EC HH Do Higher Prices Make Crypto-Assets Crypto-Currencies?

There has been a surge of interest and activity in the what have been dubbed crypto-currencies. According to the Economist, the market cap for this space is around $60 bln, and a founder of the one of the crypto-to-crypto exchange estimates daily turnover is as much as $2 bln.  

Some of the price action is breath-taking. The most well-known are the Bitcoin.The price surged 140% last year and is up nearly as much already this year. The Bitcoin accounts for around half of the market cap for crypto-currencies and acts as the numeraire for others that are linked to it.  

The Bitcoin's appreciation has percolated into the mainstream media, but it is not the only one that appreciated dramatically. Ripple, for example, began the month with a market cap of around $2 bln.It was recently at $13 bln. Ethereum was worth about $700 mln in January and recently was valued at more than $8.5 bln.  

There are several factors that may have spurred renewed interest in this space. Geopolitical uncertainty is running high. The seemingly unpredictable US President, who antagonized friends and foes, is escalating the long-simmering confrontation with North Korea, has dropped the largest non-nuclear bomb in Afghanistan, and launched a missile strike on Syria for its alleged use of chemical weapons. European politics were perceived to be a grave risk. Chinese capital controls may have encouraged some interest in crypto-currencies as a means to circumvent the restrictions. The recent cyber-attacked demanded Bitcoins as payment (and some reports suggested at least $80k of bitcoins were paid). Also, recently demand from Japan followed the inclusion of the Bitcoin under the country's regulatory framework.  

Despite the increased activity and surging prices, the crypto-currencies are currencies in name only.  There remains a fundamental contradiction at the heart of crypto-currencies. If they are an alternative to fiat currencies (though they are also typically not backed by gold or silver either), then they should be hoarded as a store of value. However, if they are hoarded, they cannot develop the critical mass of networking to fulfill the other functions of money (means of exchange).   

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Disclaimer: Read more by Marc on his site Marc to Market.

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Adarsh Patel 4 months ago Contributor's comment

Great Analysis! Yet, I have a divergent view on the value of these types of currencies. Bitcoin and other such crypto assets have an exponential "future" intrinsic value that not many other assets can offer at this current time. They aren't like penny stocks yet can give return percentages way higher than penny stocks. On the other hand, they also can devalue in that same rate. It all depends on if you are a risky and optimistic investor.

Moreover, I feel as if something that is really going to push some of these "cryptocurrencies" through the roof is Segregated Witness or "SegWit" for short. What are your opinions on SegWit and how do you think it is going to affect the prices of these assets, especially LiteCoin? I would love to hear your opinion!