Coinbase, Bitcoin, Ethereum, and Dogecoin

Everything you don’t understand about money combined with everything you don’t understand about computers.

Bitcoin and other digital currencies are going mainstream, and along with that, increased volatility. Last week, cryptocurrencies jumped in value as Coinbase, a cryptocurrency exchange, became a publicly traded company worth approximately $100 billion. In other words, trading in digital currencies, with all the expected volatility and unpredictable nature such securities bring, is here to stay.

More importantly, the explosive combination of a liquid trading platform with social media and “thought leader” influence, along with digital currencies’ disruptive nature and misunderstood role as a combination of currency, store of value, and speculation, will bring spectacular profits and losses as volatility is supercharged. Right now, volatility makes these digital currencies an unreliable medium of exchange or store of value. But no matter. They are certainly effective fodder for speculation and active trading. Thus, a $100 billion value for Coinbase.

The Volatility Keeps Rolling In

Last week, Bitcoin rose roughly 6%, Ethereum 17%, and Dogecoin rose approximately 600% while Coinbase closed the week valued, after volatile trading, at approximately $90 billion, making Coinbase the most valuable security exchange, and signifying the sustainability of digital currency trading.

Here’s what that means: volatility is here to stay. Bitcoin is down almost $8,000 from its 52-week high of about $65,000, set the day Coinbase started trading. Bitcoin prices dipped below $52,000 on Saturday and is approximately $57,000 this morning. Of course, we will be in for a wild ride because not only are there market pressures, but there are regulatory and governmental pressures. Certain countries are banning cryptocurrencies for a variety of reasons, including lack of supervisory mechanisms (which is government-speak for wanting a central bank to control currencies and not tolerating any other options).

Regulatory Risk

The lack of central bank control is a sword of Damocles dangling over the head of all digital currencies issued outside of central bank control. Regulatory controls could potentially limit greatly the applicability and use of these digital currencies within mainstream economic exchanges and investments. Of course, China has gotten ahead of this curve by issuing a digital currency controlled by the central government, even independent of its central bank. This may be a vanguard for regulatory policies to come.

Back to today’s volatility, Dogecoin is up over 30%, and while that may be because funds are being siphoned from Bitcoin into Dogecoin, the fundamental point is the wild ride is being taken to a new level. This means a great opportunity for Coinbase because exchanges need volatility and trading activity, and these securities will provide it. An investment strategy that understands this, and the components that drive digital currency valuations up and down, will be one of the great investment challenges and opportunities.

 

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