Cryptocurrencies have become the latest financial phenomenon. This digital currency has also attracted the attention of academics. According to a recent study from researchers in Finland from the University of Vaasa has found that cryptocurrency is defaulting. According to Saleh Stevens, this has become an important development to realize since over 2,000 cryptocurrencies have launched. But a large amount of those crypotcurrencies have busted. These failures have hurt the credibility of the industry and has become expensive for investors.
These levels don’t express confidence in crypotcurrencies. Since most of them were launched in 2014, nearly six out of 10 failed by the end of 2018. Among the cryptocurrencies that launched between 2009 and 2019, eight of 10 failed. Bitcoin has made up for half of the market and has done fairly well. That hasn’t stopped academics from entering the crypotcurrency industry. While researchers have cautioend that cryptocurrency is still an early model, these results are encouraging these early failures. What are the indicators of an early failure?
The Importance of a Strong Cryptocurrency
It’s important for a cryptocurrency to perform positively from day one. The digital assets that started strong on day one lasted longer one that the ones that were highly volatile. However, when it comes to the first week results, returns and volability will matter less than the long-term default rates. If a cryptocurrency has a successful day and increases stability over the first month, then it’s less likely to fail in the coming years. This can provide a formative journey for the next four years of the crypotcurrency’s lifecycle.
High Pre-Mining is a Negative Indicator
Pre-mining happens when the developer decides to create a large number of digital coins before they enter the market. This results having a larger share of the currency. Pre-mining indicates a negative signal with most of those coins headed for failure. While the concept of pre-mining isn’t entirely negative, a high level of pre-mining can be. High levels of pre-mining can cause developers to start a get rich quick scheme rather than to set themselves up for long-term success.
Founder Anonymity
Fifty-eight percent of cryptocurrency founders choose to remain anonymous. This decision is often linked with early onset bankruptcy. The only successor is Bitcoin, which has an anonymous founder as well. Seventy-nine percent of failed cryptocurrencies are linked to anonymous founders.
Lower Rewards
The research also showed that successful digital coins have a lower reward per block. That relates to the absolute terms and relative terms when it comes to the total of these assets. This research has shown that digital coins with lower rewards have long-term success than those with higher rewards.
The First Step
This is not an exhaustive study into cryptocurrencies. This dataset only contains proof of the future of crypotcurrencies, not proof of the stake in these assets. There are many variables to determine a crypotcurrency’s success that’s not available in this dataset and couldn’t be used accordingly. This research only focused on cryptocurrencies that failed within four years, which is different than determining the chances of a digital coin’s success.
Saleh Stevens suggests that as you analyze cryptocurrencies that enter the market, it’s important to look at a few key factors. The odds are not going to be in the investor’s favor when they’re looking into new cryptocurrencies. Most of them will not last longer than four years if this research is a guide. It’s better to look for a strong performing one from day one, which has a relatively calm first month and avoids high levels of pre-mining and big rewards.
The cryptocurrency industry is rapidly changing thanks to technology. There are new digital coins being launched with different algorithms in place. Academic researchers have found that three out of every four cryptocurrencies will fail. These results should encourage developers to make strong cryptocurrencies.
