On June 10th, the price of Bitcoin hit $6,700 USD, marking a 50% decrease from the beginning of 2018. This the latest development in the downward trend that has continued to afflict the cryptocurrency market since the “great spike” of late 2017.
While some investors have been spooked by this sudden drop, I see this continued downward trend as the natural next stage in the development of cryptocurrencies as a useful technology. To frame this in the context of the Gartner Hype Cycle (see Fig.1), we are likely to be moving past the “peak of inflated expectations”. Unless tangible use-cases for cryptocurrencies emerge, the downward trend will likely continue for a time.
In his seminal work, Bold, Peter Diamandis describes the hype cycle as something which emerges when a novel, exponential technology is “envisioned in its final form”, long before the conditions allow for it to live up to expectations. Then, when it inevitably fails in the short term, the “negative hype” resulting from this disillusionment results in unwarranted skepticism towards the technology, obscuring much of its potential. This has happened time and time again with new technology.
This is exactly what I think is happening now with cryptocurrencies; assets which were hailed as an exciting new way of conducting transactions, but have largely failed to deliver on the promises that drew in investors. In that respect, the current backlash is understandable. However, I would urge those remaining in the market to think twice before buying into the negative hype.
I began investing in cryptocurrencies (as I’m sure many of you did) because of my firm belief in the power of the distributed ledger, and in particular the blockchain. Should it one day live up to its promises, the blockchain will allow us to track and verify information at incredibly low cost, conduct transactions more safely and securely than any of our existing systems, and fundamentally, remove the need for trust, something which has been priced at an extraordinary premium throughout the entire duration of human history. As an individual with a transactional-legal background, this value proposition is mind-boggling, to say the least.
It is true that cryptocurrencies are currently very limited in their functional applications. However, as the blockchain is integrated into our infrastructure, it is foreseeable that some recognized use-cases will come, to fruition, and that use cases we have not yet considered will begin to emerge. This will be what drives the true value in cryptocurrencies. Not hype, not rampant investment, but real tangible value, build upon the widespread adoption of the blockchain across the traditional industries of the world.
This is the reason why prominent cryptocurrency leaders (such as Vitalik Buterin) have often cautioned against optimism, appearing to welcome bear news with open arms. While these corrections may hemorrhage their holdings, they also allow for a gradual deflation of hype. This gives the technology time to gradually build towards its initial promise. Continued inflation of expectations, on the other hand, leads more rampant speculation and market instability. This has the potential to rouse the knee-jerk reactions from regulators, who in their efforts to protect investors, may create barriers that will slow technological development and cripple potential opportunities.
It would be a shame if that ever happened; a potentially revolutionary new technology, stunted just because too many people bought into the positive hype, and when it inevitably failed to meet their fantastical expectations, swung the pendulum the other way. It would be a great loss not only for those of us who invested in this technology, but for the world as a whole.
Cryptocurrencies are a highly speculative investment, one which many of us entered into because we were enticed by its future potential. While the technology is not yet useful on a day-to-day level, we bought in on the hopes that it could be one day. And given the rate at which the world is embracing blockchain technology, that day could be coming in the next few years.
These fundamental assumptions have not been compromised by the recent events. While the influx of shoddy / fraudulent ICOs and the hacking of centralized exchanges have (in my opinion) led to a healthy degree of skepticism towards investing in cryptocurrencies, this unfortunate trend says little about the technology itself, save that it can be used for good, or for bad, like everything else.
So for those of us who believe in the potential of cryptocurrencies, consider thinking twice before selling off as we are dragged into the trough of disillusionment. Yes, it can be very tempting to sell off your investments, and try to time the market to buy back in at the “point of lowest hype”. But frankly, no one knows that that point will be, and attempting to time the market has historically been met with consistently poor outcomes. By HODLing your money during the bear market and resisting the negative hype, you are helping to stabilize the market, and investing in the future. While a financial return is far from guaranteed (I personally believe that the vast majority of current coins are doomed), you can at least rest easy knowing that your money is contributing towards building a future where value, not hype, will determine the worth of cryptocurrencies.
At the point, I would be remiss if I didn’t mentioned Hodlbot, a project I am working on with a few of my long-time friends. Hodlbot is an easy-to-use software that automatically diversifies one’s cryptocurrency portfolio, giving the user instant exposure to ~87% of the global market. In theory, this would greatly reduce unsystematic risk. To this date, our software successfully helped almost 400 individuals diversify over 3 million dollars, and is trusted by investors from around the world.
Now this software is not for everybody, and it may well be the case that your portfolios are sufficiently diversified. But for those of you who’ve yet to diversify, I would suggest checking out our software, which you can access for free at https://www.hodlbot.io/
- Disclosure: This article does not represent financial advice.