Cryptocurrencies are an entirely new asset

By Matthew Reynolds

Recently, a bunch of my friends from home made a killing in cryptocurrencies, while I watched and missed out. Whenever I travel back to suburban New Jersey to get away from the city, somehow our conversations always turn to cryptocurrencies. More accurately, they’ve talked about Ethereum - their latest “Cinderella story” - and I shut up and listen. For about a year, it’s been mentioned at least once a week in our daily chats on Google Hangouts, and the financially flexible guys in our crew scooped up as many coins as they could while they were still cheap. On March 1st of 2017, one Ether (a singular unit) was worth $16. But on June 22nd, the price of one Ether was $336. Then on June 27th, it’s gone back down to $272. That’s a lot of movement in not a lot of time. And up until the last few months, I haven’t understood why these prices fluctuated or why anyone should invest in digital currencies period. I’ve been confused about them because of the black-and-white lens I’ve looked at the crypto market. Is it a currency? Is it a stock? Well…it’s kind of both, and kind of neither.

Image result for ethereumThe way that I used to look at cryptocurrencies was strictly as an investment because of how difficult e-currencies are to use. Many businesses don’t accept Bitcoin - the most widely-used of all 700+ cryptocurrencies in existence today. Our recent Future of Money report shows that most companies underestimate the enthusiasm consumers have towards mobile payments in general. The report also shows that, although they’re mildly interested, many consumers still aren’t demanding it enough to warrant an infrastructure overhaul. The companies that do accept cryptocurrencies are largely focused in online transactions (think Ebay, Amazon, and the Apple App Store – all now accept Bitcoin as payment). And although there is a slowly increasing quantity of brick and mortar businesses that accept Bitcoin, these businesses have been proven to add surcharges just to use it. A recent experiment shows that you could pay up to a 74% transaction fee just to use Bitcoin. This all adds up to a reality where Bitcoin is still incredibly inefficient and impractical for widespread use. If I can’t use a form of currency to buy nearly everything, I don’t plan on using it at all. For now, credit cards, Venmo, and cash fulfill my daily needs.

So in my eyes, digital currencies were an investment, no different than buying shares in a business. Much like the quality of talent at a traditional company determines its stock, the quality and dedication of a cryptocoin’s developer community is the main driver of interest between coins. Investors buy the coins at a low price and hope the value of each coin increases due to the level of interest in the unique “quirks” of each currency’s code. It seemed simple on the surface – it’s just another form of stock.

But the more I research, the more I realize that we’re witnessing the birth of something entirely new: cryptocoins have flexibility that neither currency nor stock has. In the real world you can’t buy half a share in Google because shares can’t be divided - but you can buy half an Ether. Similarly, you can’t buy a dress on Amazon by paying in shares of Apple – but you can pay in Ether. This flexibility adds a new dimension to investments that traditional stock lacks, where we can chop a single unit up and use it flexibly as currency and an investment. It’s not just a currency, but it’s not quite a stock; it’s something entirely new.

But unfortunately, cryptocurrencies are still unpredictably fickle; their worth can swing backwards $64 in five days – like this last week – or leap upwards in a day. On top of that, the technologies and codes that differentiate one brand of coin from another can make a massive difference in which developers it attracts. Which do you buy, and when? When do you sell, when do you hold? Which coding updates help the state of a coin’s market, and which hurt? For the uninformed, it’s a wild gamble.

So why, after a late night barbecue in March, did I download the Ethereum App, take out my credit card, and come dangerously close to buying 4 Ether? More importantly, what stopped me from diving into the world e-currencies? I guess that, although buying cryptocurrencies appeared simple on the surface, it’s no different than buying shares in a company. Someone suggests that you invest in so-and-so company that you know nothing about, you fantasize about the stock skyrocketing shortly after, and you prepare yourself for the high life. And although my friends back home did their research, scooped up a large number of Ether, and made small fortunes, it would have been foolish of me to blindly throw money into a random digital currency without personally putting in the thorough research investing takes. I know nothing about coding (yet). I know little about the complicated specifics of cryptocurrencies. I have some very not-so-pleasant flashbacks of Atlantic City Blackjack tables. Uninformed spending is a dumb idea, period.

Alas, hindsight is 20/20. Cryptocurrencies are an emerging force that needs to be acknowledged, and I missed the Ethereum boat. That 4500% spike will forever be my “Great White Buffalo” – the asset that got away.

Matthew Reynolds is an Editorial Assistant at Oxford Economics, where he aids research programs in a variety of industries.