Investors (and we use that term lightly) in cryptocurrencies have experienced big losses this year. In 2017, it seemed that all cryptos basically went straight up, and now a cold dose of reality has hit the sector. There are many investors, of course, who remain convinced that cryptocurrencies are the only true future for all currencies, and every fiat currency will eventually disappear. Crypto traders have a ‘cult-like’ belief in a decentralized currency system.
We will admit we don’t pay too much attention to companies in the sector. There have been so many IPOs, and companies converting from the mining or oil and gas sectors into new cryptocurrency companies that we have lost track of the number. Almost all have the same game plan: Raise money, buy computer ‘mining’ equipment, look for low-cost electric power, make giant profits on cryptocurrency mining. The last point of course is highly debatable.
Well, we hate to throw cold water on this party (well, actually it is kind of fun) but here are five reasons why you might want to reconsider your belief in the whole cryptocurrency sector. These reasons are of course in addition to Warren Buffett’s warning prophecies on the whole issue as well.
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There are too many options
Currently, there are more than 1,600 different cryptocurrencies, and more seem to be launched every day. Suppose you are a merchant. How do you decide which one to accept? Say all the negative things you want to about fiat currency, but at least it has this going for it — the government only issues one single currency, not thousands.
Too few places to use them
So far, cryptocurrency holders seem far more likely to ‘hoard’ their coins rather than actually spend them. For this reason, there are very few merchants that will actually accept them. And, with all of the initial coin offerings (ICOs), guess what currency you have to pay in? That’s right: dollars. Even companies that are raising money by selling ICOs still want actual dollars in return. That’s not a strong endorsement.
Advertising is being banned
I remember last year, when my inbox and social media platforms were bombarding me with ads for cryptocurrency trading platforms. But, now, many media companies have outright banned ads for cryptocurrencies, with concern that their customers will get sucked into something they don’t understand. With far less marketing, consumers will be far less likely to continue to keep up the frenzy of the cryptocurrency market. Last year, as an example, binary options advertisements were banned, and it effectively killed the industry (which was a good thing!).
Beware of hackers
Last week, there was another ‘hack’ of the cryptocurrency market, and billions were lost. When was the last time billions were stolen from a bank? Not lost in the market or on trading, but actually stolen? Never, perhaps. Until the cryptocurrency industry can stop these hacks from happening, investors and potential consumers will never fully accept the industry to the degree that it wants to be accepted.
Governments don’t like them
Of all our points, this is likely the most relevant. Governments need fiat currency to finance their deficits. Without fiat currency, the whole system potentially becomes jeopardized. Governments do not want you getting paid in bitcoins, or using Bitcoin as your ‘savings’ vehicle. If we have learned anything in the past 30 years, it’s that if the government doesn’t want something to happen, it will put up as many roadblocks as possible in its way. Now, new regulations may not kill the cryptocurrency industry, but it can certainly slow down its growth.
Peter Hodson, CFA, is Founder and Head of Research of 5i Research Inc., an independent research network providing conflict-free advice to individual investors (http://www.5iresearch.ca).