Bitcoin seems to be being spoken of everywhere and by almost everyone…. and most of the people speaking about it have no clue what to make of it, so most conversations end up becoming a pooling of ignorance, rather than a useful growth experience.

This Tuesday Tip is not focussing on explaining what Bitcoin and Blockchain are. For some useful insight and understanding have a look at this simple introduction Ray wrote recently

What we want to help with in this article is some basics to consider when engaging with, or responding to, offers to enter the fray.

Yes, the hype is real, and it making some people VERY rich

If you read the linked article above you will have a better understanding of how these cryptocurrencies like Bitcoin are being created, and the legitimacy of the value they are creating. While they are unorthodox developments and fly in the face of historic financial logic, they are very real artifacts of the modern digitisation of money. Early adopters are making a lot of money, and even people getting into them today are too…. in time, they will form the base of a borderless digital global financial system. So, don’t write them off because you don’t understand them. Instead, commit to spending some time and effort to find out how and why they work, and you too may be part of the select group who make money while it is still maturing.

There is more than just one option

The media has focused on the largest of the cryptocurrencies – Bitcoin, but there are a number of other options. Ether, Bitcoin cash, Litecoin, and others are all cryptocurrencies that use underlying distributed ledger technology (again, see the linked article if you need to understand what this is) like Blockchain to create coins for their user and developer communities. At the moment Bitcoin is the largest of the cryptocurrencies by value, but the others have additional value propositions that may make them better choices for some investors, e.g. Ethereum has more users than Bitcoin / Blockchain even though the price per coin is currently lower.

The growth is astronomical

If you held 10,000 Bitcoin in 2010 you could buy 2 pizzas with it, If you held the same number in Sept 2017 it would’ve been worth in excess of $40 million. There are few other assets or investment vehicles that come close to delivering that type of growth and return over a similar period. All indications are that the price will continue to go up for the foreseeable future. While the creation of cryptocurrencies is driven by the “mining” of the distributed ledger (see linked article above) the value of the coin once it is created is driven by supply/demand dynamics in the market. As long as there are more people wanting to buy/hold cryptocurrencies than there is new coin created, the prices will continue to rise. Every ledger has a built-in algorithm that will increase the scarcity of the coins as more people use the ledger…. thereby continuing to drive the price up (in theory).

A crash may be on the horizon

The technology has several checks and balances in place to continue to push the prices up, but the dynamics that may cause a correction are more than likely external to the cryptocurrency system. Innovation theory indicates that the next phase of development for this market/innovation is “The Innovator’s Chasm” or “The Trough of Disillusionment”. These are necessary correction mechanisms to move an innovation beyond the bloated expectations and hype of early adopters toward a more mature technology that influences the life of mainstream people. For those getting into cryptocurrency investment or mining right now, this means that it is wise to flag this activity as riskier than other investment options. It will also be important to view these as assets that need to be actively managed rather than passively invested. There is money to be made before the bubble bursts or the crash happens, but a disengaged investor stands a significantly high chance of losing their investment if they don’t track and manage it actively. Most engaged in the market should do so with a view to exiting it temporarily when it crashes and consolidates toward a more mainstream development.

Watch out for charlatans and network marketers

There are many individuals and fly-by-night organisations taking advantage of the hype and interest in these innovations, but also relying on the relatively low levels of education and understanding. Some companies are offering platforms, wallets, and investment vehicles that will not last or that are specifically designed to take your money and disappear. There are also a lot of network marketing or pyramid-type schemes that have developed offering you the opportunity to get into the market by pooling your money with others…. and then encouraging you to recruit others who will join your “team”. These are the same types of schemes that have tried to rope you into selling homeware and cleaning products, makeup, or costume jewellery…. the only difference is that in this case, the product they are using to hook you into the network is Bitcoin or another cryptocurrency. It is not necessary to buy through these networks, if you want to invest you can do so directly without a middleman/network. If they are trying to make it sound confusing, and that they are the experts you need to support your activity they are very likely not the people you need to be working through. Like every other space in which you may invest or part with your hard earned cash – make sure to do your research and due diligence before giving anyone a cent…. and if you have questions don’t move until those questions have been answered in a simple and understandable manner. Despite the unorthodoxy of these new technologies, they are not difficult to understand and come to grips with.

The hype around Bitcoin is real and deserved, it (and it’s sister currencies) are changing the way in which we think about money. There is still space for risk-aware early adopters to enter the market and make money. But, the window is closing, and in the short-term, the risk of investing will increase not decrease and a savvy individual will factor that into their financial planning and investment activity.

The final thing to be aware of is that these technologies are merely the vanguard of a much more extensive shakeup and digital disruption of money, banking, and financial services as a whole…. hold onto your hats, there is more to come.

TomorrowToday Global