Is a cryptocurrency bubble around the corner?

Well, as fate would have it, I did not follow through and a few months after, Bitcoin became a huge hit across the world. The reality is that I might have become richer had I followed through. At one point he sent me a screenshot of what his portfolio of cryptocurrencies looked like and based on the going market rates then, he was worth a few million dollars. From then on, he shared offers upon offers and kept reminding me of how I missed out in the early days and that I had no excuse to miss out again. I must confess that this experience heightened my fear of missing the next big thing, which still haunts me every now and then. So what is a cryptocurrency? According to Invstopedia.com, a cryptocurrency is a digital or virtual currency that uses cryptography for security. Many cryptocurrencies are decentralised systems based on blockchain technology – a distributed ledger enforced by a disparate network of computers. A defining feature of a cryptocurrency, and arguably its biggest allure, is its organic nature. No central authority issues it, thereby rendering it theoretically immune to government interference or manipulation. The interesting thing about the world of cryptocurrencies is that a deep conspiracy theory has created unrepentant supporters, many of whom believe that cryptos are the only way to redistribute the world’s wealth by altering the current financial systems. Another important aspect of the crypto ecosystem today is the altcoin or alternative coin, usually regarded as any cryptocurrency developed after Bitcoin was released. For example, a former Google employee, Charlie Lee, created Litecoin in 2011 and it is built on the same core technology used by Bitcoin, but with shorter time to process transactions. LTC was designed to improve on Bitcoin, but it has forged a path for itself while gaining trust. It remits financial transactions at a quarter fraction of the time that Bitcoin does. Another early altcoin is Ethereum, developed by then 19-year-old Vitalik Buterin, a Russian-Canadian programmer. It is designed to be a platform for smart contracts between applications; trying to perform related transactions. It offers server performances, such that there is zero possibility of downtime, fraud or censorship. This allows several independent organisations to build products on the decentralised platform that allows each user to maintain his or her privacy while performing transactions. The Ethereum platform allows each developer to build market places with encrypted (read signed) inventories for sale, such that, in theory, artists can sell digital forms of their arts and control how it can be used online. For instance, if you are a graphic designer and someone has not paid for a commissioned work, you can prevent him or her from using it on the Internet. The difference between Ethereum and other altcoins is in how entities are rewarded. On Ethereum, traders transact in the platform’s official cryptocurrency. Last year witnessed several developers coming up with innovative ways to build on Ethereum. An example is a virtual game, where people are allowed to buy and breed digital cats – cryptokitties. This game became so popular that it broke the whole Ethereum blockchain ecosystem for some time, but the underlying fact that people could trade and have fun using a financial blockchain system excited ardent blockchain evangelists. Crypto Kitty is an example of collectibles — things you buy for keeps and the most popular in the virtual world. Why was there a rush to buy Crypto Kitties? What was the drive that brought people to start trading collectibles? Let us examine these questions. As seen in numerous instances, once a new Blockchain product is announced, speculators troop in to cash-in on early access, thereby causing demand of products to shoot up. In any market, as demand increases, the cost of such product also follows suit. This was evident when a single collectible of Crypto Kitty, Genesis Kitty, was sold for $100,000. There were high demands for kitties, the cost went up, and people could not afford the high prices, so they stopped buying. This repeating cycle is usually fueled by fear — the fear of missing the next big thing. Developers and enthusiasts have not fully come to understand the possibilities of what the Blockchain technology could become, and have not exactly succeeded at determining what innovation will succeed it. Therefore, they try to get a large share of any product that comes out before it goes mainstream, in the hope that it will be profitable enough for them to sell later. This is Microeconomics 101: buy cheap, sell high. The only problem is knowing what product to buy; and which of them might become profitable in the nearest future. This lack of insight has led people to try to be ahead, by investing early in innovations and hoping to sell or dilute whatever they have, should the solution become a hit. Those who cannot get early access take a waiting position, hoping to gain early access on the next big hit. The problem with this strategy is that most people are simply playing the same card, thus, instead of a product growing for the benefit of the community; it becomes a case where people start baiting themselves. Since the second wave of users who will bring stability to any product do not venture, as they are waiting for the next big thing, the initial seeders of the platform start becoming agitated and in the panic, trust is lost in the product and the cycle continues. The big question is – Can all of these, plus other factors, lead to a cryptocurrency bubble? Only time will tell, but I urge you to always look before you leap.]]>