Is the Cryptocurrency market development healthy?

I am getting this question asked several times per day. Also people who know that I am invested myself in crypto's a longer time now keep asking me (in summer no one was asking, since the last couple of weeks questions come in on a daily basis) ?is it too late to buy bitcoin?“ Or ?what would you suggest I should do?“, "where and how can I buy some Bitcoin?"

My answer though is "who knows" or "maybe" or something like that. I just can’t give advise since the numbers rationally don’t add up at all. Maybe it is because of our education? No one of us (between 30 and 50 year olds) had a class like ?alternative money“ or ?Austrian economics“. The Germans have a love/hate relationship with Austrian leaders due to bad things happening in the past. People tend to stick to the past somehow. Maybe this is why investors like charts that much? They show the past in different time periods. You can choose from a drop down menu and every time the chart looks different....

Bitcoin and the whole cryptocurrency "thing"

It is just hard to figure out with the academic education the relevant group (see above) of people enjoyed. The relevant group here is the woman/man who is responsible for the numbers below in the table. The ones who invest all the money. Sophisticated, well educated people plus some nerds who happened to mine Bitcoin in the early days. It is obvious that not the uneducated wast majority of the world is trading bitcoin and altcoins right now on the relevant exchanges. The adoption by the masses is still science fiction until exchanges are not DDoS attacked on a weekly basis and confidence has grown to a level that supports the ?little man“ in a way that she/he can spent their savings via mobile phone and store their wealth in a way they feel comfortable with plus can buy valueable hard assets in real life.

The parents of our above mentioned relevant group of market participants were born during world war II (Dad) and right after (Mom). They hardly adopted technology for a long time and we can be proud of our parents in their 60s and 70s who today use WhatsApp and Facebook and Facetime to keep contact with their family, grandchildren aso. This is a huge development and we all can thank Steve Jobs and Apple for it. No company has had such an impact in establishing not only tech products but more important ?UX“ (useability) in all their products. They have driven the whole industry and made the IT guys think of the customer. Not only the most sophisticated and clean code was needed but also user friendliness was the key.

This is were the sales and mass adoption took off. A couple of years after the iPhone was invented and John Doe figured out how to spent money using just his phone.

Back to the cryptocurrency industry that is somewhere close before inventing ?their“ iPhone.

Vitalik Buterin asked on Twitter: 

So total cryptocoin market cap just hit $0.5T today. But have we *earned* it?

He asked a couple of questions like

• ?how many unbanked people have we banked?“
• ?how many Venezuelans have been protected by us from hyperinflation?“
• ?how many dapps have we created that have substantial usage? Low added value *per user* for using a blockchain is fine, but then you have to make up for it in volume.“

We don’t have the ?iPhone“ of the cryptocurrency-industry yet. Or the ?Killer-DApp“.

We like Cryptokitties though. It is fun but also reminds us of all those Malta-based Internet Poker and Casino-Sites. Most of it is a scam. The Kitties are not a scam but not really serious in a business sense.

The never ending boring arguments that Bitcoin is a Darknet-Payment-System and money laundering-tool and what not are not getting old still. The best answers to this are:

• What was first, money laundering or Bitcoin?
• What was first, pink sheets or ICOs?
• What was first, fracking or Bitcoin-Mining?
• …

The list goes on. If someone is open for real arguments, it is fun to discuss. If not, it’s not….

Lets look at the Numbers to get a sense as to where ?we“ stand.

Market development since June 14th 2017 until December 14th 2017

It all looks pretty good though. This is the total market capitalization of all crypto-currencies according to coinmarketcap.com

Since there are no derivatives out there that could confuse the numbers (yes, the CBOE Bitcoin future only exists 3 days plus it is a cash-settlement future. So no real Bitcoin underlying/delivery possible, we skip those for the moment), we can say that all this is "real" trading. No synthetic trades/derivatives etc.

The numbers show that the 24h trading volume worldwide grew by factor 8.22 between June 14th and December 14th. The overall market capitalization in the same period grew by factor 4.67.

This looks like a healthy rate at first sight. Usually in high growth assets like shares of "hyped" companies, the trading volume is getting lower as soon as the value per share rises sharply. We usually don't see a double as high growth in trading volume compared to the market capitalization of that share. 

The ordinary share is an "asset" that can be traded easily. The systems are approved in a way that everyone can trade any time and quick with professional companies worth billions of dollars and hundreds, even thousands of employees. Liquidity is mostly no issue (at least in the biggest listed companies).

With cryptocurrencies it is more difficult

The big exchanges are heavily under siege by DDoS attacks as seen this and last week all around the world. Hackers stealing money from these exchanges and flaws in the code of some smart contracts happen all the time. There is simply no big professional ?solidity“-software-development company with hundreds of professionals out there - yet. The exchanges struggle keeping up with the extremely high demand for new accounts. Hiring people is difficult since there is no education available for these urgently needed specialists.

Companies like Charles Schwab and the likes are only dreaming about these growth rates (or sadly remember the good old times when they opened thousands of new accounts per day - should be the same pace back then as it is today. Maybe someone can comment on this and compare customer growth of Coinbase with Charles Schwab).

A listed share is limited in number. At least as long as the company is not issuing new shares. If they do, the price drops naturally because of the value of the company stays the same but is being divided by a higher number of shares - share price dilution. In this event, the market cap stays the same and trading volume in USD/EURO etc. also stays the same. The number of shares being traded rises.

But again - what happened between mid June and mid December with the cryptocurrencies?

One difference between an ordinary share or say the S&P 500 and the 1.500 plus x cryptocurrencies/tokens out there is that within these last 6 month an undisclosed number of new coins have been MINED, ISSUED, PRE-MINED, BURNED, LOST, ERASED and what have you.

This being said - what is the total number of coins at the time on June 14th? What is the total number of coins december 14th?

We can only guess - unless someone can provide a number and source that is reliable - but it should be at least 8x the number of coins that are now being traded compared to June 14th.

What does this mean?

Comparing apples with apples it should say that the actual VALUATION of all coins on average rose by more than 3700% in 6 month!

(37,36 times) = (8 (times more coins) * 4.67 times higher market cap (valuation))

Now that is definitely a bubble, isn’t it?

Lets see if the good old/new battle of economics can help to understand what is going on. 

Here is a comparison between the Austrian economic thinking and the Keynesian ideas/values and our new friend, the cryptografic economic thinking of an decentralized digital nomad seeking to find his way into all of John Doe’s heart:

Looking at the table above, we learn that some of the core principles just don’t work going forward.

• There will never be a bailout of a failed ICO.
• Their will hardly be any savings of cryptocurrencies - most of them are utility tokens that want to be spent!
• The gold standard is the Bitcoin, but we don’t know how long and in what shape and form.
• The term ?market“ is completely useless in a world where we sign smart contracts on ERC-20 protocols and send money and assets around the globe at no cost and in split seconds (yes, the transaction backlog on Bitcoin Blockchain was high last week and it took half a day but who cares compared with all other settlement and cost structures that are available in Fiat currency?)

There are no simple answers to the many questions simply because there is no "killer DApp" yet invented, the "Killer-Usecase" is still under development. Given the huge capital invested already in the cryptocurrency world, the most urgent next steps are reasonable regulations worldwide to help the industry getting access to ?real world“ assets. If this happens soon, the actual valuation might be even ridiculously low.