The Wild Crypto Ride

Just another bubble waiting to burst, or a truly free market?

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Judging solely by the bearish trend lines of cryptocurrency price graphs over the last few weeks, you might have already written Bitcoin and its ilk off as potentially lucrative investment options for 2018. If, on the other hand,  you’re in the bulls camp on crypto as an asset class, you may well be rubbing your hands in glee and snapping up all the cheaply-priced crypto moving around at the moment.

Whatever the case, there’s little denying that cryptocurrencies, and the blockchain distributed ledger technology which is their foundation, have made an impact on the global traditional financial markets. And, therefore, achieved what the original cryptocurrency, Bitcoin, set out to achieve over ten years ago:Disrupting existing financial systems.

Still, this achievement doesn’t count much to investors, some of whom have made a substantial amount in this fledgling market, and some of whom lost their shirts by buying too high and then selling too low. Or through scams, of which there are no shortage in this Frontier-style market.

With governments across the globe coming down hard on this potentially explosive asset class, and a raft of institutionalised investors with serious profiles pouring scorn over the space, the future of crypto can look unappealing at best. Several times we have heard influential fund managers, ministers of finance, investment gurus and representatives of “old money” exclaiming with some degrees of joy that “Crypto is dead.”

And yet, it isn’t.

Those who call for an unbundling of the underlying technology, the blockchain, from the supposed “evils” of cryptocurrency, freeing business up to take advantage of this revolutionary tech without burdening their financial managers with crypto concern, have missed the fundamentals.

What is blockchain?

The blockchain is a tamper proof, cloud-based multi-node distributed ledger.It allows for rapid and transparent transactions recorded across a non-centralised network of computer systems. The entire point of the blockchain lies in that fact: it’s a decentralised record of value-bearing transactions which can be interrogated by anyone with a clear and definite record as the output.

To remove cryptocurrency from this equation, would require that this distributed ledger be funded and maintained by a single entity or group of entities. In effect, centralising control of the blockchain.

We already have centralised, siloed financial institutions transacting many millions of times a second on a closed, secretive record. They charge substantial fees for their efforts, and are not above a little bit of obscurity here and there, when it suits them. Remember the Lehman Brothers back in 2008?

In truth this manner of aloof but all-powerful financial institutes, and their shadowy corridors of control, were the reason Bitcoin was born in the first place.

The very reason that Bitcoin saw its meteoric surge in 2017, was because regular people and denizens of the digital realm are losing faith in these established ecosystems, and are seeking liberation from these outdated and inefficient mechanisms of wealth control.

And what of the extreme volatility? Is there no way to capitalise on the advantages of blockchain technology without risking it all, so to speak?

By its very nature, the blockchain environment and the cryptocurrencies it is built on are a pure free market. Unregulated, unrestricted, and with no centralised control. Hence both meteoric ascents, and wild collapses in value, are par for the course.

Through price corrections, like the phase playing out right now, the market self-regulates. At its core it will remain a store of value which appreciates over time, since the total number of Bitcoins in circulation is a known variable at any point in the lifecycle, and there are a finite number of coins ever to be released.

One way to hedge against this volatility is to invest not in the tokens themselves as an asset class, where you run the same risks as investing in any traditional stock, share, or future derivative. But rather to invest in crypto at the coal-face, as it were.

Crypto mining

Mining equipment. A fixed cost, with a small operating expenditure, steadily and quietly amassing tokens which may be just another victim of the bears at the moment, but will likely be picked up to run with the bulls once more before the year comes to an end.

In numbers, the business case is clear. A R60k initial investment, the operating cost of which amounts to little more than R600 per month of additional electricity consumed, is currently in the extremely depressed state of the global crypto market generating in the region of R4000 worth of currency a month. A quick calculation will tell you that that rate of income yields an ROI of just under two years, based on the assumption that crypto prices will remain static, which they obviously do not, and a model of immediately selling off the product of your mining endeavours on a month by month basis.

However playing the long game with these tokens changes the outlook somewhat. Should Bitcoin merely settle at the level it was comfortable at over December 2017, the USD12 000 mark, that ROI tumbles to less than 12 months. After which further mining income is practically pure profit. And the hardware itself remains an asset, albeit a depreciating one, which can be sold once made redundant to further pad the profit column.

Since the product is a dollar-based value, add in some volatility in the Rand, which is certainly not unfeasible given the expropriation without compensation debate currently sizzling through our political landscape, and the numbers swing further in the favour of the miners.

What’s more, as public interest drops away the cost of this equipment will also decline making for cheaper rigs delivering the same returns. Most importantly, income scales directly with the size of the initial investment. So a R120k rig delivers twice the profit.

In the idiom of traditional structures, the parallels with actual, physical mining of otherwise worthless ore such as gold due to its store of value qualities are stark. Just in this well-established environment, the barriers to entry are insurmountable. One would need a mountain of capital, as well as key relationships with government ministers in your geographical locale, to straddle this advantageous position.

The world of crypto delivers this same wealth-generating opportunity into the hands of individuals. What you make of it, is up to you.

Disclosure: The author of this article runs crypto miners in his own personal capacity as well as for several outside investors and is therefore, naturally, firmly in the bull pen on this asset class.

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