Is a cryptocurrency bubble around the corner?

Chukwuemeka Fred Agbata Jnr.

A few months ago, Carl (not his real name) visited Nigeria and
he made every attempt to hold a meeting with me. After some back
and forth, we eventually agreed on a meeting date. His mission was
to work with me to deepen the cryptocurrency market in this part of
the world. He also tried to sell me the idea of becoming a Bitcoin
merchant and that would mean not just owning some, but also
actively involved in the trade.

Well, as fate would have it, I did not follow through and a few
months after, Bitcoin became a huge hit across the world. The
reality is that I might have become richer had I followed through.
At one point he sent me a screenshot of what his portfolio of
cryptocurrencies looked like and based on the going market rates
then, he was worth a few million dollars. From then on, he shared
offers upon offers and kept reminding me of how I missed out in the
early days and that I had no excuse to miss out again. I must
confess that this experience heightened my fear of missing the next
big thing, which still haunts me every now and then.

So what is a cryptocurrency?

According to Invstopedia.com, a cryptocurrency is a digital or
virtual currency that uses cryptography for security. Many
cryptocurrencies are decentralised systems based on blockchain
technology – a distributed ledger enforced by a disparate network
of computers. A defining feature of a cryptocurrency, and arguably
its biggest allure, is its organic nature. No central authority
issues it, thereby rendering it theoretically immune to government
interference or manipulation.

The interesting thing about the world of cryptocurrencies is
that a deep conspiracy theory has created unrepentant supporters,
many of whom believe that cryptos are the only way to redistribute
the world’s wealth by altering the current financial systems.

Another important aspect of the crypto ecosystem today is the
altcoin or alternative coin, usually regarded as any cryptocurrency
developed after Bitcoin was released. For example, a former Google
employee, Charlie Lee, created Litecoin in 2011 and it is built on
the same core technology used by Bitcoin, but with shorter time to
process transactions. LTC was designed to improve on Bitcoin, but
it has forged a path for itself while gaining trust. It remits
financial transactions at a quarter fraction of the time that
Bitcoin does.

Another early altcoin is Ethereum, developed by then 19-year-old
Vitalik Buterin, a Russian-Canadian programmer. It is designed to
be a platform for smart contracts between applications; trying to
perform related transactions. It offers server performances, such
that there is zero possibility of downtime, fraud or censorship.
This allows several independent organisations to build products on
the decentralised platform that allows each user to maintain his or
her privacy while performing transactions.

The Ethereum platform allows each developer to build market
places with encrypted (read signed) inventories for sale, such
that, in theory, artists can sell digital forms of their arts and
control how it can be used online. For instance, if you are a
graphic designer and someone has not paid for a commissioned work,
you can prevent him or her from using it on the Internet.

The difference between Ethereum and other altcoins is in how
entities are rewarded. On Ethereum, traders transact in the
platform’s official cryptocurrency. Last year witnessed several
developers coming up with innovative ways to build on Ethereum. An
example is a virtual game, where people are allowed to buy and
breed digital cats – cryptokitties. This game became so popular
that it broke the whole Ethereum blockchain ecosystem for some
time, but the underlying fact that people could trade and have fun
using a financial blockchain system excited ardent blockchain
evangelists.

Crypto Kitty is an example of collectibles — things you buy for
keeps and the most popular in the virtual world. Why was there a
rush to buy Crypto Kitties? What was the drive that brought people
to start trading collectibles? Let us examine these questions.

As seen in numerous instances, once a new Blockchain product is
announced, speculators troop in to cash-in on early access, thereby
causing demand of products to shoot up. In any market, as demand
increases, the cost of such product also follows suit. This was
evident when a single collectible of Crypto Kitty, Genesis Kitty,
was sold for $100,000. There were high demands for kitties, the
cost went up, and people could not afford the high prices, so they
stopped buying.

This repeating cycle is usually fueled by fear — the fear of
missing the next big thing. Developers and enthusiasts have not
fully come to understand the possibilities of what the Blockchain
technology could become, and have not exactly succeeded at
determining what innovation will succeed it. Therefore, they try to
get a large share of any product that comes out before it goes
mainstream, in the hope that it will be profitable enough for them
to sell later. This is Microeconomics 101: buy cheap, sell high.
The only problem is knowing what product to buy; and which of them
might become profitable in the nearest future.

This lack of insight has led people to try to be ahead, by
investing early in innovations and hoping to sell or dilute
whatever they have, should the solution become a hit. Those who
cannot get early access take a waiting position, hoping to gain
early access on the next big hit.

The problem with this strategy is that most people are simply
playing the same card, thus, instead of a product growing for the
benefit of the community; it becomes a case where people start
baiting themselves. Since the second wave of users who will bring
stability to any product do not venture, as they are waiting for
the next big thing, the initial seeders of the platform start
becoming agitated and in the panic, trust is lost in the product
and the cycle continues.

The big question is – Can all of these, plus other factors, lead
to a cryptocurrency bubble? Only time will tell, but I urge you to
always look before you leap.

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