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The relation between the blockchain technology and crypto-assets

2018-04-23 14:28:53.0

The digital age is changing the human behaviour. The way people and businesses communicate, exchange goods and services and make payments is changing drastically and it appears that the blockchain technology offers an increasingly adopted basis for the development of a new business model, allowing users of a community to be part of the value chain and emphasizing peer-to-peer transactions.
Today, the blockchain technology is used to transfer value, to collect, share and match data, and to decentralize many industries by pushing the middle-men out of the system. Hundreds of companies pop up every day proposing services based on blockchain technology. These services include travel, real estate, logistics, transportation, matchmaking, leisure and more.
The goal is to reduce costs, to increase efficiency and to provide transparency.
The key word is ‘decentralized’, although this doesn’t apply to all blockchain platforms. Ripple, for example, is a privately-owned company, yet offers global payment solutions based on a blockchain model.

Blockchain versus cryptocurrency
For most people, the blockchain technology refers to cryptocurrencies, and more specifically to Bitcoin. But the reality is that the blockchain technology could be used for a great variety of projects.

It is well possible that the blockchain itself refers to any data or service, without necessarily referring to a ‘currency’.
But blockchain and cryptocoins go hand in hand, as cryptocurrencies offer a convenient way to reward users of the blockchain network and ICOs (Initial Coin Offering) prove to be a suitable way for raising funds for new projects.

In this respect, tokens are issued to finance projects and to pay users of a blockchain to encourage them to help the chain moving forward. It is like issuing shares in the stock market, but here, users and investors overlap in the sense that users would also be rewarded with shares and become shareholders automatically. The system holds solid as long as the community of users trust each other, hence tokens have value as long as the confidence reigns.

The problem is that the ICOs are not well regulated yet; therefore, risks are elevated.

Looking beyond the short-term price volatility
The reason why traders feel exposed to tricky trading conditions in the crypto market is the asymmetric historical price chart and biased expectations.

The persistent downtrend is particularly disheartening for the new joiners. But the truth is, a 2017-like rally in prices of cryptocurrencies, which was mainly due to the rapid spread of the new concept, may possibly be over after having profited to crypto-pioneers and angel investors. This is how markets work. There is no free lunch, as there is no such market which would continuously trend in the same direction.

It is therefore interesting to look beyond the short-term price movement and to chart cryptocurrencies versus a meaningful benchmark. In this respect, Bitcoin is the most widely used benchmark in the crypto market, as it stands for the trust investors and traders put into the crypto-system as a whole. Today, Bitcoin is seen as the last piece to fall if the system bursts.

On the other hand, stalling prices, and even the downside correction, does not mean that the cryptocurrencies are losing their value. It only means that they are seeking for the right value in a more balanced market.

Think of the internet bubble that hit the market in 2000s. Hundreds, if not thousands of .com businesses went to through the roof before collapsing. Nonetheless, a decade following the internet crash, the internet technology became an essential basis for everything we do. It is well possible that the history repeats itself with the blockchain technology and cryptocoins.

Investing in cryptocoins as the market matures
The reason why the cryptocurrency prices skyrocketed was undeniably due to the assault of joiners to the newly-born market. Naturally, the market had one and unique direction. In the absence of one-sided initial inflows, the market would have simply not existed. As a result, first buyers took the risk and, in return, could surf on the significant price rise.

It is hard to tell whether the market has reached a level of saturation encouraging some traders to veer to the sell-side, or the current sell-off is simply a pause and there is more momentum to explore on the upside. But the existence of futures market for the major cryptocurrencies is an indication that the bullish asymmetry would be lessened, at least for these ones.

As a result, investors seeking to benefit from a significant price rise would need to identify less popular coins with a promising growth potential. In the same way as penny-stock traders do.

Blockchain is a booming technology
The impressive inflows into the crypto market during 2017 gave no time to governments, conventional businesses and laws to adopt to an entirely new concept of decentralized value creation.

However, in the latest G20 meeting, all countries except China displayed a neutral-to-positive stance regarding the purposes of the cryptocurrency scenario. In more than half of the countries including the US, the UK, France, Germany and Brazil, businesses based on cryptos are considered as legal activities. Even in China, projects based on the blockchain technology bloom, though funding by tokens which is no longer possible due to regulatory restrictions, has become a paradox that needs to be resolved.

Currency or stock?
Referring to this new asset class as ‘crypto-assets’ and not ‘cryptocurrencies’ could also help to reduce confusion among many investors, who believe that only a central authority, such as a central bank, is given the right to issue a ‘currency’.
But a cryptocurrency is somewhere between a currency and a stock. Thus, they need to be identified and regulated separately from the traditional assets, such as stocks, bonds and commodities.

Regulation, or a lack thereof
Although many agree that the undermining blockchain technology has a tremendous potential to grow, the future direction of cryptocurrencies remains uncertain due to two main concerns: regulation and safety.

The Financial Commission now has ICC, a committee certifying new ICOs in the same way than the forex industry, nevertheless policymakers around the world remain cautious about the issue.

Unfortunately, the regulation takes too much time to be completed in comparison to the speed at which the underlying market evolves. Nevertheless, the price volatility in cryptocurrencies is here to stay until a bridge between the crypto-finance and the existing financial system is set.

However, there are interesting attempts to increase the safety within the crypto-universe without entirely relying on the rule of law. In this respect, South Korea’s largest cryptocurrency exchange Upbit has put in place a scheme allowing all its users to report illegal schemes and fraud. Upbit rewards the original complaint with a cash payment of 1 million won, the equivalent of approximately 930 US dollars.

Ipek Ozkardeskaya
Senior Market Analyst
MBAex Analyst