Crypto: Searching For Value

Over the course of the past week or so I have spent lots of time thinking and writing about how cryptocurrencies represent solid value relative to stocks, bonds and other commodities like gold or oil.  While the pragmatic investor looks for fundamental reasons to buy  itcoin and finds a mixed picture, the value investor rationalizes this point entirely.

The value investor takes note of the 60%+ price decline, reads about all the bad news about crypto regulation, slow speeds and security issues.  Then the conclusion is drawn that there is more risk in Facebook, Tesla or other stocks that in bitcoin, ether or other cryptos.

If all this makes sense, you probably want to consider a value investing strategy.

The Good News Has Been Getting Better

If you are a fan of crypto in general and bitcoin in particular, the big picture is smothered with regulatory issues.  Seems like everyday a government in some region of the world is issuing threats or taking actions to restrict adoption.  This is not going to change until someone declares victory against criminal activity of all sorts. This, of course, will never happen so we need to put these headlines on the back-burner of our thinking.

If we are able to accomplish that, the crypto community has been making out sizable progress on one very key issue: transaction speed and costs. If all the regulators in the world were to suddenly disappear, the future of bitcoin would not be worth a dollar unless improvements in speed and cost were made.  Well, that is starting to happen.

The Lightning Network’s (TLN) latest release has now been operational for a very short period and already the number of nodes has jumped to almost 850 and over 2,200 channels.  Without trying to come across like a member of the geek squad, the more nodes and channels, the better.

The best reason to explain this surge of participation is The Lightning Network can process about 50,000 transactions per second.  That is a far cry from the average of less than 10 that bitcoin has been running. Beyond this compelling offer is the fact that transaction costs come down dramatically as well because TLN consumes far less energy.

Because all eyes are watching for TLN to set the bar by which Ethereum’s Raiden Network must match, every little glitch that occurs will be magnified.  The thing to remember is that TLN is not the final solution, not by a long shot. Before it is over, bitcoin, Ethereum and others will need to compete in a world of tens of millions of transactions per second.  Otherwise, we have all been fooling ourselves.

Investors Looking For Leadership

The Lightning Network developments illustrate an important point.  Improvements in speed are one of the truly decisive issues to be tackled.  But closing the gap between 8 transactions per second as bitcoin has been configured up to now and the tens of millions of transactions needed to compete is a long multi-step story.

The evolution of cryptocurrencies today compares closely with the Internet circa 2003 following the bursting of the bubble.  Crypto has passed through its speculative phase and now the focus is shifting from all of the bazillion possibilities for blockchains and smart contracts over to putting together the bazillion details of delivering the services.

So, with all respect to the crypto expert Thomas Lee, who holds a price target of $25,000 on bitcoin in 2017, the price of cryptocurrencies may more closely track fundamentals unless or until somebody makes a spectacular breakthrough that can solve the twin problems of speed and security in lightning speed.  

Say, for example, bitcoin were to end 2018 closer to $12,000, that might sound disappointing. That is still more than a 70% upside with less implied volatility. That would be a good thing in the eyes of many regulators both in and outside of government.  

Featured image courtesy of Shutterstock. 

James Waggoner is a veteran Wall Street analyst and hedge fund manager who has spent the past few years researching the fintech possibilities of cryptocurrencies. He has a special passion for writing about the future of crypto.