Currently we see cryptocurrencies (CC, for the purposes of this article) and the interest in them expanding at a dizzying rate, with daily news articles creating high turmoil in their value and the user trust factors supporting them. Recent CC activities have been truly astounding to analyze from economic importance, social impact, and crowd behavior perspectives.
In the following article I cobble together some thoughts as they relate to CCs and how investors, as a group, act in times of rampant speculation. I don’t want to talk about tulip bulb and the year 1637. I don’t want to talk about the Internet boom that went boom in 2000.
Speculation is a term that has been thrown around quite a bit during this time. There are 2 primary definitions, which I find very interesting:
- The forming of a theory or conjecture without firm evidence or proof.
- Investment in financial venture in hopes of a gain
There is no doubt we are seeing both definitions simultaneously in action at this time. People seem to be throwing money at anyone who announces a new CC with little understanding of what the investment and underlying implementation means. Individual CC prices fluctuate rampantly, and cross-CC valuations are in a state of constant confusion or outright unknown at any given point in time. It is somewhat common to see a variety of pricing and valuation between CC exchanges and individuals. This will eventually settle down, but for now it is interesting to look at this rapidly expanding and diverse monetary model and try to understand the overall future impact and result. The current constant churn factor makes investment in CC daunting.
Recent Price Trends
Bitcoin is the current leader as far as speculative mindshare or anchor point to most speculators, with its trend line generally reflecting the trend lines observed with other major CCs. Below is a one-year look at the pricing of it. I used to lightly dabble in technical trading. I am sure there are a variety of very serious players out there in CC markets right now – from minute-to-minute day-traders to large portfolio holders. If I were a speculator, I would probably see some potential troubles ahead if Bitcoin breaks and holds under the $10,000 value. That line appears to be a potential resistance point (producing buy/sell pressures on either side) …today it bounced down to almost $9,800 but rebounded to just over $10,000. Breaking in either direction (and staying under or over that line) might be the major sign to buy or sell, depending on which way it goes. But don’t take my word for it. These thoughts are pure speculation (pun intended).
This type of quick hit, light analysis may be common with some investors. Others carefully watch volume, price, change velocity and other factors to more accurately determine price direction. It is more common, however, for the broader investment heard to demonstrate swarming behavior. It is closely aligned to how flocks of birds or schools of smaller food fish move within their environment.
Investment Crowd behavior
What are the basic mechanics of crowd behavior? Crowds consist of individuals. Individuals act and react according to those around them. How they react depends on different zones. Here is a basic but good graphic representing the zones of behavior:
The center ring is the zone of collision – avoid running into another individual. The second and outer rings are where it gets interesting. The second ring represents a zone of attraction – stay close to those within it. The outer ring is the attraction zone…the individual strives to move toward the center of mass of the larger group. Basically this is how individuals in the stock market rapidly drive prices up and down. They act as a herd rather than individuals, fueled by speculation.
Basically, a couple of investors make some money at something, others notice it, and everyone piles on. Or a news flash hits of some sort hits, speculation kicks in, and the stock market reacts due to the crowd demonstrating swarm behavior. It is all somewhat irrational to some degree but that is basically the open market system.
The Stock Floor
We all see the stock market as this really cool, exciting Ferris Buellerian trading floor with people screaming and signaling to buy and sell stocks, futures, and other financial commodities. In reality, it is akin to a darkly lit room in which a crowd of people walk around trying to pick each other’s pockets. Everyone is trying to make money at the expense of someone else. It is hard to make money consistently in the stock market due to this nature of the beast.
Speculation and CC Value
The current situation is pretty interesting. Speculators seem to pile on anything that contains the words crypto and currency. Instant value is created regardless of who creates CC (or, more importantly, for what reasons). Here are three examples of what you can find in the world of digital currencies.
We have all heard the joke about a company producing items of little interest due to their products being decidedly out-of-date. We call them buggy whip manufacturers. A perfect example is Kodak, the company that had difficulty realizing they once ruled the lion’s share of the market that was evaporating due to photography going from a somewhat specialized hobby or profession to a completely distributed (electronically and inexpensively) convenience to the masses. Their stock had been flailing for some time. They recently announced the creation of KODAKCoin, and viola…instant 60% leap in stock market valuation. Here is a one-month view of what happened before and after the announcement:
They state the underlying block chain will also provide digital rights management for photographers, which has been around for, well…decades. The company even announced a CC mining system that could be leased. I don’t expect this business model to rescue the company but speculators clambered to get on board and the company was temporarily saved. All because of the creation of a CC.
The government of Venezuela, decided to toss their hat in the CC ring as well, but due to even more dire conditions than Kodak was experiencing. As global oil prices fell and the country defaulted on its debts, their economy basically imploded. The result was hyperinflation, shortages of food and medical supplies, and rioting in the streets. The government decided to introduce their version of a CC, called the Petro, to turn things around. It would be based on a tangible asset – oil. However, there are some seriously questionable aspects with this particular CC. The Venezuelan government controls and issues the CC. It is allegedly backed by natural resources, particularly oil, of which the country has a pile of supplies valued at around $6 billion that will be used to back the CC.
But we’re not quite sure how that really works as far as tying the CC directly to the reserves in order to guarantee a hard asset valuation. Also, in order to mine the CC you have to register with the Venezuelan government (which is currently approaching 1 million registrants). CCs are typically designed to be anonymous (to some degree) and openly traded. Petro is controlled completely by a government in serious trouble. And the way the Petro is being managed seems at odds with the original design purpose of CCs, which is anonymity.
What about logical and good implementations of CCs? One of my favorites, from a business perspective, was Goldman Sachs’ solution. When brokerages transact stock trades, they typically have to go through a clearing house at the end of the trading day. The clearing house has the responsibility to take all the buys and sells between parties, validate them, and provide the independently approved results back to the broker. The broker then allocates funds according to results. This can take days to complete, and represents a high cost for the brokerage.
Enter SETLcoin, a somewhat slick and highly efficient system for managing brokerage activities. In order to trade with Goldmaan Sachs, investors purchase SETLcoin. Within this blockchain system individual sub-SETLcoins are created for each stock, then purchased, bought, or held according to the investor’s SETLcoin wallet (consisting of the sub-SETLcoins). Cross trading of stocks (for example, IBM traded for Apple) is possible and based on each sub-SETLcoin valuation. At the end of the day instant and accurate account reconciliation is provided by the associated blockchain versus a clearing house. The ledger is immutable and the cost is contained with the brokerage – simple IT support. Want to cash out? Simply notify the brokerage you are finished and your ‘real’ bank account gets a deposit based on your SETLcoin wallet value. This is somewhat simplified but you get the idea.
Where is this current craze going? Who will win and who will lose? I honestly don’t know. I have a few more articles about the whole digital currency in me that are yelling for freedom.
I guess I just want you to understand that this is a very volatile, dangerous time for investing in CCs. If you do, I wish you all the luck in the world. Try to stay safely within the herd if possible.
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About Keith Rayle