The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
The following article is a macro view of the cryptocurrency market.
Based in Zürich, Simon is an independent Financial Analyst with a keen interest in digital assets and alternative investment. His background includes positions in portfolio management and buy-side research in investment companies. He currently works in Assurance in Zürich for a Big Four company.
Graduated from the IFZ in Zug (Switzerland) with a MSc. in Banking & Finance, Simon started allocating digital asset as well as Bitcoin option strategies in his portfolio. Along with his personal researches, he developed a sound expertise in Distributed Ledger Technologies from an investment perspective and keeps on exploring the depths of this evolving technology.
Altcoins will continue their path into a steady, slow and painful death.
Mainly because they were indeed in a bubble. However, Bitcoin will continue its path: being digital gold, soaking up the huge fiat/debt liquidity created by our central bankers, and finally becoming a legitimate asset class as “digital gold”. Furthermore, it will be shown that it is more about distributed ledger technology (DLT) than “Blockchain”. DLTs such as Hedera Hashgraph will have a superior chance of leading the next Altseason.
Fundamentals do matter, fool!
Yes, indeed every asset will eventually thrive based on its fundamentals. Be it stocks based on cash flow, commodities based on supply and demand dynamics, or gold based on its ability to be the world’s alternative to fiat money.
If one does not believe it, he or she can hold on to his altcoin bags.
But isn’t the decentralization aspect of cryptocurrencies, specifically cutting out the middleman and saving cost, a legitimate value proposition? Well, a company that can become more efficient and save money by cutting out avoidable costs will indeed report more profit and therefore be valued higher by the market.
So, where are those successful reinvented businesses with their smart contracts running on Ethereum?
Everything the altseason created in 2017 turned out to be complete failures. One of the best and most promising Dapp (decentralized application) so far might be “Brave” with its Utility Token BAT, a browser that enables the user to get paid in BATs for allowing advertisements.
Nevertheless, one has to acknowledge that in many business cases a middleman indeed does important work and is often more efficient in allocation resources. For example: Uber maintains the platform, conducts research, markets the freelancing platform, adjusts the prices and generally helps to connect supply and demand.
One can also conduct a history lesson: Humankind once lived in caves and was mainly self-sufficient. At some point our ancestors settled and specialized in various arts and crafts, but the vast majority were still farming.
Eventually, the industrial revolution in the mid-19th century enabled further division of labor, specialization and hence exponential growth of productivity. Centralization and the fact that people had to trust each other was one of the main side effects.
Why should decentralization suddenly be the new Holy Grail of innovation?
We also want to point out the fact that most western nations have a trusted government. Generally, especially in Switzerland, one can rely on the institutions. Some idealists might argue that a decentralized, immutable ledger can help citizens living under corrupt, undemocratic regimes to claim e.g. a property being under their ownership.
However, a dictator does not care if the property under confiscation was recorded on an immutable or a centralized ledger. He goes on regardless because he can do so by the law of power.
So, what are decentralized ledger technologies good for?
Why Bitcoin is different
So far Bitcoin is the only DLT application (namely Blockchain), which has a real use case. The decentralized database of Bitcoin’s network is indeed a necessity. There had been many attempts to create a digital equivalent to gold. E-Gold was a project created in 1996 and was backed by real gold.
Unfortunately, hackers could attack the centralized database, and money launderers, as well as other criminals, chose E-Gold for their transactions. Eventually, a US federal plea agreement against money laundering put an end to the company. In 2006, someone in Costa Rica started an attempt to establish the “Liberty Reserve”, which lasted until 2013 when it eventually got closed by US prosecutors for money laundering.
These examples clearly show the weak point of a centralized database when used for illicit activities. Having only one point of failure is already enough for authorities to easily close it down. So, when undermining the central banks in their monopoly of creating money out of nowhere, it is essential to be protected against prosecution.
The decentralized database might not be the most efficient way of running a database, obviously. But, to kill it, one must shut down the whole internet. One can also examine the clear incentive from Satoshi to create an alternative to fiat money in his Bitcoin whitepaper.
Thus, firstly the so-called “cyberpunks” bought into his idea of “digital gold” and got rewarded enormously in the middle of 2011 (see chart above).
Until the all-time high at approximately 19’000$ in December 2017, Bitcoin had performed several “bubbles”, but always recovered and gained more followers in the process. The latest peak had the effect that established economists and bankers had to give their opinion on Bitcoin.
Especially Austrian Economists recognized the parallels to gold and most – except for Peter Schiff – came out in favour of Bitcoin. Monetary history shows that people also periodically used coal, copper or salt for value transaction, however, humankind eventually always found the way back to precious metals such as gold.
Bitcoin might not be the ultimate “digital gold”, but so far it is the lasting true king of cryptocurrencies. The real use case is there, and the world is waking up to it.
Bitcoin had performed several “bubbles”, but always recovered and gained more followers in the process.
DLT, not Blockchain
The new wave of altcoins will thrive from other DLTs superior to Blockchain and will be based merely on fundamentals. Yet, most Dapps run on Ethereum, as it can be seen on Coinmarketcap.com. However, the author makes the case that Ethereum couldn’t fully profit from the first-mover advantage and hasn’t reached the critical network size defined by Metcalf’s law.
Ethereum still runs on Proof of Work (PoW), and can only cope with 15 transactions per second. In contrast, Hedera Hashgraph is anticipated to handle 10’000 transactions per second, is based on Proof of Stake (PoS), and in addition has a governance council with established members such as Boeing and IBM.
If one wants to know more about the technical aspect, he is free to read the whitepaper. As experienced investors know, the ultimate proof is the price paid on a market. Well, it does not look good for HBAR, which is the token of the Hedera platform.
As the chart below illustrates, if an investor had immediately bought HBAR on the first day they got released on the exchanges, his investment would only be worth something over 10%. But alone the first closing price on the exchange on 17th September 2019 with 9 cents on the dollar was way under the initial ICO price of 0.13$ (-30%). Consider a SAFT investor, who bought HBAR for 0.13$, his investment would, at the current price of 0.011$ (27.01.2020), only be worth 8.4% of the initial exposure.
Contrary, an ICO participant in Ethereum invested 0.31$ for each Ether (ETH) and, at the first release day (07th August 2015), could already sell them for 2.77$ (+892%) and for about 1.0$ (+321%) during the following days. HBAR got released in a bear market and suffers the full consequences.
When observing the post-performance after the exchange release (see above Chart), it can be concluded that HBAR might have found a bottom between approximately 10 and 12 cents on the dollar.
However, as a true value investor, one must now take the initiative and start accumulating HBARs. Buy when the last ICO investor sold and the news flow is low. As soon as the fundamentals such as the development of Dapps on the Hedera platform start to improve, the price will reflect this development and move up.
Nevertheless, the Dapps built on it truly must bring added value. It will not be as easy as it was for Ethereum in 2017. One argument often undervalued by other crypto investors is the fact that Hedera’s smart contracts are written in Solidity, which will allow the existing smart contracts to be easily transferred on the Hedera platform.
The author knows that it is not the chosen coding language of developers but stresses the possibility of easily transferring programs running on Ethereum on to Hedera Hashgraph. The race of the platforms is not decided yet. The Hedera network is currently valued at a market capitalization of 23.9 Mio. $ and ranked 127th on Coinmarketcap.com.
Compared to the other platforms such as EOS (3’798 Mio. $), or Tezos (1’056 Mio. $) Hedera looks way undervalued.
So, what to do now?
To conclude, one can still believe in “crypto”. However, it will be about DLTs and real-world use cases. The altseason bubble in 2017 busted and washed out illicit and useless projects.
A true value investor might look at new platforms such as Hedera Hashgraph, which are extremely undervalued compared to their peers due to bearish sentiment. But nevertheless, Bitcoin will continue to perform as “digital gold”.
This article served as a macro view and should give a broader picture of the current crypto space. In the future, the author will elaborate on different options strategies such as Covered Calls, Naked Puts as well as Call Bull/Bear Put Spreads.
Due to the volatile nature of Bitcoin, options are the perfect instrument to capture some high premiums and gain additional profit. Also, the author will explain market neutral strategies such as pair trades.
For example, a fundamental investor can short ETH, Cardano or Tezos and go long HBAR without any market exposure.