So, Sneakers or Crypto? Where’s Your Money Safer?

From the S-shaped curve to Metcalfe’s law to the dramatic stirrings of Elon Musk – industry watchers are explaining the recent roller-coasters of Crypto through several arguments. It’s really hard to put the genie back in the bottle, but we can always trace where it is going. ~ Pratima H.

A lot has happened in a matter of a few days in the crypto universe. For one, of course, Bitcoin was having a bungee-jump again. It is amazing how it can move from stratospheric swings to sudden nose-dives without much changing around it. Bitcoin came tumbling down and fell almost 53% from the crypto asset’s all-time high.  Then, a dog face that reminds you of dear ‘Tuffy’ from Indian Blockbuster ‘Hum Aapke Hain Kaun’ is an overnight rockstar!

Before you could see it coming, a fun experiment by two software engineers embraced an insane bull run and hit a market cap of about $85 billion in the first week of May 2021. It turned into something – suddenly and staggeringly- that is no more a funny meme but a hot crypto investment. And the usual debate about whether crypto is an asset or a currency – and worth the risk – that keeps getting back in the microwave. What stays steady is the excitement and nerves that this space triggers. Like it or hate it, get it or clueless about it – people are curious about crypto and where it’s all going.

Especially when a Chinese Economist and a JP Morgan executive repeat the same concern – of being cautious about crypto? But at the same time, Nobel laureates and Economists like Robert Shiller and Paul Krugman change from hard-core sceptics to people who are tempted to get into Crypto and who feel that it’s a cult that might survive, after all? So is anything predictable in this strange universe?

Up n Down n Up n Back

Siddharth Sogani, Founder, CEO, CREBACO explains the volatile nature of cryptocurrencies' rise and dips as seen recently. It can be due to several factors, he spells out. “It can be due to the expected dip by technical analysts. Or because of China banning fud (It was repeated news by Reuters, China never allowed payment in crypto since the start). It could also be due to the hash-rate drop due to blackout and electricity restrictions for miners. Or due to institutional fud creation to make a dip and buy it.”

Incidentally, many supporters maintain that the crash is nothing new and is just a Déjà vu of the cycles seen in 2013, 2017, 2021 - hence, hinting that Bitcoin will hit a peak again. Also, the industry has a special undercurrent – the halving cycles – i.e. recurring events when the reward for mining Bitcoin transactions is cut in half due to the inherent mathematics and coin limits ingrained in the foundational Blockchain. It so happens that previous halvings showed correlations with the boom and bust cycles that Bitcoin went through.

Emerging technologies go through multiple cycles (at times spanning years) of experimentation and value discovery before they stabilize, reasons Pranav Sharma, Founding Partner, Woodstock Fund. “The best way to look at it is as an "S Curve" and we are in the middle of it as there is already significant traction and infrastructure, but we are not there yet on the maturity cycle. Fasten your seat belts and embrace the volatility.”

Notably enough, Diar’s analysis in May indicated how Bitcoin's price surged to an 8-month high despite facing multiple overwhelmingly negative events in recent weeks. “But token fatigue may have kicked into full gear as the 'King of Coins' widens the gap against other cryptocurrencies that are now trading at a fraction of what they did in 2017/18 when Bitcoin was at the current price,” it stated.

Sathvik Vishwanath, Co-founder & CEO, Unocoin, attributed the volatility of the crypto industry to its nascent nature. “While we have seen significant drops in the prices during certain intervals, this market has always been on an up-trend on average. It is still the time of the industry where the value is getting established. Apart from financial risk the investor also should be aware of security and legal risks associated as the industry still operates with minimum or no regulation worldwide. The recent rise and dips are more attributed to comments from influencers but the industry was strong enough to sustain the impact minimally as compared to volatility for such news a few years ago.”

All Bark No Bite? Or?

Sogani also cites Shiba type meme coins here. “These meme coins take the market valuation to sky-high limits and dump it. Before it was with ICOs now it is with these shit coins. And, of course, 'ELON MUSK'! He triggered it and the prices crashed. This dip was one of the worst ones. New investors lost a lot of money, unfortunately.”

Yes, Elon Musk (who, reportedly, had purchased about $1.5 billion in Bitcoin, earlier) had tweeted about suspending the purchase of electric vehicles with Bitcoin, raising concerns about the energy impact of crypto-mining. As to the really amusing, weird and inexplicable Dogecoin phenomenon, Sogani quips that Dogecoin has now reached a level of consensus where it cannot be called a joke anymore. “Metcalfe's law applies to it now at a greater magnitude. It is POW (Proof-of-Work) based, and many new users to it. The only drawback is few wallets control about 28% of Doge, but in time, they will lose dominance. In the short-term (6 to 10 months) it would be stable, but after one to three years, and of course, with Elon’s help, it has a potential to reach $10 to 15.”

POW is a system in which a miner has to show proof of mathematical work to be able to participate in the blockchain. This is a consensus method that helps to fortify the security of the system and deter span or double-spends. It has other alternatives like Proof-of-Stake (POS) or Proof-of-Authority (POA). Sharma adds that over the past decade or so, many social experiments have become phenomenal commercial successes.

“As a case in point, both Facebook and Google have roots as social experiments literally out of college dorms. Dogecoin as a meme coin is a social experiment that has an underlying economic network. Theoretically, with decentralization, if there is a critical mass adoption and affiliation then this has the potential to become a social and economic success. Our point is that - whether you believe in a meme coin or a social experiment or not, it is best not to dismiss it altogether and keep a close watch and participate to whatever extent is meaningful to you. If there is ever an inflexion point - Don't miss it because of biases,” he states.

According to Vishwanath, the main intention of cryptocurrencies like bitcoin is to enable fast and free transactions online. “However, due to the popularity of these coins, their price and the transaction fee to send them out have increased paving a way for cheaper and faster coins like Dogecoin. While there is some utility for Dogecoin, it still lacks the network effect and widespread decentralisation and it looks like bitcoin some 7-8 years ago.”

Interestingly, apart from memes getting in the spotlight, the concept of NFTs or Non-Fungible Tokens has also become popular in the last few months. Now, art-lovers or investors can have bragging rights for owning a piece of their favourite digital art and helping the artists. But would the trend last? Explaining the on crypto market value touch-down of $2 trillion Vikram Rangala, CMO, ZebPay had remarked, “Probably the biggest factor is the growing NFT market, which is largely powered by Ethereum which has hit new all-time highs. NFTs are getting a lot of mainstream attention and it's only the beginning. ZebPay launched its Zebra NFT project last December to bring this marketplace to India, which we will later this year.”

Rangala contended that NFTs aren't just for digital art and collectables. They can store all forms of intellectual property and agreements, giving them huge potential. “A lot of the other currencies are also associated with larger use cases, like decentralized finance, which has the potential to bring a lot of financial inclusion and opportunity. In short, the valuation is based on real value. These are use cases that go far beyond price speculation.”

Fence or Bungee?

The basic question for the layman out there stays as huge and as cryptic as it was ten years back. What to do when everything is so unpredictable about this industry? Sit silent or dive in?

Sharma advises with the age-old adage. Simple - "Beat inflation over longer time frames". “You can only do this by appropriate diversification and allocation of your portfolio. Part of it should be in alternate assets. And a subset of it in emerging technology investments like Decentralized ledger technology. How else will you be part of futuristic applications and experience the potential exponential returns.”

A TokenInsight reckoning highlights that the "unprecedented" high volatility caused by the plummeted price on May 19 swept the entire crypto asset market like a tsunami. “Although the prices of mainstream crypto assets have temporarily stabilized, the market value has shrunk to $1.62 trillion, which is far lower than the previous $2.3 trillion, and the current "stability" is only a combination of multi-party games. Under extremely high volatility, a large number of investors are waiting and watching, so that any turmoil will cause panic. Tracking policies and macro indicators have become the focus for investors recently.”

Bitcoin's fluctuation will influence the entire market, it stresses. “The good news is that the overall market volatility has begun to show a downward trend, while it is still far from the threshold of entry risk that ordinary investors can bear”. As to risk-seekers who wish to make bargain-hunting; please do a good job of risk control, the analysis-backed recommendation insists. Sogani underlines that its Bitcoiners v/s the world. “We see this as an opportunity because Bitcoin has always been a roller-coaster ride. But now, with new investors announcing their views on bitcoin like Mark Cuban, Ray Dalio, etc. I think we will see 100 k by December 2021.”

“The world is facing challenges due to the downfall in the economy and excessive money printing on one side, followed by unemployment or job insecurity on the other, argues Vishwanath. “These are quite similar to the situations when the recession would occur. Inflation could go through the roof and could un-stabilise the system. On the other side, given that cryptocurrency like bitcoin with predictable supply and generally inflation-proof and a stable way to hold the assets without the dependency on the third party would mean quite a lot to the common man. This would be one of the main reasons for the recent price increase for cryptos marking a bull market since the start of this year.”

Well, whether you buy those ridiculously expensive sneakers or an abstract painting that looks like the artist was smoking something special or a crypto-currency/asset – nothing is ever predictable about the risk or return it will fetch you. It’s still up to you if you would love the adrenaline or throw up. Join the ride but only if you feel chuffed enough – not because your friend is hopping there.

After all - It’s hard to tell whether they are screaming with the rush of joy or the shock of fear. On a huge ride, the shouting is, well, all cryptic. And all alone.