Security not, nor physical bar
How I wonder what you are
Up the values rise, so high
The convinced point to price, the skeptics ask why?
Commodity more than currency
You seem to me
Twinkle, twinkle, blockchain star
Cryptocurrencies from afar
– Adapted from “The Star” by Jane Taylor, 1806
I saw the headlines this morning. Dogecoin gains as Elon Musk tweets that Tesla (TSLA) will accept Dogecoin for some merchandise. Musk added in the same tweet, “See how it goes.” As I set about to write this piece, Dogecoin was trading at $0.1973, or up 20.6% for the morning.
Last week, several crypto industry leaders testified before the House Financial Services Committee, in what was seen as more of a positive than contentious effort to enhance legislator understanding of what digital assets are. Coinbase (COIN) CFO Alesia Haas spoke: “Because of their nascent stage of development and unique underlying technology, digital assets trade in markets that are fundamentally different from traditional financial markets. As a result, existing regulatory regimes often do not accommodate this new technology.”
There can be no confusion. No one knows how to regulate digital assets. We think they might be securities one day. The next day, we’re not so sure. Beijing has tried to chase all crypto activity out of the country. Binance Asia Services announced on Monday of this week that it would drop its application for a license in Singapore due to regulatory issues and would wrap up its business in that nation by February.
This led to a 6% selloff on Monday for both of the two most well known cryptocurrencies, Bitcoin, and Ether. That and the fact that Monday was in general, a risk-off session two days ahead of a Federal Reserve Policy decision.
Thinking About Cryptos
Trust me. I am no expert in this space. I trade and invest for a living. If hubcaps were hot, I would probably be writing this piece about hubcaps. I am truly surprised that the large reserve currency central banks, who stand the most to lose, have not declared war on cryptocurrencies, and or made serious headway in replacing both fiat currency and independent cryptocurrencies with a digital version of the fiat that would be even easier from their perspective to control from above than is currently the fiat.
Imagine knowing everything about every transaction every time currency changes hands. Quite possibly this would make illegal industries such as drug dealing, prostitution, terrorism and money laundering much more difficult to operate than they are now, through the use of both fiat currency and digital assets. A cashless society would also permit governments to put their hands in every back pocket and even tax saving accounts. So, yes, I am surprised that the major central banks have been so quiet on this issue as these assets have become more and more popular. Imagine the government taxing the kid who shovels snow off of his elderly neighbor’s sidewalk for a 10 spot.
Most traders I know who are well educated in this space will tell you flat out that 90% of digital assets are pure garbage. Heck, the above-mentioned Dogecoin was invented as a joke, and then a couple of celebrities got interested and it took off. XRP has been in and out of court, and appears to possibly exhibit some of the characteristics of money, but trades at just $0.79 per token.
The fact is that most of the focus in the space from this outsider’s point of view is focused upon Bitcoin (BTF) and Ether (ETHE) . Bitcoin to this admittedly amateur (in this space only, no wise cracks), appears almost useless as a medium of exchange. Several businesses have tried to open up transactions to consumers using either fiat or Bitcoin, but the idea has never caught on. Small wonder, Bitcoin operates on a proof of work blockchain model, and computers must solve highly complex mathematical equations to validate any transaction. The “money supply” of Bitcoin is finite and 90% of all potential Bitcoin has already been mined. In other words, there is very little likelihood that anyone will ever buy a slice of pizza with Bitcoin, but there sure is a kind of scarcity that might very well lend itself to providing value as a store of value, and it is divisible.
So, in my opinion, much more like gold than currency. Big difference though, is that physical gold is physical gold. Bitcoin is worth zero when the lights go out.
Now, Ether, which is the native token created by Ethereum, which is an open-source blockchain currently switching over from a proof of work mining model to a proof of stake mining model. The whole model is also in the process of upgrading to Eth2 (Ethereum 2.0) which will make this blockchain more scalable, more secure and more sustainable. Not only does Ethereum come complete with an expandable money supply but also has a built in burn function to allow for contraction in supply as well as expansion. In other words, Ether is in far better shape in terms of being responsive to a monetary policy authority than Bitcoin could ever be in its current state. Maybe that’s what some investors like about Bitcoin. I think I like Ether more, because it might act more like money.
What are the three characteristics of money? Divisible. Check. Medium of Transaction. Ether has much more potential here than does Bitcoin. Store of Value. Bitcoin has more potential here than does Ether, but my thought is that once Ether becomes more useful, this evens out just enough to make Ether a better balanced option of the two. Just my opinion, gang. I think it will all boil down to accessibility to liquidity in the end, and my opinion is that Ether will be more liquid than Bitcoin down the road.
It may be key to point out that I don’t own any of these assets directly. I have done well with chip manufacturers such as Advanced Micro Devices (AMD) and Nvidia (NVDA) that have benefited through mining created demand for their products, but I have been paying much more attention of late to traders younger than I, because that is where the expertise in this area is.
I am not afraid to learn, and I will not be afraid to enter this area should I get my price. For now, I see $3500 as an entry point for Ether (Maybe for between 1/16 and 1/8 of a full position) as that was resistance from mid-September through mid-October and it would not surprise me to see that spot retested. I would then try to scale in the balance of my purchases. I would need a really cheap price to think about getting involved in Bitcoin at this time. Ether is where I am focused.