Here we are again: Bitcoin, Ethereum and Ripple are soaring

It has been a crazy year for Wall Street and the investment community. The unprecedented 2019 coronavirus pandemic (COVID-19) wiped out more than a third of S&P 500worth about a month earlier this year, with the benchmark registering its 10 biggest single-session point losses and eight biggest single-session point gains in 2020 history.

These wild vacillations in equities are akin to a financial boost for investors.

The Big Three of Cryptocurrency Are Unstoppable, Once Again

But not all assets received the note that it was time to panic. Digital cryptocurrencies have been on fire since March, with the three largest digital tokens by market cap – Bitcoin, Ethereum, and Ripple – leading the way. Since the bottom of the stock market on March 23, 2020, Bitcoin, Ethereum and Ripple have gained 187%, 356% and 289% respectively, on the early evening of November 23.

Why the renewed interest in cryptocurrencies after the 2017 price hike and the bursting of the bubble? The best guess I can offer is the continued push towards cashless and digital payments. The COVID-19 pandemic has caused consumers to question their payment choices, with cash seen as a potential harbinger of germs. As millennials and millennials get older, they have become a larger percentage of the consumer pool. They’ve been much more willing than Gen Xers or Baby Boomers to embrace digital payment options.

Investors are also likely excited about real-world applications for certain cryptocurrencies and their underlying blockchain technology. Blockchain is the digital and decentralized ledger responsible for recording all transactions without the help of a third-party provider. Blockchain is expected to be able to improve security through its decentralization, as well as speed up the settlement of transactions – especially international payments.

Individual stories are also at play. Bitcoin has become the go-to intermediary on crypto trading platforms for virtually every activity. If investors want to buy tokens other than a major cryptocurrency, they will first need to buy bitcoin for trading.

Bitcoin’s commercial popularity has been particularly evident with digital payment platforms Pay Pal (NASDAQ: PYPL) and Square (NYSE: SQ). In October, PayPal announced that it would be launching a new service that will allow its customers to buy, sell and hold cryptocurrencies directly in their PayPal account. Meanwhile, Square has seen its revenues skyrocket due to the bitcoin exchange on the peer-to-peer payment platform Cash App. Square also acquired around $ 50 million worth of Bitcoin tokens. Cryptocurrency stocks have skyrocketed along with digital tokens.

Another example is Ethereum’s smart contracts, which are built into its blockchain. These smart contracts help verify transactions and enforce contract negotiations. For example, a company’s products can be automatically rearranged once total sales reach a certain level, if multiple parties agree. These smart contracts could completely overhaul supply chain management.

It didn’t end well before, and this time will be no different

For millennial and novice investors alike, cryptocurrencies like Bitcoin, Ethereum, and Ripple are like a dream come true. They are very hesitant on a regular basis and can generate triple-digit gains in a matter of weeks if investor sentiment behind a token is strong enough.

But we’ve seen digital tokens go vertical a few times before, and it hasn’t ended well for crypto investors. In my opinion, crypto investors are fighting an uphill battle against three very real issues.

First, at least when it comes to bitcoin, there is a perceived scarcity issue. Bitcoin is often viewed as a direct threat to gold as a store of value and potential hedge for the stock market given its ‘cap’ of 21 million tokens mined (there are currently 18.55 million tokens in circulation) . The problem is, these circulating supply caps are not tangible like gold. This means that we can only extract the quantity of gold found on planet Earth. In comparison, programming is all that keeps Bitcoin’s virtual cap in place.

A second but much more concerning issue for Bitcoin, Ethereum, and Ripple is utility. In 2017, the global gross domestic product stood at $ 81 trillion. Yet on Monday, November 23, all bitcoin in circulation had a market value of around $ 340 billion. Of that $ 340 billion, about 40% is held by investors and is not outstanding for payments. Essentially, this means that only around $ 200 billion worth of bitcoin is available for transactional purposes. Aside from the fact that only between 1% and 3% of companies accept crypto as a method of payment (according to Matthew May, co-founder of financial firm Acuity), around $ 200 billion in circulating supply is unlikely to become the norm. .

There is also no guarantee that the crypto tokens will be needed. Branded financial services and tech companies are developing their own blockchain technology that might be able to work with fiat currencies, making arbitrary digital tokens obsolete.

The third big concern here is security. Although blockchain is designed to further protect users’ digital assets, a number of large-scale token thefts have taken place over the past decade. The problem isn’t so much that thieves are looking to get your crypto tokens as much as there is little the Securities and Exchange Commission (SEC) can do to stop it or help those affected. With most crypto transactions and payments taking place outside of the United States, the SEC has no way of prosecuting these cybercriminals.

I think what we are seeing in the crypto market is nothing more than sentiment based trading, with no substance behind it. Over a century of investing history has shown that investor sentiment is impossible to predict and can change in no time. Ether and Ripple have already suffered prolonged declines of over 90%, and bitcoin has retraced well over 80% on a few occasions. It has happened before, and it is quite possible that it will happen again.