Cryptocurrency is the internet’s native currency. There are more than 12,000 cryptocurrencies in existence. That is significantly more than all of the different fiat currencies in the world. Fiat currencies are government issued “legal tender” that isn’t back by a commodity (i.e. gold, silver, or other precious metals). Examples include the U.S. dollar, euro, peso, and the British pound.
With so many options available, what is the best way to approach crypto? DYOR, or do your own research, is constantly thrown out there by online crypto influencers after they’ve hyped you up on the next 1,000x gainer. When I first started investing in crypto, I often took the word of these influencers. Following their YouTube videos and Twitter posts was my research. I eventually found out that that was a big mistake.
Following their YouTube videos and Twitter posts was my research.
Bulls, Bears, and Frigid Winters
In crypto, there are bull cycles and bear cycles. Bull cycles are sustained periods of time in which the prices of cryptocurrencies are on the rise. Bear cycles are when prices fall over a sustained period of time. In the 15 months that I’ve been involved in crypto, I’ve experienced 1 traditional bull cycle, 1 “micro” bull cycle, 1 “micro” bear cycle, and what could potentially be 1 traditional bear cycle. In fact, as of this writing we’re in the midst of that potential bear cycle. And we’ve been here since mid-November 2021.
During bull cycles, every crypto influencer looks like a genius. So-called “experts” spring up out of the wood works when the market is hot. Those same experts and geniuses use the “I told you to do your own research” line when the market heads south for the winter. Well, as of now, it’s winter.
Continue reading and I’ll explain what I mean by traditional bull/bear and “micro” bull/bear cycles.
No one knows exactly how long the current bear cycle will last. Some suggest that prices might not turn around until 2024. That prediction is based off of Bitcoin’s traditional bull cycles which are closely tied to something called “halving”. Make no mistake about it, as of this writing, Bitcoin is the leading indicator for what will happen in the entire crypto market. The rewards that bitcoin miners receive from validating transactions on its network get cut in half every 4 years. That is what is meant by halving.
[..] Bitcoin is the leading indicator for what will happen in the entire crypto market.
Bitcoin miners run specialized computers that solve complex cryptographic puzzles. Miners are the backbone of bitcoin’s blockchain because they validate and monitor transactions on the network. There are over 1,000,000 bitcoin miners in the world that share this responsibility. This constant validation and monitoring ensures the absolute integrity of the network. There is no 3rd party or central authority (i.e. bank or government) required. This is what makes bitcoin fully decentralized.
Mining is also how new bitcoins come into existence. These new bitcoins are what miners receive as rewards for running the systems that solve the mathematical problems. The total number of bitcoins that will ever exist is 21 million. As of this writing, there are 18.9 million bitcoins in existence. The remaining 2.1 million bitcoins are projected to be mined by the year 2040.
Every halving, the bitcoin rewards that miners receive are cut in half from the previous period. The first halving occurred in November 2012, when the bitcoin price was around $11. Within a year, the price rose a hundredfold. The second halving occurred in July 2016, when bitcoin’s price fluctuated between $500-$1,000 before ballooning to $20,000 by December 2017. The third halving was in May 2020. At the time, the bitcoin price was around $9,000. It rose to $30,000 by the end December 2020. By mid-April 2021, bitcoin reached an all-time high, to that point, of nearly $65,000.
Using the “halving theory” to project bitcoin’s bull cycles is popular in many crypto circles. If one subscribes to that theory, the next bull cycle will begin in 2024.
Other industry leaders, such as analyst Willy Woo, believe that crypto’s traditional bull and bear cycles are a thing of the past. Woo is an on-chain analyst that uses real-time, actual blockchain analysis to gauge market conditions and direction. He believes that the market is maturing, and we’re going to enter a new era in which bitcoin does not have obvious bull and bear markets.
Woo’s theory has been somewhat validated by the fact that, 1) after markets dipped for several months after reaching an all-time high in April 2021, there was another run up that led to new all-time highs of 69,000 in November 2021; and 2) the typical bear market drop of 80% that could take as long as a year to shake out, did not happen in April, and has not happened since the November all-time high. In fact, bitcoin is only down 45% from that high point.
Whether we’re in a bitcoin “supercycle”, which is a prolonged period of upward price momentum; or experiencing micro bull and micro bear cycles is yet to be determined. My earlier statement that in 15 months I have realized 1 “traditional” bull cycle, 1 “micro” bull cycle, 1 “micro” bear cycle, and what could potentially be 1 “traditional” bear cycle is based on the price action that I’ve seen over that time.
In hindsight, that reversal looks to me like a “micro” bull cycle.
I believe that we came out of a traditional crypto bear market in mid to late 2020. At that time, a traditional bull market started, which seemed to sputter out in mid-April 2021. For 3 months, crypto prices dipped into a “micro” bear cycle that reversed course in the preceding 4 months. In hindsight, that reversal looks to me like a “micro” bull cycle.
Currently, we’re in a nearly 4-month downtrend which could either be the beginning of a traditional bear market, or another “micro” bear market. I’m hoping for the latter. If prices do turn back around and the bitcoin price rallies to $100,000 in 2022, which has been predicted, some might end up classifying the entire time period since mid to late 2020 as a supercycle.
The King Kong of Crypto
Two key lessons that I’ve learned about crypto is that, 1) nobody really knows what will happen, until it happens. Hindsight is always 20/20; and 2) The price of bitcoin, the leading indicator for the entire crypto market, has consistently trended upward over time.
YouTube University was the first place that I sought out the secrets.
Bitcoin was the first cryptocurrency, and has the largest market cap. It is the king kong of crypto. Yet and still, it is one of more than 12,000 cryptocurrencies in existence. Because of this, the first several months that I was involved in crypto were confusing. Which crypto should I invest in? What do cryptocurrencies do? How should I diversify in the space? These were all questions that that needed to be answered. YouTube University was the first place that I sought out the secrets.
Honestly, YouTube was a good start for me. It made me aware of some of the more common cryptocurrencies that were on the influencers’ radars. That was helpful. However, because I stumbled upon crypto during a very prosperous moment in a bull cycle, everyone did seem like a genius.
While I decided to invest in Ethereum and Bitcoin based on my own research, I started buying other cryptocurrencies on the advice of several YouTube channels. That taught me a lot of lessons. Not the least of which was to fully understand the “use case” of any cryptocurrency that I invest in.
Generally speaking, I’ve found that the cryptocurrencies that hold the most value are those that solve, or attempt to solve, some type of real-world problem. In other words, they have an actual use case beyond just being a digital form of currency.
I’ll end this issue with a breakdown of the real-world problems that 5 of the more than 12,000 cryptocurrencies attempt to solve. Full disclosure - I do hold some, but not all, of these coins.
(market cap: $793.9 billion at the time of this writing)
Legend has it that Bitcoin was created by Satoshi Nakamoto, who to-date is anonymous and pseudonymous. No one knows who he or she is. Launched in 2009, Bitcoin was created as a digital cash system that removes third party intermediaries (i.e. banks, governments, etc.). It offers scarcity in the fact that there will only ever be 21 million bitcoins in existence. In that sense, some consider it to be digital gold, and a potential hedge against inflation. Bitcoin is intended to provide an alternative payment system that is free from central controls.
(market cap: $322.4 billion at the time of this writing)
Co-founded by programmer Vitalik Buterin, Ethereum launched in 2015. Ethereum is an open source, decentralized blockchain that enables the use of smart contracts. It’s native token, Ether, is the second largest cryptocurrency in the world. Ethereum is a powerful ecosystem that helps developers to create decentralized applications (dApps) on top of its blockchain. Its smart contracts feature has fostered numerous protocols in the areas of decentralized finance, decentralized exchanges, gaming, new crypto token standards, NFTs (non-fungible tokens), and more. The majority of NFTs that exist were minted on the Ethereum blockchain. If Bitcoin is digital gold, Ethereum is digital oil.
(market cap: $36.5 billion at the time of this writing)
Launched in 2012, XRP was developed by software engineers David Schwartz, Jed McCaleb, and Arthur Britto. The three were eventually joined by Chris Larsen, and together they formed a company that is now known as Ripple. XRP’s primary use case is to facilitate cross-border payments between countries. It solves the problem of high transaction costs and low transaction speeds.
There has been controversy surrounding Ripple and XRP. In December 2020, the SEC charged Ripple, along with two of its executives, of raising more than $1.3 billion in an unregistered offering of digital asset securities. Due to its centralized infrastructure, the SEC’s claim was that XRP should be considered a security, and not a decentralized cryptocurrency. The lawsuit caused the token price of XRP to initially plummet. It’s made up some ground since then, but the charges are still pending. Ripple executives believe that they will win the lawsuit against the SEC, which could have major implications on the future of other cryptocurrencies.
(market cap: $27.9 billion at the time of this writing)
Solana is also an open-source blockchain that supports smart contracts, NFTs, and decentralized applications. It was created in 2017 by Anatoly Yakovenko and Raj Gokal. Solana solves the problem of blockchain processing speed. Ethereum, the leader in the space, has very slow processing speeds compared to Solana. As a result of the slow speeds, transaction costs on the Ethereum blockchain can be high when the network is congested. Solana solves this problem, which has made it ideal for blockchain game developers and NFT creators. One of the controversies surrounding Solana is that they may have sacrificed true decentralization in order to achieve super fast speeds and cheaper transaction costs. Nonetheless, it is one of the most highly used blockchains today.
(market cap: $16 billion at the time of this writing)
Dogecoin was created in 2013 as a joke. Its creators, software engineers Billy Markus and Jackson Palmer, developed the token as a way of making fun of the overhyped and inflated speculation in Bitcoin and other cryptocurrencies at the time. Dogecoin features the face of the Shiba Inu dog from the “Doge” meme as its logo and namesake. Considered a meme coin, Dogecoin has a loyal and dedicated following.
It took Amazon 13 years to deliver a 10,000% return to its investors. Investing in Dogecoin at the beginning of 2021 would have delivered those same returns in 5 months. With the public support of Elon Musk and Mark Cuban, Dogecoin has gone from merely a joke, to potentially a viable digital currency that could be used to purchase goods and services.
When researching various cryptocurrencies, I’ve found that market cap and use case are extremely helpful features to understand. There are more than 12,000 cryptocurrencies. Many of them won’t last for the next four years. Those that do will undoubtedly offer value to vast networks of users and speculators, as well as solve real world problems.
Obviously, the opinions expressed in The Coles Report are meant to be informational and educational, not investment advice. My goal is to provide useful guidance in the areas of cryptocurrency and blockchain technologies. We’re in the very early days of an economic and societal transformation. Let’s make sure that we stay on the bleeding edge of it.