It seems like everyone nowadays is talking about cryptocurrencies. Whether it’s the proselytizers on CNBC or the techie next door, it feels as if everyone is either talking about or buying into this next big thing.
Trying to adequately explain an emerging technology and it’s economic impact in less then a few thousand words is bound to neglect certain facets of the subject. This series attempts to cover the technical specification of cryptocurrencies, how they can be viewed in an investment environment, the narratives that accompany this new technology, and the future impact, applications, and risk of the cryptocurrency universe.
Recent Market Conditions
Economist Robert Shiller, the 2013 Economics Nobel Prize co-recipient, noted a similarity between the current Bitcoin movement and the bimetallism movement of the late 1800s. Shiller’s recent book Narrative Economics focuses on the stories or ideas that we tell ourselves that influence our economic decisions.
The narrative of Bitcoin is a fascinating story to tell. It starts with intrigue as the founder (or founders) of Bitcoin, Satoshi Nakamoto, has never been identified or even confirmed to exist. This creates a great human-interest story and helps to grab the attention of individuals.
We follow the human-interest story by delving into the complexity of cryptographic hash functions and network protocols that few understand. This complexity and need for experts to understand presents the next draw of Bitcoin.
Similar to young people of the late 1800s and their enthusiasm with the abstruse monetary economics of bimetallism, Bitcoin advocates take pleasure in the fact that it is only a select few (including themselves) that understand this complicated subject.
Bitcoin and cryptocurrencies have also caught the eye of various pop culture icons. In January of 2020, Bitcoin rose 20% in a matter of hours after Elon Musk famously changed his Twitter Bio to #bitcoin. Jack Dorsey, the CEO of Twitter and Square, has been a vocal supporter of Bitcoin and even sold his very first tweet in the form of a Non-Fungible Token (NFT) for 1,630 Ethereum (or $2.9 million). This allure of seeing individuals with household names using cryptocurrencies provides yet another boost in the awareness and interest created by the narrative of Bitcoin and cryptocurrencies.
Add to this the fact that in the past eight years (11/5/15 – 4/26/21) Bitcoin has had an annualized return of 82%. This has led to many sites and brokerages promoting advertisements showing these high levels of returns without mentioning the fact that Bitcoin has also suffered three 75% corrections in the 10+ years of its existence. Unfortunately, our human brains were wired millions of years ago and tend to value recent information over past information. Throughout history, this wiring has led to commodity fads. One of the earliest and most spectacular was “tulip mania,” a three-year period in the mid-1600s when tulip bulbs appreciated at an annualized rate of 200% per year.
While we have seen many of these types of narratives before, the combination of them in Bitcoin provides something attractive and seemingly new; and the ease and accessibility has never been higher, facilitating high demand. Financial applications such as PayPal can give just about anyone with a few bucks access to buying this exciting new asset class.
Stay tuned for the last installment where we discuss the future of cryptocurrencies. And if you missed our first installment, you can find it here.
Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.
It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Opinions expressed by Merriman are based on economic or market conditions at the time this material was written. Economies and markets fluctuate. Actual economic or market events may turn out differently than anticipated. Any reference to an index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indices are unmanaged vehicles that serve as market indicators and do not account for the deduction of management fees and/or transaction costs generally associated with investable products. As always please remember investing involves risk and possible loss of principal capital and past performance does not guarantee future returns; please seek advice from a licensed professional. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place. All composite data and corresponding calculations are available upon request.
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As a Research Analyst, Lev works to improve Merriman’s core investment solutions using an evidenced based approach. Lev spends his days researching specific topics, performing custom client analyses, preparing client materials and improving automated systems. Before joining Merriman, Lev gained experience at Parametric Portfolio Associates a quantitative asset management firm.
Lev has a bachelor’s degree from the University of Washington where he studied physics and astronomy. While at UW Lev competed in pole vault and is still active in the community around Seattle, coaching at high schools and local camps.
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