In my previous post, Technical Analysis For Beginners, I talked about ways to make short-term price predictions. However, as mentioned, predicting cryptocurrency prices, especially in the long-term, is difficult at the best of times. The fact is, the drivers of value are too varied to make any kind of accurate assessment.
So how do you invest for the long-term? And more to the point, which coin(s) should you invest in?
Well, knowing what to buy and what to hold starts with ignoring the hype. In other words, our decisions should not be solely based on whatever is trending at the moment. For example, there’s much talk about Ripple XRP going to $589, which for most people, at the current price of $0.25, is enough to trigger serious FOMO (fear-of-missing-out). However, by looking deeper into the maths behind that number, it becomes clear that the assumptions made are exactly that – assumptions. No-one has a crystal ball, and for that reason, it’s always good to remember that your guesstimate is just as valid as anyone else’s.
Instead, long-term investment decisions should take into account qualitative factors that influence a project’s longevity. Primarily, that’s use case, but as you’ll see, most other factors, such as rising demand, are linked to having a strong utility. Applying this kind of thinking to Ripple XRP shows that it’s likely to be around in the long-term. But at what price, I cannot say.
Before we go deeper into the topic, I think it’s important to inject a dose of reality into proceedings. After all, given the insane potential for percentage gains, it’s all too easy to get carried away with cryptocurrencies.
As the crypto industry is still in its infancy, we should assess crypto projects in a similar way to how we might assess a start-up company. Ask yourself, does it have a solid team? Is the project viable? Is there a reliable working product? Would someone use it? However, as a fully completed project doesn’t yet exist, it’s impossible to answer all of these questions with any certainty.
That being so, unlike the real world, where a public company’s share price is driven by the performance of their products/services, the crypto market is driven purely by speculation. This complicates matters, as cryptocurrency prices will fluctuate rampantly according to news reports and hearsay, also, this can mean price differences, for the same coin, across different exchanges. All in all, price action is volatile and inconsistent.
Buying cryptocurrency is not an investment in a real currency, it’s an investment in a future that has yet to happen. Buying crypto is buying into the idea that one day, we’ll all be exchanging coins with one another in a futuristic utopia. Having said that, it’s clear, by the continuing progress of the major coins, that blockchain technology is fighting hard to create this future.
There is little point in acquiring cryptocurrency just because it’s digital money. Fiat currency already exists as a medium of exchange, and it isn’t going away anytime soon.
But, when cryptocurrencies are used to solve problems, then they have a valid reason to exist beyond their monetary value. Innovative and practical use cases are what will pave the way for mainstream adoption. This is because the goal of cryptocurrencies should be to improve and democratize systems. Any project that can achieve this, whether that’s through decentralized systems, lowering costs, increasing privacy, improving fraud prevention, and so on, will experience rising demand.
The whole point of innovation is to make life better for us all. Which is why the best cryptocurrencies are those that use the inherent advantages of blockchain technology to give power back to the people. And those which offer none of these things will fade into obscurity.
Although public interest has cooled greatly since the end of 2017, there’s still an acknowledge by experts that blockchain technology will play a major role in our future. And more and more companies and governments are clamouring to implement this technology in order to stay current.
As well as that, there’s much talk about bringing institutional money into crypto. As things stand, there are regulatory blocks that prevent institutional investors from entering this space. Hedge funds simply cannot invest their clients’ funds in the same easy manner as a retail investor.
But that’s not to say things won’t change. Coinbase recently announced its custodial crypto service, which offers cold storage, institutional standard broker-dealer and reporting services, and a client coverage program. This demonstrates Coinbase’s belief that The US Securities and Exchange Commission will eventually grant approval for Bitcoin traded funds. And if that happens, it’s expected that demand for Bitcoin, and by default, other cryptocurrencies will skyrocket.
Scams & scandals
Scandals, such as a hack, will, in the short-term at least, negatively affect the price. Bitcoin has been the target of several high-profile exchange hacks in the past but has always bounced back.
In the case of Ethereum, in 2015 a security breach caused the coin to hard-fork. And whilst the short-term price did recover, this highlights the exposure all investors have to events outside of their control.
The issue started when 40k Ether was stolen from an Ethereum developer’s wallet. To recover the funds, the developer proposed a system-wide software “upgrade”, which was, in essence, a hard fork. After much debate within the Ethereum community, holders voted in favour of hard-forking to return the stolen funds. Those who disagreed with the decision forked off the main Ethereum chain to create Ethereum Classic.
If a project becomes commonly known as a scam, demand will plummet as holders sell out their positions. Investors should watch out for:
- Fraudulent Initial Coin Offerings
- Dodgy exchanges
- Fake wallets
- Pyramid schemes
- Pump & dump groups
BitConnect was the biggest scam in crypto history. Their investment model offered “amazing returns” and “guaranteed profits”, which in and of itself should be red flags to any investor.
Whilst the internet was awash with rumours, the biggest criticism being their policy of paying profits in their own BCC coin, rather than the Bitcoin that investors “lent” to the platform, it didn’t stop people signing up. At the start of 2018, after several high-profile news reports, their website suddenly went offline.
Over the course of the following week, the BitConnect price fell from $420 to $20. It’s estimated that $1.5 billion was stolen, and prosecutions against the alleged operators, as well as YouTubers who promoted the coin, are pending.
As far as cryptocurrency is concerned, regulation is a double-edged sword. On the one hand, the fundamental goal of Bitcoin was always to create a decentralized monetary system. One where people could transact without the need for an intermediary. But then again, without clear regulation, the entire industry is held back by:
- Increased risk of scams
- Uncertainty by institutional investors
- Stifled growth potential for fear of innocently breaking the law
- Investment money going to countries that have embraced the technology
It’s inevitable that regulation will come as the market matures. After all, if cryptocurrency is to shake its scam reputation amongst the non-believers and become a legitimate asset class, then steps need to be taken to promote order, consistency, and accountability.
At the moment, there is no clear and convincing argument as to whether regulation will be good, or bad, for cryptocurrency prices. As mentioned, SEC approval of Bitcoin traded funds is likely to increase demand which is expected to cause a price pump. But is regulation as a whole a means to centralization by the back door? And will this lead to another power consolidation by the elites?
Going back to the factors that influence long-term prices. As far as regulation is concerned, the only thing that’s certain is that governments have the power to outlaw cryptocurrency altogether. Such a move by a major Western government would destroy public confidence in the technology, and crush crypto prices as a result. So perhaps the best-case scenario might involve having just the right amount of regulation that legitimizes the space, but balanced enough so as not to repress market forces.