In the summer of 2022, Sean Russell, a 38-year-old from the United Kingdom, invested his entire life savings of £120,000 into Crypto currency, lured by the promise of substantial returns. Initially, his investment quadrupled, reaching nearly £500,000 within a month. However, the volatile nature of the cryptocurrency market soon became evident. As market conditions shifted, Russell’s portfolio plummeted, erasing his gains and leaving him with significant losses. Reflecting on the experience, he acknowledged the emotional toll and the realization that the rapid profits were unsustainable. Russell’s story serves as a cautionary tale about the risks associated with speculative investments in the crypto market.

As of December 3, 2024, the global cryptocurrency market capitalization stands at approximately $3.58 trillion, these two cryptocurrencies constitute roughly 64.88% of the entire cryptocurrency market capitalization.

Proliferation and Attrition of Cryptocurrencies

The cryptocurrency ecosystem has seen an explosion in the number of different digital assets. As of April 2024, over 2.52 million cryptocurrencies have been created, with approximately 5,300 new tokens launched daily. However, many of these are inactive or lack significant value. By January 2024, nearly two-thirds of cryptocurrencies created over the past several years had become defunct.

Crypto Market Behavior

Digital investment performance has shown a notable correlation with traditional financial markets. Historically, the largest digital asset exhibited a beta of approximately 1.5 relative to the S&P 500, implying that for every 1% movement in the S&P 500, the price tended to move by about 1.5% in the same direction. This indicates that digital assets have NOT consistently served as a reliable defensive position or store of value, as its price movements often mirror and amplify those of the broader market.

Cryptocurrency as Money

To function effectively as money, an asset must serve as a medium of exchange, a unit of account, and a store of value. While cryptocurrencies exhibit fungibility, their high volatility undermines their role as a stable store of value. This volatility poses challenges for borrowing, lending, and pricing goods and services. Additionally, transaction costs can be substantial. Blockchain technology requires transactions to be grouped into blocks, with each block verified before the transaction proceeds. This process can lead to increased transaction costs and energy consumption.

Energy Consumption Concerns

The energy consumption of blockchain networks, particularly those using Proof of Work (PoW) consensus mechanisms, has raised environmental concerns. One crypto currency consumes between 91 and 177 terawatt-hours (TWh) annually, which is substantial compared to traditional banking systems. For instance, the SWIFT network, a key component of the global banking infrastructure, recorded an average of 44.8 million FIN messages per day, whereas the biggest crypto network processed approximately 640,943 transactions in a single day. This disparity highlights the higher energy cost per transaction in blockchain networks compared to traditional banking systems.

While cryptocurrencies have introduced innovative financial instruments and decentralized transaction methods, they face challenges in serving as stable stores of value and efficient mediums of exchange. Their volatility, correlation with traditional markets, and significant energy consumption present obstacles to widespread adoption as conventional currencies. As the cryptocurrency landscape continues to evolve, addressing these issues will be crucial for their integration into the broader financial system.

The cryptocurrency market’s rapid expansion has led some to question whether it operates on the “greater fool” theory—a concept where investors buy overvalued assets, anticipating they can sell them to someone else at a higher price. Bill Gates has remarked that cryptocurrencies and NFTs are “100% based on greater fool theory.”

Investing, by definition, involves allocating resources with the expectation of generating profit. This expectation is typically grounded in the intrinsic value of the asset, its business model, competitive advantages, and strategic execution. In contrast, the “greater fool” approach disregards these fundamentals, focusing solely on the hope of selling to a “greater fool” at a higher price. This strategy resembles gambling more than investing, as it lacks a reasonable expectation of return based on the asset’s inherent value.

In the context of cryptocurrencies, many investors are drawn by price momentum and speculative potential rather than intrinsic value or utility. This behavior mirrors that of gamblers seeking the next big win, relying on the assumption that someone else will pay more for the asset. Such speculative practices contribute to market volatility and can lead to significant financial losses when the pool of “greater fools” diminishes.

True investing requires a thorough analysis of an asset’s fundamentals, including its value proposition, market position, and growth prospects. Relying on the “greater fool” theory undermines these principles, transforming investment into speculation. Therefore, approaching cryptocurrency investments with a focus on intrinsic value and long-term potential is crucial, rather than succumbing to speculative fervor.

 

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