Anyone following the financial market or news about cryptocurrencies is faced on a daily basis with predictions by “experts” on the future price of a certain cryptocurrency.
It is a natural human trait: our uncontrollable desire to foresee the future. And we continue to believe we can.
Since cryptocurrencies began to make the headlines, there was a vast number of reputable people predicting their crash and extinction. There still is. Warren Buffet still insists bitcoin is a bad investment. And it may as well be a really bad investment. Or not.
There is an equal number of experts that predicted a rise in value, although few (if any) predicted such an increase as we have seen in 2017.
My point is: nobody knows. Nobody knows if bitcoin or ethereum or ripple will triple in value or be worth nothing by the end of this year. As much as nobody knows if any stock will rise or fall in the coming days, weeks and months. But we still insist on trying to guess.
There was one particularly famous study on the matter by CXO advisory that tracked the performance of financial market experts predicting future prices and trends over a long period of time (1998 to 2012). The result? On average, this group of 68 gurus was right about 47% of the time. In other words, it would be more efficient to just flip a coin.
This phenomenon was described in detail by Nassim Taleb in his much celebrated Fooled by Randomness. The book does a great job at describing how randomness plays a central role in the outcomes of financial markets and yet we are constantly dissuading ourselves of this logic and placing a great deal of value on predictions that will ultimately prove to be right – usually ignoring the predictions that failed.
Some will refer to this discussion using the image of a blindfolded monkey selecting stocks that would be worth investing in, making the case that the monkey would do a better job than market experts.
This is not to say that all the hard work done by financial market professionals is worthless, or that studies about market trends should be ignored. However, as much as there is a lot to be learnt from these studies, it has been proven again and again that there are so many factors that will influence the performance of stocks (or the value of currencies) that it is actually worthless to rely on the prediction of future market results. Maybe we should just accept that nobody knows and learn how to live with such an uncontrollable environment.
But, as this decade old article on the Economist puts it, “humans are bad at factoring in the possibility of randomness and uncertainty”.
The future of bitcoin and other cryptocurrencies is in fact wildly unpredictable.
Many (myself included) believe that cryptocurrencies and blockchains came to stay and will indeed have a significant impact on the world in many aspects. This does not mean that one or the other cryptocurrency will be more successful. In the past two years, we have seen how easy it is to create a brand-new cryptocurrency (there are more than 1,000 different cryptocurrencies today) and even how easy it is to raise significant start-up capital to fund its development. So, the leading cryptocurrency in five years might well be a copycat version of bitcoin that has not even been created yet.
And, in addition to that, being successful does not mean being expensive. Even if a cryptocurrency becomes incredibly important in our daily lives and we rely on it for a variety of activities, it does not mean its value (as compared to the USD for example) should be necessarily high. Valuations of cryptocurrencies are today – and will continue to be – completely subjective, as is the case with artwork, gold or other assets.
Again, nobody knows. And I, for one, am ok with it.
In closing, and for full disclosure, I am an investor in a number of cryptocurrencies. As a result, I sincerely hope they will rise in value. But I truly believe it is impossible to predict. Time will tell.
Crypto Conjecture 