim.
- Eight years after the introduction of Bitcoin, there are now over 900 cryptocurrencies and their prices are at all-time highs.
- Richard Schiller categorizes bubbles as an underlying story driving the market forward, as opposed to the fundamentals of the assets. Cryptocurrencies are riding on a narrative of economic empowerment and freedom.
- Despite the widespread attention that cryptocurrency receive, many of the actors involved in the market are not fully informed. Debate tends to turn to hype and naive investors are buying crypto-assets without fully understanding what they are.
- Banks spend 73% of the market capitalization of Bitcoin each year on regulatory compliance. Crypto-assets are currently unregulated and free of these restrictions. As such, the market has thrived but also developed some bad habits.
- Regulators cannot necessarily shut down cryptocurrencies, but they can restrict liquidity into them from fiat currencies and hamper their growth. The global derivatives market, for example, is worth $1.2 quadrillion, dwarfing Bitcoin’s $100 billion market cap.
Market manipulations in crypto markets are undermining their credibility.
- Due to low liquidity, no regulation, and a lack of clear understanding of the markets, pump and dumps are widespread in crypto markets. This is where a speculator can artificially sell while concurrently buying their own currency, wait for the market to rise, and then dump their holdings.
- Frontrunning is also a common occurrence in ICOs, where early investors—who are used to show initial faith in the enterprise—buy discounted tokens before immediately selling them on.
As with historic bubbles, scams are exploiting naive investors.
ICOs can have the characteristics of vaporware. Entrepreneurs are raising hundred of millions of dollars purely on concepts. Money is being raised from investors who do not truly understand the technical concepts being proposed to them, let alone whether they are feasible.
- The actual asset structures of ICOs are not only complex but also new forms of assets in their own right. This further confuses investors, which is compounded by the "FOMO" mentality of rushing into investments and following the crowd.
- The use of celebrities to promote ICOs further demonstrates the use of manipulative marketing techniques used to cajole immature investors into participating in ICOs.
- The current ICO craze is reminiscent of the South Sea Bubble of the 18th century, a speculatory period that involved crazed investment into enterprises in the New World. Once one of the highest valued companies of all time, the South Sea Company’s bubble burst and the company disappeared almost as quickly as it appeared.
Blockchains are still not proven technology, and more work is required.
- Blockchains are still new concepts and their technology has not yet been proven on a consumer-wide scale. Attention should be focused on developing this, not speculating on short-termist projects.
- The security of blockchains is a concept that most investors in crypto-assets do not understand. The onus is on them to protect their assets, which, on the basis of the amount of thefts and frauds in the space, is not being done properly.
There are some solutions to these issues.
- A less polarized mentality of "us against the world" is needed; this could be enforced by the promotion of self-regulatory standards. These could also help to highlight the bad actors in the ecosystem.
- More development is required into the underlying technology of blockchains. In the long run, this would be far more valuable than ICO moon-shot projects.
- Awareness and discussion needs to be promoted. Conferences should present balanced debates from both sides of the crypto-view and more emphasis should be placed on educating investors instead of soliciting their investments.
Originally Published here at https://www.toptal.com