The year of cryptocurrencies: Why the gateway to rapid “financial disruption” is open

Everyone is talking about cryptocurrencies, especially Bitcoin. Not a day goes by without headlines about huge gains, lost hard disks and companies that are now doing something with cryptocurrencies. Just the next bubble?

(Reading time: 5 minutes)

Tulip and housewife boom

When I was recently traveling by cab in Munich, the driver asked me early in the morning what I do for a living. I replied that I had something to do with computers, to which he replied that he had already thought so (aha!). I was expecting him to ask me to solve some stupid problem with his smartphone. Instead, he said:

“Sage, solle invest diese Bit-e-goin?

”
It sent shivers down my spine. So that’s how far the whole thing has come. On the same day, the BTC price rose another 3k US dollars. And, admittedly, so did my BTC positions.

A bubble?

Since the enormous rise in Bitcoin, the question of whether it is all a bubble has been omnipresent. The price increase curves of all the crash stocks are superimposed on each other and many an expert draws unseen comparisons with the “tulip bubble” in Holland.

These rapid price rises are unhealthy and have their very own psychology. And of course Bitcoin is inflated like a balloon at a child’s birthday party. And yes, there will be a shakeout.

But: money can never form a bubble per se. The unit can only be valued higher or lower in comparison to other currencies. The intrinsic value of money is, as we know, a mental construct. A human, fictional convention.

This is true, but admittedly does not play such a major role in speculation and everyday life. And yet this difference is hugely important compared to historical bubbles.

Something is completely different here

Because I believe that the general, current madness surrounding Bitcoin is obscuring the view of what is actually going on – the underlying principle:

In contrast to such financial scenarios, this time we are dealing with a completely new technology for these very transactions. A technology that is capable of completely pulverizing the transaction costs for the entire financial sector. And, to put it somewhat trivially, to allow these transactions to go through without complex verification points.

Speed of adaptation

One of my fundamental theses with regard to change through technology is that every technology will be used by users as soon as it offers them a fundamentally better benefit than conventional methods. This is no different here with the underlying technology.

Until now, the exchange of value in the form of money, securities and collateral has been a state- and interstate-regulated domain. Cryptocurrencies break this up by being able to offer this benefit as largely unregulated and, above all, uncontrollable parallel currencies. If you can’t control something properly, any regulation is superfluous. Sooner or later, the current supervisory authorities will come to this conclusion.

It is precisely this adaptation of Bitcoin that has become increasingly widespread in recent months. Various companies have started to accept Bitcoin as a means of payment. The preliminary peak of this adaptation is the ETF on Bitcoin of the Chicago Stock Exchange.

What the hell is going on here?

People from the financial industry have told me in the last few days that they sat together as a team to understand “what is actually going on here”. To simply declare the whole thing a bubble and a flash in the pan is convenient and, looking at the past, stringent in itself. But it is also extremely dangerous.

Crypto children’s shoes

It is dangerous because cryptocurrencies are still in their infancy. A few days ago, the total volume of cryptocurrencies exceeded 0.5 thousand US dollars for the first time.

By comparison, Apple had around 0.26 thousand US dollars in cash reserves at the end of FY2017. The global money supply is estimated at around 90 T US dollars. It will now be very exciting to see how the share of cryptocurrencies will grow. The number of transactions should remain the same over time and then gradually decrease as the share of crypto increases and intermediary transactions disappear.

In this scenario, demand and supply play out. The more transactions are transferred to cryptocurrencies, the more in demand they are. The value of these currencies increases accordingly.

If we are in a paradigm and technology shift regarding currencies, we may not be experiencing a fabulous appreciation of cryptocurrencies at the moment, but a gradual devaluation of traditional currencies.

So if you exchange conventional money for cryptocurrencies today, you are unconsciously relying on this mechanism and supporting it. Whether you are aware of it or not.

Acceleration

If you read here often, you know that I think in terms of probabilities. As far as the technological change in value exchange, i.e. the switch to cryptocurrencies, is concerned, I see a very high probability that it will occur in the long term. The question is what influences will determine the speed of adaptation.

In terms of accelerating this adaptation process, one of the larger platform players could strike again. First and foremost Apple, which already has almost the entire infrastructure in place. An adaptation of Bitcoin: a few well thought-out B2C and business products and Bitcoin will become part of our daily lives. The question that Apple is probably asking itself is whether it should launch its own coin directly.

Cryptocurrencies are to financial institutions what e-mails were to the postal service.

A change like this can happen so quickly that regulation can’t keep up. In fact, it already can’t keep up today. However, I still don’t see the probability of a player performing an acceleration function as high.

Defender

This is because the conventional financial industry is not going to give up the field just like that. A big player like Apple or Amazon who dares to take this step will face as many obstacles as possible. So they think twice about it. After all, they are also dependent on “good old finance”.

Because even if I hear a lot of despair from conversations with bank representatives, it is just as clear that they are ready to fight. And many have realized that the mistake that the music industry or the car industry, for example, made at the beginning, namely to negate the new technologies, will not lead anywhere. Whatever leads to lower costs at the end of the day will sooner or later prevail. That’s why many large banks are experimenting with blockchain technology. That is very encouraging.

Invest

These days I often hear people say that they have invested in cryptocurrencies. I don’t think that’s correct. What you do with currencies is always speculation. A currency doesn’t create anything new. It has no dividend and delivers no return per se.

It’s a bet on “financial disruption”, the biggest change in the sector since the introduction of fiat money. In my opinion, the odds are in favor of this bet. The only sensible thing to do, if you have money to spare and a desire to bet, is to buy in and HODL. And not look at your account again for another 3 years.

Disclaimer: The author holds all kinds of crypto positions and advises everyone against them. Betting is not sensible. If you are looking for a sensible investment, invest in your life. Because “in the long run we’re all dead”. Sometimes the “long run” can be tomorrow. Tulips on the grave don’t make it any better.