Developments in Cryptocurrency

As many speculators keeping an eye on the space know, cryptocurrencies as a whole got absolutely hammered in 2018. This event was quite predictable given the mania that occurred in 2017 and early 2018. Everyone who asked me about cryptos at that time got a firm answer, "Stay away!"

Electronic tokens trading at valuations of billions of dollars when no-one even knows what to do with them is crazy! Sure, sending money around the world quickly and at a low cost is fantastic, but anyone with an ounce of honesty knew they weren't buying cryptos for that.

What Happened in 2018?

A lot of people who jumped into the space to buy Bitcoin and other "alt-coins" in 2017 have learned a hard lesson in speculation. Many have lost 80 to 90 percent of their money last year. Others got ripped off by exchange hacks, poor security, and scammers or lost access to their wallets.

However, 2018 was actually a great year in the blockchain world as far as the technology goes. This past year we are seeing better development of smart contracts, higher transaction capacity within the various protocols, increased efficiency, and some interesting end-user emerging projects.

For example, artists may soon be able to load their creative work on blockchain platforms and receive micropayments for each "listen" or "view" directly from their consumer. Code can be embedded into the work to prevent loss of revenue from things like torrent uploads.

Websites and blogs could attach micropayments to articles so readers can show appreciation for the work done by the authors. While many would shy away from a $10 monthly subscription (a general minimum amount required to make a credit card transaction viable), paying something like 1/10th of a penny to read an article might be acceptable.

There are also some very interesting advancements using blockchain contracts for betting. One project, Augur, is establishing an open-source market for bets. While not yet fully active, the idea is that users will be able to freely design bets of all kinds and settle in cryptocurrencies in a peer-to-peer format.

Beyond gambling on horseracing or election wins, Augur could theoretically host bets that work like options contracts or futures contracts in financial markets. It would completely bypass the exchanges, drastically reduce fees, and eliminate third-party risks as we saw with MF Global and some of the FOREX brokers.

One of the most exciting changes is the continued development of transaction processing and verification. As you might know with Bitcoin, the proof-of-work ("mining") model is very energy intensive. It also limits the number of transactions the system can handle to less than 10 per second.

Cardano, TRON, IOTA, and a few other projects are basing their verification and transaction handling process on proof-of-stake protocols. They claim this will allow great decentralization, be highly secure, and the blockchain will be able to handle hundreds of transactions per second with a roadmap to increase this to thousands of transactions per second.

The second largest blockchain platform, Ethereum, is said to be moving to a proof-of-stake protocol as well in the coming year so they can increase their transaction capacity and reduce the energy intensive "mining" process.

These developments are showing a use case for blockchain and cryptocurrencies that can be understood by the broader public. The blockchain is becoming more user friendly and it's only a matter of time before average Internet users will be able to use the blockchain for a wide variety of tasks.

It could be compared in many ways to the Internet: developing from a technical network used by universities and defense contractors to today's user friendly tools like Google, WordPress, and Interactive Brokers.

I suspect we might be at the beginning stages of a very exciting time in the blockchain world. If even a fraction of the blockchain ideas proceed, it will be a major disrupter to today's giant "middlemen" corporations: banks, exchanges, lawyers, payment processing companies, data management companies, and so on.

Speculating in Blockchain/Cryptocurrencies

From a technical trading perspective, a number of cryptocurrencies are beginning to look much more attractive. I'm particularly interested in the cryptos which are making large strides in technology—often called the 3rd generation blockchain.

Ethereum

Source: Yahoo Finance

While technically still a second generation blockchain project, Ethereum started the idea of smart contracts and has an active developer community working on moving the blockchain into the third generation to compete with Cardano and TRON.

After bumping up against the 10-week simple moving average for most of 2018, Ethereum solidly crossed over and has been climbing upwards for the past three weeks. The crypto also hit long-term oversold conditions in December 2018.

Cardano

Source: Yahoo Finance

Cardano is solidly a third generation blockchain with ample academic research behind it. The developers are working hard perfecting proof-of-stake models and are making significant progress in other areas of the protocol as well.

This is a newer blockchain that is still in early stages of development. However, it is also one of the most interesting projects in the entire space. If even a portion of their objectives are achieved, Cardano could be a blockchain platform that is a true game changer.

Cardano features a similar technical picture as Ethereum. The last several weeks have seen a turnaround that could be very promising for speculators.

TRON

Source: Yahoo Finance

TRON was formerly a token issued under the Ethereum blockchain. A migration to an independent third generation blockchain took place in June 2018. TRON has focused their efforts on the entertainment industry.

TRON is a Chinese-based blockchain group with many developers who formerly worked at companies like Tencent, Baidu, and Alibaba. The team seems highly centered around the CEO Justin Sun. TRON does state it is a fully decentralized blockchain which is a not-for-profit.

Summary

While still highly speculative and risky for any individual investor, cryptocurrencies seem to have finally shaken off the mania of the past several years. Interesting things are happening in this space.

Using simple trend indicators, some of the better cryptocurrencies are making a shift from a long, solid downtrend to a potentially promising uptrend. This could be a good time to take a closer look at some of these currencies and add a tiny amount to your portfolio.

I think it's still fair to say that many of these blockchain projects will fail and their associated currencies will be worthless. Proper risk management is absolutely crucial in this space as it is in all investing applications.

Some of the most interesting blockchain projects in my view are Cardano, TRON, and Ethereum. As these projects continue to develop their capacity and end-user tools, their adoption could become much more widespread. That can only mean one thing for their associated currency valuations.

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3 Replies to “Developments in Cryptocurrency”

  1. Blockchain technology is here to stay; but I am not so sure about cryptocurrencies in their current form.

    Regulatory oversight is still very mild in the space and I think is fair to assume it will strengthen in the future. While some would argue this is a good thing; many purists would argue this goes against the very nature of cryptocurrencies.

    In an extreme case a country or region could decide to ban them outright and you are going to be left with a pile of worthless bytes.

    And the main problem is that to date you need a way to convert crytos into fiat currency. And there are not many “decent” exchanges to do that.

    It would be so nice if you could buy things with cryptos directly but there are not many of those around either.

    Not to mention the vast majority of retail investors know nothing about how to keep their cryptos safe.

    Finally, the speed at which one cryto is replaced by a much cooler rival would probably make this short term investments. If so, you need exchanges to migrate to the new shiny token. Would you trust the likes of QuadrigaCX?

    1. Daren (Editor) says:

      You bring a lot of good points. This is definitely not an area where you put in all your money and hope to get rich quick.
      Regulatory developments are inevitably coming, if not only to control taxation abilities. For a country to ban cryptos, would they need to effectively put in a type of “Chinese firewall”?
      I think it’s fair to say that cryptos will need to be converted to government fiat for a long time yet. There are some better exchanges coming online with lower fees. Just as with stock brokerages, the days of 2+ percent fees each way are going to quickly disappear.
      There are also developments in the works for interchangeability between cryptos within secure wallets in a P2P method.
      I am certainly not advocating everyone to buy into this space. At this point in blockchain tech development it requires reasonably advanced technical skills to keep these assets safe and off-exchange. I do think we are seeing some great developments that could be extremely disruptive. It’s a vast improvement from 2017 with Bitcoin and Dogecoin hype where I saw almost zero end-user, real world application.

  2. I guess time will tell. The technology itself is ground breaking and is here to stay. But yeah, it is very risky.

    “For a country to ban cryptos, would they need to effectively put in a type of “Chinese firewall”?”

    A country can enact a law making the use and storage of cryptos a crime. That fact alone would keep law obedient investors out. The law makers don’t have to put a firewall in place. Just making it a crime would limit the use of cryptos to criminals.

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