Cryptocurrency crash – time to get in?

Maybe so. Maybe not. However, I’m content to watch from the sidelines. Last year these cryptos saw levels of appreciation that were nothing short of parabolic.

I wouldn’t be surprised to see them fall more, but if they bounce and go up meaningfully from here I think that may actually be the most dangerous sign for their long term pricing. That is to say, if the bubble psychology continues then when reality does finally catch up, and it will, I believe it will be a harder landing.

Bitcoin bubble?

My reason for looking at these cryptos with skepticism is that:

1: There are 1,442 cryptocurrencies and not a single one has a viable use case in real-life commerce.

2: The second most popular coin, Ethereum, has no limit to how many can be created. How can that be a store of value?

3: Bitcoin consumes an inordinate amount of power. At this price it takes about 10 days worth of power for an average American home to reconcile each transaction. That is unsustainable and the problem gets worse at higher prices.

4: There is almost no liquidity in day to day trading. That is to say when price action gets wild, especially to the downside, the bid just vanishes. That means it’s impossible to get out of the way of a crash. And some exchanges become so overwhelmed they just stop accepting orders. But the worst part is because the miners are in charge of the entire construct, there are times when their memory pool gets clogged up with orders, fees skyrocket and each transaction can take weeks+ to clear.

5: From a technical analysis perspective, everything looks toppy. There’s a lot of downside risk and the upside potential is difficult to quantify.

6: There is zero validity to any of the price action, especially since it is driven by very small amounts of capital. It’s essentially the greater fool theory with very little liquidity. As an example, Bitcoin has leaped thousands of dollars with single trades being made in the liquidity vacuum of their shark-driven exchanges.

7: Retail investors have been taking out loans, including second mortgages and credit card debt, to speculate in this space. This sort of activity generally marks a speculative top. Since then most cryptos have been tumbling as fresh capital is not entering the space.

That all being said, of all the cryptocurrencies, Ripple may be one that has some potential as it is already seeing some use in commerce and interbank funding. Then, maybe Ethereum, but there’s the problem with Proof of Stake and whether the implementation will go well combined with unlimited potential coin creation. IOTA seems interesting, but it’s still very experimental.

In closing, I am still content to watch this space and see how this situation plays out. I don’t believe that cryptocurrencies are the solution to our financial system woes. The level of corruption and fraud that have occurred at the exchanges and in the ICO space is staggering and makes some of the Wall Street bucket shops of the 80s look almost angelic in comparison — and I say that as a skeptic of Wall Street’s integrity and honesty.