The Logic Behind Why Ethereum, Ripple, Litecoin, and Dash Keep Heading Higher

It's simple really: No one makes money if cryptocurrencies fall.

Sean Williams (TMFUltraLong) Jan 13, 2018 at 10:39AM

What an incredible year 2017 was for cryptocurrencies. Having begun the year with a combined market cap of less than $18 billion, the aggregate value of all virtual currencies by year's end hit $613 billion, representing a better than 3,300% increase. Cryptocurrencies soared even more to begin 2018, hitting an all-time aggregate market cap high of $836 billion on Jan. 5, before losing a little bit of steam. These are essentially lifetime gains for investors that have been crammed into a span of just 52 to 53 weeks!

Yet, what's really interesting is that bitcoin (CCC: BTC-USD), the world's most valuable and popular cryptocurrency, wasn't a primary focus in 2017. Rather than investors flocking to bitcoin, the goal among digital currency investors became to find the next bitcoin. As a result, a number of burgeoning cryptocurrencies ran circles around bitcoin last year. In particular, Ethereum (CCC: ETH-USD), Ripple (CCC: XRP-USD), Litecoin (CCC: LTC-USD), and Dash (CCC: DASH-USD) were veritably unstoppable, with respective gains of 9,383%, 36,564%, 5,260%, and 9,282%!

A physical gold bitcoin lying atop a messy pile of hundred dollar bills.

IMAGE SOURCE: GETTY IMAGES.

You're giving these crypto catalysts too much credit

How on Earth do virtual coins that have gained 5,000%, 10,000%, or possibly more, keep heading higher? What I can say with some certainty is that it's not entirely due to the emergence of blockchain technology, as much as Wall Street would like to believe so. Blockchain is the digital, distributed, and decentralized ledger tethered to virtual coins that's responsible for recording all transactions without the need for a financial intermediary, such as a bank.

Unquestionably, blockchain does offer a number of potential advantages if financial service companies deploy the technology in place of the current payment networks. As a decentralized network, blockchain ensures that cybercriminals would never be able to gain hold of enough data to cripple a cryptocurrency, and that no single entity would ever control a majority stake.

Furthermore, since transactions are being verified 24 hours a day, seven days a week, blockchain-processed transactions may be verified within seconds, as opposed to waiting up to three to five days with cross-border payments. Additionally, not having a middleman involved means potentially lower transaction costs.

 

Dice that say buy or sell being rolled atop a digital chart.

IMAGE SOURCE: GETTY IMAGES.

Other catalysts, such as bitcoin being accepted as legal tender in Japan, select investors choosing bitcoin as a store of value over gold, and a weaker U.S. dollar, have possibly played a role in pushing cryptocurrency prices higher, but they're not the primary source of higher market caps.

The logic behind higher cryptocurrency valuations

If you want to truly understand why cryptocurrencies like Ethereum, Ripple, Litecoin, and Dash have pushed higher, then you need to familiarize yourself with the logic behind the cryptocurrency market.

With the exception of bitcoin, cryptocurrency investors have but two choices to make: Do I buy, or do I sell what I own? That's it. There are no options contracts to choose from and no futures to consider, unless you trade futures contracts on bitcoin offered by CME Group or CBOE Global Markets. There's also no ability to short-sell a cryptocurrency. The path to prosperity is very narrow when it comes to virtual currencies. If they go up, everyone makes money. If they go down, no one makes money. That logic leads to one natural conclusion: everyone buys.

Source: https://www.fool.com