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What makes Cryptocurrencies a Speculative Investment?

Posted by : Premraj | Posted on : Saturday, June 2, 2018

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The Bitcoin conversation seems to have settled down, but that does not mean the cryptocurrency craze is over. Quite the contrast, Bitcoin has a market cap of $0.13 trillion dollars and dominates almost 40% of the cryptocurrency industry.

On the other hand, more than 1,500 crypto coins are trading on different exchanges. Trading these coins as investments is not easy though. As this article explains, buying coins for investments is just a matter of speculation.

Bitcoin was Never Intended for Investment

Bitcoin was launched in 2009 by a pseudo-anonymous figure, Satoshi Nakamoto. Satoshi launched Bitcoin to be a payment protocol managed in a decentralized manner. The payment protocol was unique in a lot of ways, but the use of a cryptocurrency has remained to be one of the biggest innovations.

Bitcoin, the pioneer cryptocurrency, was ideally introduced to be the currency of use on the new payment protocol. Satoshi’s goal, therefore, was for Bitcoin users to use the cryptocurrency regularly on the new payment protocol.

However, investors soon realized that demand for the coin was rising at a much higher rate than its supply. They began buying Bitcoins and holding them to sell at a later date for profits.

Altcoins

Bitcoin’s alternatives are collectively known as altcoins. Some of them, like Litecoin, are designed to become currencies that can buy goods and services. Most of them, however, serve specific purposes in different industries.

Ethereum, for example, is the second most popular cryptocurrency. Launched in 2015, Ethereum’s main purpose is to offer a platform for building decentralized applications. All services offered by Ethereum are paid for using ether coins. Read more here to learn if it will crash soon.

Ripple, on the other hand, was designed to enable fast and low-fee transactions among large financial institutions. Banks mainly use ripple coins to complete these transactions but not always.  Many other cryptocurrencies work in the same manner as Bitcoin, Ethereum or Ripple. Only very few cryptocurrencies encourage investors to hold their coins for the sake of investment.

Many cryptocurrency startups create coins to create for regular use on their platforms or elsewhere. However, there are several unique features among most cryptocurrencies that make them great investments based purely on speculation.

Features and Factors that Determine Cryptocurrencies’ Value

Demand and Supply

Like goods and services in a fair of product, the prices of cryptocurrencies are largely influenced by the amount of demand for the coin versus its supply. The demand for a coin can be influenced by any of the following factors:

— Demand for the services the coin offers

— The hype surrounding the coin usually as a result of aggressive marketing

— Special bonuses promised for purchasing the coin

— The type of press given to the coin, either negative or positive

— Government regulation or endorsement

— Market manipulation by whale investors

— The coin’s developers

The last point is a common practice in the less popular cryptocurrencies. Usually, after the launch of a cryptocurrency, investors with huge resources can create false demand for the coin by purchasing it in large amounts. Once other investors notice a growth curve in the coin, they get into the whales’ trap to purchase it as well. Afterward, the whales dump the coin, leaving it for a market crash and losses to the smaller investors.

Investors speculate the value of cryptocurrencies by predicting whether the services offered by a particular coin will continue to increase or not. They stay on tabs with what the media reports about a particular coin, what the coin’s developers plan to do about their platform and other indicators that drive demand. If they speculate that a coin’s demand will increase, they then purchase it for investment.

Market Liquidity

Many cryptocurrencies are not regulated by governments. Trading is solely controlled by demand and supply. As such, cryptocurrencies tend to have dynamic trading volumes on a day to day basis.

Some coins are more volatile than others. Cryptocurrency investors tend to invest in coins based on how much liquidity a given coin is expected to develop in the future. Usually, coins with higher liquidity have more stable prices and are easier to predict.

Any investors that correctly predict which coin is likely to gain market liquidity in the future will often make more profits. However, this manner of predicting price movements is nothing more than speculation. Sometimes investors are wrong, and the coin could have sudden low liquidity when other signs showed an increase in market liquidity.

Limited use Cases

Many cryptocurrencies don’t have any significant use in the outside world. In fact, with more than 1000 cryptocurrencies in the world, only less than 20 coins are accepted as payment methods by merchants. Bitcoin, the most adopted payment currency, has less than 1000 merchants accepting it as a payment.

This is the case despite the fact that it’s valued at more than $7,000 at the time of writing. Bitcoin attributes the high value to its use as a currency for trading alternative coins and its finite supply.

There are currently about 16.7 million Bitcoins in circulation, and about 3 million of them are unaccounted for. That implies that there are less than 15 million Bitcoins owned and regularly used by people. However, there are very few Bitcoins used to buy products and services. This further makes it difficult to predict the coin’s value without using speculation.

Government Involvement

Although cryptocurrencies are designed to avoid any control by governments, any regulations made for or against coins tend to affect prices. Government involvement in the cryptocurrency industry has always helped a coin’s value positively or negatively.

A good example of how a government’s involvement can influence prices was when the Chinese government decided to ban ICO coins in the country. The ban affected most ICO coins negatively, and there was little investors could do about it. This adds on to the many reasons why investing in any coin is a matter of speculation, and some forces can hugely affect a coin’s value in a way that most currencies wouldn’t.

In Conclusion

The high volatility experienced with many cryptocurrencies makes it difficult to make price prediction that is influenced by nothing else other than speculation. For investors planning to join the industry, they must be diligent in following the trends and indicators that make it possible to speculate a coin’s price movement in the correct manner.

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