Editor's note: Seeking Alpha is proud to welcome David Sanville as a new contributor. It's easy to become a Seeking Alpha contributor and earn money for your best investment ideas. Active contributors also get free access to the SA PRO archive. Click here to find out more »
After a bubbalicious rise, the price of cryptocurrencies have plummeted, and will stay plummeted
The vertical ascent of the price of bitcoin and other cryptocurrencies captivated main street and professional investors, alike. Throughout the first half of 2017, money marched into bitcoin, and during second half, Bitcoin dominance was challenged by alternative cryptocurrencies. As cryptocurrencies prices peaked, sentiment reached hysteria in the last days of December. Crypto trading has occurred on thinly-traded exchanges, or small trading volume compared to market capitalization of the asset traded, which allow lock-step price movements to occur as orders fill 'gaps' in the bid/ask spread. This allowed cryptocurrency prices to continue floating higher as many buyers accumulated the limited supply available on exchanges. The reciprocal mechanism allowed Bitcoin to plummet more as much as 68% from its peaks as sellers rush for 'crowded exits'. Cryptocurrencies have been in a unison downtrend since the beginning of 2018, and the downtrend has accelerated into February.
Clamorous debaters have attempted to explain the extreme price action of cryptocurrencies. Early crypto evangelists illustrated the potential for cryptocurrencies to replace traditional, fiat currencies. While naysayers compared cryptocurrency prices to historical bubbles. In September 2017, a prominent crypto skeptic and CEO of JPMorgan (NYSE:JPM), Jamie Dimon warned, "It's worse than tulip bulbs. It won't end well. Someone is going to get killed". A reference to Tulip Mania of the 17th century; one of the earliest recorded commodity bubbles. Tulip shortages created speculation that future tulip shipments may not arrive causing tulip prices to soar more than 4000% over four months before restoring to pre-shortage prices once shipments arrived. At the time of these statements, Dimon was correct about the coming tulip-esque price movements in cryptocurrencies.
Last month, January 2018, Jamie Dimon acknowledged a shift from his earlier perspective saying, "I regret making that comment" in regards to calling Bitcoin a 'fraud'. Then Dimon added a key point, "the blockchain is real". The reporter described Dimon as "backpedaling a bit on his earlier criticisms on cryptocurrencies". While that reporter's commentary is true, it fails to address the reason for Dimon's change in thinking merely stating "he believes in the technology behind [bitcoin]". Dimon was correct before so it's crucial to interpret how he justified his paradigm shift - that the blockchain is real. What Dimon meant by that point is that the underlying blockchain technology - a network solution for immutable, digital ledgers that store an accessible history of transactions chronologically - will become mainstream.
This is not the first massive Bitcoin "boom and bust" cycle. In 2013, Bitcoin increased from less than $15 at the beginning of the year to $100 by August, and increased by another order-of-magnitude to over $1k by December 2013, before declining more than 80% over the following 24 months.
Bitcoin grazed the $1k mark again at the turn of 2017, and was sheparded to its peak of $19k+ on Dec 17th. For seasonal comparison, Bitcoin increased 1000%+ increase in four months in 2013, and 700%+ in the same months of 2017. From peak at $19,205 on Dec 17th, Bitcoin has tumbled to a recent low of $6,166, as much as a 68% decline in about six weeks.
Bitcoin and cryptocurrencies will not recover from this selling like they did in the aftermath of 2013. This recent cycle of cryptocurrency experimentation revealed significant issues to adoption.
Cryptocurrencies rely on blockchain networks, not the other way around. This is the beginning-of-the-end for cryptocurrencies, and the end-of-the-beginning for blockchain technology. Software applications using blockchain technology will become mainstream, and will not rely on cryptocurrencies.
(Author's Note: When I started composing this article two weeks ago, I was writing 'why bitcoins price would continue to decline'. Over my writing, it has fallen dramatically… Such is the nature of writing about bitcoin and cryptos!)
A wave of early adopters experimented with cryptocurrencies exposing an array of hurdles to overcome before widespread assimilation.
A gold rush mentality pushed a first entrants from hedge funds, vcs, startups, and even established banks to pursue cryptocurrency trading, mining, exchanges, financial services and other applications. But, not every disruptive entrant can be successful. The Oracle's adage provides itself aptly here, "Only when the tide goes out do you discover who's been swimming naked". Corporate infrastructure engulfed the cryptocurrency world in a bubbalicious experiment that aligned increasing crypto prices with a chase for any public company that mentioned blockchain technology. Square Inc. (NYSE:SQ) shares climbed after introducing Bitcoin trading to its cash payments app . Even non-traditional microcaps including Xunlei Limited (NASDAQ:XNET), Riot Blockchain, Inc. (NASDAQ:RIOT), LongFin Corp (OTCPK:LFIN), Document Security Systems, Inc (NYSEMKT:DSS), Long Island Ice Tea, etc saw rapid price spikes fueled by outlandish investor interest for any public equity mentioning the word 'blockchain' in its name, branding, or even a press release. This author dares not compare these price movements to the spikes of early ".com" failures like Pets.com during the internet bubble.
Established players tested the bitcoin and cryptocurrency payments solutions revealing many hurdles to widespread adoption. Overstock introduced a glitch to their bitcoin payment system that confused Bitcoin with Bitcoin Cash creating a vulnerability such that customers could buy $14k of products with less than $3k of cryptocurrency. Other early adopters like Stripe are planning to discontinue bitcoin and cryptocurrency payment services, citing a lack of third-party interest, high transaction costs, and slow processing times. While chatter of Amazon accepting Bitcoin is esteemed as the 'holy grail' of integrating cryptocurrency payments. The volatile price, regulatory risks, and implementation costs of integrating cryptocurrency payments into E-commerce platforms outweigh the marginal benefits. There simply are not troves of people begging to pay with cryptocurrency. As cryptocurrencies fade from view, a second wave of innovators will emerge focusing on blockchain-based applications.
Cryptocurrencies are shrouded with regulatory risk and supply side issues that will limit their adoption
Cryptocurrencies are in a nascent regulatory regime, and a noticeable concern leading up to the downward price action appears to be potential for regulation. Cryptocurrencies have been under increased observation and scrutiny by governments. Indirectly competing with fiat currencies has placed the immediate political incentives against cryptocurrencies, and the regulatory trend has been anti-cryptocurrency. China banned on ICOs, a new Facebook (NASDAQ:FB) advertising policy banning from promotion of cryptocurrency related products and services. Alabama Senator Richard Shelby today said they "need to put together a task force on Bitcoin", and other lawmakers have made similar comments about cryptocurrency regulation.
Regulation and policy bear risk of unintended consequences. Cryptocurrency policies would require multilateral coordination across governments. Unilateral or conflicting regulatory regimes across borders would force cryptocurrency infrastructure to haven in the less stringent regulatory environments. There is by no means an international standard for the budding blockchain networks making their future uncertain. While it is beyond my expertise to prognosticate the outcomes of a regulation, it is evident that regulatory scrutiny could significantly limit cryptocurrencies legal uses.
Desire to improve the performance of the cryptocurrency networks or to expand their uses, new cryptocurrencies were issued through ICOs and others branched from existing blockchain networks via a 'fork' - a process where one blockchain network is split into two blockchain networks. Unlike fiat currencies, the issuers of cryptocurrencies "do not have sovereign backing, someone just made them up". Electrical power requirements are a familiar limitation to Bitcoin. By one calculation each transaction requires enough energy to power an entire european home for nine days! The most prominent fork of Bitcoin, Bitcoin Cash aimed to alleviate the requirements power requirements of its predecessor by designating larger 'blocks' of transaction records to be added to the public ledger, the 'blockchain'. Increasing block sizes from 1MB to 8MB in the Bitcoin Cash network is a security trade-off for reduced processing time & power requirements. Others Bitcoin forks including Bitcoin Diamond, Bitcoin Ruby, Bitcoin Gold were created with idiosyncratic forks, and Bitcoin is not the only cryptocurrency to have established a precedent of forking. There are potentially infinite, esoteric variations of the same core algorithms that can be issued as new cryptocurrencies. Supply-side issues surrounding forks and ICOs could lead to tremendously overwhelming supply, sans regulation, meaning prices for the entire asset class are inherently vulnerable to future supply shocks.
A new wave of blockchain-powered applications will come from disrupting startups and corporate behemoths leveraging blockchain uses, separate from any cryptocurrency
The internet created a global means of exchange that handles countless microtransactions, and tracking the history of these transactions is a computing and security 'nightmare'. While cryptocurrencies utilize a blockchain network to transact tokens. The digital-ledger technology can be used far beyond just currency usages. Blockchain technology is the 'nitrous'' for the Internet 'engine' capable of resolving, tracking, and securing the enormous ledgers of microtransactions more efficiently than traditional relational databases.
Attracting new startup entrants, and swiftly being experimented with in all sectors of the economy, blockchain technology enables developers to build applications on decentralized networks that can be incredibly effective for money transfer, voting, supply chain logistics, and beyond. As a quick thought experiment, imagine a voting network where each vote is paired with an immutable sender's address to know where it came from. Or tracing a rotten tomato on a store-shelf back to the supplier to locate bad sources of produce on a supply chain in a matter of seconds. Or even tracing a dollar's transaction history all the way back to its minting. These are just some of the applications of blockchain networks that are offered as educational examples for new blockchain developers.
Many of the largest U.S. companies stand to benefit from blockchain uses. Walmart has an enormous opportunity to unlock value in one of the most complex and integrated supply chains on the planet. A blockchain-based network promises less time to pinpoint, bad product sources, faster and more precisely by quickly tracing each microtransaction along the supply chain. IBM (NYSE:IBM) is pursuing blockchain software as a service, blockchain computing platforms, and development tools. A potential for a fast-growing B2B segment, as other startups and mid-caps adopt blockchain applications that require enterprise-level blockchain network solutions. On the hardware side, manufacturers of GPUs will continue to benefit from demand for processors designed for blockchain computing, even as focus shifts away from cryptocurrencies. Companies that engage in consumer financial services, like Visa and most large banks, have an opportunity to create money transfer & lending applications that improve the performance of existing financial infrastructure. There is a wide open playing field to use decentralized networks and digital ledgers to create new categories of applications, products, and services. In a new competitive business environment, existing institution's customer bases give them an engaged audience to test new products with, and new launch to services. This gives larger players a first-move advantage, for some time. The unlocked economic potential of blockchain will benefit corporations, across all sectors of the economy.
Invest in large-cap blockchain benefiters, and be patient for future, tactical IPOs
Cryptocurrencies are undergoing late-stage bubble mechanics and and will be overshadowed by blockchain-power applications that are independent of cryptocurrencies. I think people are already looking back on 2017 and saying "what were we all thinking to let the hootenanny go on like that". Robust software takes time to develop, even for fast-moving startups. But some blockchain applications have already arrived, and more are coming in 2018. It's the blockchain technology, not the currencies that will change the world.
Right now, large-caps are best positioned to benefit from blockchain technology. IBM is vying to utilize blockchain technology to develop a fast-growing, long-term business segments. WalMart (NYSE:WMT) has the potential to translate blockchain technology into cost-savings. As more companies pursue blockchain-based endeavors, search for entrants with the capability to solve unmet needs, and can create high return-on-capital, high barrier-to-entry business models. But don't miss the dark-horse chasing stallions! Dare I mention a once lowly bookstore in New York that endured the bursting of the internet bubble, and climbed to dominance one innovation after another. There will be new players, new IPOs, and like Amazon (NASDAQ:AMZN) in the internet era aftermath, and as with any world-changing technological advancement in history, new winners will emerge over time.
Disclosure: I am/we are long WMT, BK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.