It seems 2017 was the year cryptocurrencies made their breakthrough to mainstream investing. This breakthrough was achieved with a combination of massive media coverage and price increases that have left many seasoned investors wondering what the hell is going on.
Many cryptocurrency focused discussion groups saw massive inflows of new people pouring in as Bitcoin price kept going higher and media made sure Bitcoin is featured prominently in front-page titles.
There’s not necessarily anything wrong with significant and sudden price appreciation. Where someone might see a bubble, another person might see a proof of the validity of an asset class. The invisible hand of the market adjusts asset prices in response to all kinds of signals: Those that come from investors who make an investment based on research and those that come from people relying on their instincts and what is the word on the street. In aggregate, both approaches to asset valuation are needed to find the current “best” price for an asset.
Many new cryptocurrency projects were launched in 2017 with the help of a novel way to finance new projects by issuing an ICO (Initial Coin Offering). Many people characterised the ICO funding as Ethereum’s first killer application. Indeed Ethereum seemed to solve just the right problem by smart contracts being able to keep track of incoming investments and also automating token distribution for the investors.
2017 market returns
Salkku Cryptocurrency Index tries to capture the collective crypto market by using biggest cryptocurrencies as a proxy for the whole market. Index increase for the 2017 was breathtaking 2,509.65 %! 2015 gains were “just” 43.72 % and 2016 120.12 %, so in comparison 2017 seems like an anomaly.
| Index/crypto | Gain |
|---|---|
| Salkku Cryptocurrency Index | 2,509.65 % |
| Bitcoin | 1,291.97 % * |
| Ethereum | 9,010.45 % |
| Litecoin | 5,023.44 % |
| Monero | 2,344.92 % |
* = Does not include gains from Bitcoin Cash/Gold etc.
I suspect there are many cryptocurrency enthusiasts who have made their initial investment in the early years of crypto and are now sitting on significant, if not potentially life changing gains. Lets hope that people who have been fortunate enough to jump on the crypto train early enough are using their newfound wealth productively, or even keep supporting new projects.
Because of the way capitalism works, money accumulates and the rich keep getting richer. Traditional stock market seems to be geared to deliver largest gains to big individual or institutional investors while small investors have to settle for crumbs. With cryptocurrency I’m delighted to see many young, smart and/or lucky people being rewarded for their curiosity and passion to this totally new technology.
Future drivers for cryptocurrency valuation
Are we likely to see similar price increased as in previous years? 2017 seems to have been exceptional in that a whole new asset class has jumped on the radar of many investors. Novelty factor subsides eventually and we have to start looking for concrete use cases. What are the drivers for cryptocurrency adoption in the future?
Can cryptocurrencies work as medium of exchange? Yes, if distributed ledgers can be scaled to process significantly more transactions than they are doing now.
Can cryptocurrencies work as a store of value? So far, yes :) Deflationary aspect built on many blockchains could convince people that their investments are not going to significantly dilute in value. When usage of a blockchain increases, it drives up the demand for the underlying currency/token. This creates a natural support for the price.
Are smart contracts the future? Most definitely so. If ICO funding was the first cryptocurrency killer application, second might be some project started in 2017 utilising blockchain for storing the application state. I’m personally excited about distributed computing applications and prediction markets.