Is Ethereum and the Digital Currency Market Over?
Is It Time to Get out of Digital Currency?
No one is enjoying the nausea-inducing volatility of the digital currency market right now.
With both Ethereum and Bitcoin dropping, the market has entered full panic mode. A lot of people have already fled the crypto carnage for the safety of blue chip stock portfolios.
If you're one of the investors who are still on the fence, there are a few points that you should consider.
First, the volatility we're currently observing isn’t unique or novel. Historically, assets that haven’t established themselves on the market are subject to extreme volatility.
Second, we could still see landmark profits from digital currencies. Investors just need to understand the underlying cycle of boom and bust.
Because, for the momment, a boom and bust cycle is what digital currency is fated to be.
Trapped in a Cycle of Boom and Bust
Humans crave structure. That's why for things to survive in our economy, they have to have regulated values.
You aren’t terribly worried about the dollars in your wallet disappearing into thin air, but you do check your Coinbase account four times a day.
That's because we're not certain about Bitcoin, Ethereum, and other digital assets. They have not proven their long-term stability because they're far too easy to manipulate through panic or hope.
Investors create the bubble. They are excited by profit potential and hoard digital currency, knowing that it will increase in value in the future.
Then it stops increasing and people panic — this is the bust. And with digital currency, it happens quite frequently. It’s almost like we're caught in a cycle of booms and busts that we've just started to define as "volatility."
By these terms, the digital currency market is the most volatile market investors have ever seen.
Our emotions inflate and deflate it.
Without governing power, or a wide span of coins in active circulation (being used for purchase items) to moderate value, Bitcoin and other digital currencies are struggling to find their rightful value as assets.
Unfortunetly, in this cycle of boom and bust investing, most investors end up cashing out on the bottom.
Have we ever seen anything like this before? The answer is yes, we saw the same exact thing from the oldest asset in our economic history: gold.
Gold proved that volatility is a substance’s way of testing the market. It took it nearly fifty years to find level ground.
Decoupling From the Dollar to Ride the Storm
Do you remember when gold was $35 an ounce?
I don’t because I wasn’t born yet.
But if you do, you’re one of the lucky investors who witnessed a global asset establishing its value.
Considering the extreme similarities between the leading digital currency, Bitcoin, and its ancient counterpart, gold, I often turn to gold to help me navigate this rapidly emerging market.
It requires knowledge of other volatile markets, which of course, gold is.
Gold, back in the day, used to be tied to the dollar. Every dollar could be traded in for its worth in gold. The federal reserve couldn’t print a dollar if it didn’t have the gold to back it up.
And then in 1971, all of this changed. Nixon had us leave the gold standard, and gold surged:
Decoupled from the dollar, gold had limitless potential. It was up to the market to determine its value.
Gold skyrocketed to $600 before dropping back down below to $400. In the 2000s, when it was dipping hard, the asset geared up again and soared past the $1,000 mark by 2005.
That gold chart should look fairly familiar to Bitcoin investors — it's a rollercoaster of anxiety.
The chart above is from 2013, and you can see one of Bitcoin's more infamous drops. It took Bitcoin a few years to recover from this tailspin, but, as you know, it did reach the $1000s again.
Because Bitcoin, like gold, is not backed by the dollar, the price is volatile. The market determines its value, and that means panic and fear - like the kind that occurred after the Mt. Gox Bitcoin scandal - heavily influences price.
More importantly, volatility will continue to be an issue until the asset stabilizes at a certain price — or until it finds a utility that gives it an established value.
Gold, as many of you know, has calmed in the past few years. It hasn't hurtled back down to $400, despite political turbulence.
The market tested the asset and decided that gold was a worthy store of value. It has all the trademark utilities that make it superior to the dollar, as does Bitcoin.
But where does that leave digital currency investors? Is now the time to sell? Have we reached the end?
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But Will the Digital Currency Volatility End?
In a recent article, CNBC cited experts as saying:
Investors should not be put off by the price volatility for cryptocurrencies like bitcoin and ethereum because these digital assets are still very new and offer nearly unparalleled returns.
Pay attention to the words “digital assets are still very new.”
This is key. We quickly forget that Bitcoin is barely in middle school and that Ethereum is basically in diapers.
With Bitcoin, we're talking about a vastly profitable global asset that simply can’t lock down a price. Why? Because Bitcoin is only 10 years old. You just saw the gold chart, where an ancient digital asset struggled for over 50 years to establish itself once it was decoupled from the dollar.
Digital currency has never been associated with the dollar. And its utility as a store of value is still being evaluated. There simply isn't enough of it in active circulation for people to establish its utility as a monetary exchange.
But we are getting to a point where that will be possible.
We're now entering a stage where major companies and countries (Russia, China, and the United Kingdom) are beginning to recognize digital currencies and their underlying technology: blockchain.
The Enterprise Ethereum Alliance (EEA) lends credibility to Ethereum and its underlying properties.
Bitcoin’s acceptance by dozens of investment funds gives it credibility as a real asset.
All of this means that we are slowly moving toward a more stable digital currency world. But we certainly aren’t there yet. Like gold, we are likely going to see more ups and downs because digital currencies are ruled by human nature.
Our emotional investing will keep digital currency in a boom or bust cycle until the individual currencies are more established through regulation.
Analysts still say that Bitcoin’s market cap could hit $1.75 trillion by 2025. That would each make coin close to $100,000.
Whether you believe such statements are hyperbolic is up to you. At the end of the day, it takes nerves of steel to hold through a 50% dip.
But now you can take away some key facts about this game we are playing.
- It’s not just Bitcoin and Ethereum: Digital currency is an incredibly volatile market, but other assets have demonstrated similar patterns.
- We need to find regulation: hopefully, a more stable price will come with increased interest from large companies and countries. Though initial prices will increase, making investors money, these companies and countries will help guide digital currency to a place with real world utility.
- There is every possibility we could see $0: There is also every possibility we could see $10,000. The analysts have come forward in support of massive valuations for Bitcoin and other digital currencies, but in a volatile market ruled by human emotion, nothing is certain. All we know is that we can expect volatility.
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