How Cryptocurrencies Appreciate: Speculation versus Organic Growth
The word “bubble” is more and more frequent when it comes to cryptocurrencies. After all, Ethereum was $10 just a year ago and now sits at around $300. If anything, this appreciation is extremely fast.
So, what does it takes for a currency to appreciate? How its value increases (or decreases)?
In my opinion, there are only two ways in which this happens: speculation and organic growth.
This is a process in which risk is traded for reward. The higher the risk, the bigger the reward. And the loss. You bet with a certain amount of your current stake that the value of that token will appreciate in a certain timeframe (usually a very short one). If it does, you get a lot of money. If it doesn’t, you lose a lot of money.
The problem with speculation is that big actors can manipulate the market. If there is a “smell” of a profit, they will start moving the market in the direction they want. How they do this is beyond the scope of the article, but it’s not rocket science. In short, they can make a token “seem” profitable by manipulating its actual growth, making it “look like” it’s growing. When other actors see a significant increase in the price, they jump in, by fear of not losing out (FOMO).
But when they do, it’s probably too late: price will correct itself fast and they will lose a lot (if not all) of their investment.
Speculation is a high risk / high reward process and, because of that, I call it “expensive”. Many members of the ecosystem will lose very fast very significant amounts of money, while others will reap the benefits.
This is a process in which the risk is balanced in an ecosystem of external transactions for goods and services. In other words, the currency is valued not only towards people who want to trade it in and by itself, but also against the perceived values which that currency can bring to them. Namely, what you can buy with it.
Many fiat currencies appeared as a byproduct of barter transactions, by the way. They were created as placeholders for trust in one to one exchanges of goods. Whereas cryptos were created (well, most of them) as a mathematical experiment. There isn’t (yet) much you can buy with crypto.
But as the quantity and quality of the goods which can be acquired with crypto will increase, their value, as tokens, will stabilize.
The price of organic appreciation is usually very small. It’s not an “expensive” way of appreciation, because nobody actually loses anything. The underlying value of the entire ecosystem grows. Think of it like countries and their currencies. The stronger the economy of a country, the more you can buy with that currency.
Anaerobic versus Aerobic Effort
As many of you know, I’m an ultra-runner, currently enjoying distances between 100 and 200 km. Getting to that level of endurance requires — apart from training, obviously — a lot of knowledge about the inner working of the human body. I learned this hard way. I really can’t remember how many times I was injured during my first year of running. I know that swollen ankles and blocked knees were just natural for me. Slowly, I learned not only how to run better and stay injure free, but how to train that specific part of the body that accounts for endurance.
You see, the human body has two way of moving:
- extremely fast (anaerobic), but for a small amount of time — the “fight or flight” protective mechanism
- or slow (aerobic), but for a very, very long time — the “persistence hunting” mechanism
And by very long time I mean really long time, like days. I know it’s hard for a modern individual to accept the fact that you can run for days, continuously, but this is how we, humans, outsmarted other mammals, with what is known today as ‘persistence hunting”. Basically we could pursue a much faster animal, like an antelope, for days, until that poor antelope felt down, overheated and exhausted. We still have that in us.
As for the “fast but short”, we used this to avoid imminent dangers, like bigger predators or environmental hazard (earthquakes, fires, floods). The downside of running fast was that the fuel for it was in less quantity than ideal. In other words, we couldn’t sustain maximum speed for more than a few dozens of minutes.
And the real downside was that the byproducts of this high sprint were quite toxic: lactic acid was forming between our muscle fibers, overall body acidity was increasing, leading to all sort of other dysfunctions. We could escape the danger but usually it took us days to recover. The cost was high.
The differences between these two “gears” of the human body are very similar to the differences between speculation and organic growth of a currency.
In certain conditions you can have a sprint, and appreciate really fast, but the costs are usually high. Members of the ecosystem will be deprived (they will lose a lot more than they can afford) and a correction will come soon. The recovery process will be lengthy.
Whereas organic appreciation is much more like persistence hunting: it may take months or years, but the overall cost for the community is insignificant: everybody will have a piece of the prey and the body damage will be minimal.