We’re entering a new phase in Nxt’s business cycle – and it might be one we’ve never seen before. What happens next is uncertain, as ever, but we can at least be sure there are new challenges ahead.
Back in May the NXT market turned a corner after a downward slide that lasted most of a year. Around that time I wrote an article about what had happened in that year. Basically, the decreasing value of NXT prompted people either to sell their coins or invest them in assets. The bear market had the same effect that central banks engineer with quantitative easing and interest rate cuts: increase inflation and make people spend the money they think will be worth less tomorrow.
Nxt is an odd system, economically. There are just a shade under 1 billion NXT coins, and there will never be any more. It’s a deflationary currency, as I explored in this article. No big deal, so are many others. But it’s not just a currency. It’s an entire economic platform, and that system crucially includes the Asset Exchange, our very own, very popular cryptostocks’ system. The best of those cryptostocks have been extremely well funded over the past year; in that respect, the bear market may have been the best thing that ever happened to Nxt. The cash they collected provides a solid foundation for growing businesses and pumping money back into the Nxt ecosystem in the form of future dividends. As a result, we can expect rising prices. And herein lies the next challenge: the Credit Crunch.
The credit crunch
Healthy business isn’t the only factor driving the price increase of recent weeks. In fact, it’s a very minor factor at this stage in Nxt’s development. Right now a wave of money from China is making a much greater difference, probably as a direct result of their stock market tanking. But the point remains the same: if inflation causes people to invest their NXT in revenue-generating businesses, what will rising prices (deflation) do?
It’s a little early to be a doom-monger. In fact, we’re barely out of the bear market – if at all, depending on what metrics you use to judge the exit point. But already the price action is impressive. At the time of writing, NXT’s price has roughly doubled in just six weeks.
It’s been a while since we’ve seen that kind of rise. Critically, we’ve not seen such a rise since the Asset Exchange has been up and running. NXT saw a spike up to its all-time high shortly after it was launched, at the beginning of 2014. Then another bull run in May saw a run up to $0.10 and a $100 million market cap – dubbed the ‘PayExpo pump’, but more likely mainly caused by Chinese speculators again. The Asset Exchange was just starting to become active at that point, but was certainly not the thriving hub of entrepreneurship it is now. The only other major rise in price happened at the end of last summer, when jl777 launched SuperNET. That time, though, the increase in NXT price was caused by the asset launch. As James had offered a 5% bonus for NXT and BTCD purchases, a huge number of people bought NXT to fund their SuperNET investment. The effect on what was a fairly thinly-traded market was substantial.
Now? For the first time ever, the Asset Exchange is at full steam contemporaneously with NXT possibly being in a bull phase.
China is a huge factor in that. As time goes on, the asset market itself will contribute more and more, since businesses will need to buy NXT to pay out as dividends to their asset holders. The irony is that the more successful those businesses are, and the more they push up the price, the less people will want to invest in new businesses. A rising NXT price equals a credit crunch.
However, it’s possible that those businesses grinding out the dividends will, by doing so, effectively solve the credit crunch problem themselves but only if existing investors see those dividends as ‘free money’ and use it to take a punt on the next big asset. Then again, maybe they’ll just decide to blow it all on a Lambo or a few rounds of very expensive drinks.
Beware fiat
And so to the bottom line. What does all this mean for Nxters?
For starters, not all assets are the same. Compare your average mining outfit (or rather, one that actually pays out instead of cutting and running…) with an arbitrage and market-making bot, like MMNXT. The former converts NXT to fiat after the ICO, uses it to buy mining rigs and then pays out in NXT that it buys with its mining proceeds. By contrast, the latter might convert some NXT to BTC, but generates revenues from low-risk trading activities, taking advantage of price differentials across different exchanges.
Assuming the mining asset is legit, it makes perfect sense to invest in a bear market: NXT is sold for fiat, which is used to buy mining equipment. So you’re not really investing NXT, you’re investing fiat and then the further NXT falls, the more you receive in dividends. In a bull market, by contrast, mining assets can be a disaster. Imagine, for example, buying an ASIC for 1 BTC when the price was $100, only to see it rise tenfold. Your returns diminish to 10 percent of what they were in BTC terms, without taking into account any other factors like increased ‘difficulty’ prompted by extra competition entering the mining race in the hope of easy returns.
The arbitrage asset, on the other hand, isn’t subject to the same risk. All things being equal, the NXT revenues stay the same – and in reality, rising prices bring more exchange activity and more opportunities for arbitrage.
For investors, then, there is a clear warning: make sure you know how the asset will generate income. If it involves conversion to fiat at any point, there’s a risk of exchange rate changes wiping out the benefits of any revenues, or worse.
For asset issuers, there’s the problem of attracting enough investment to launch. Simply, if investors think their NXT will be worth ten times more if they keep it in their wallet for another month, they’re unlikely to part with it to fund a speculative project. That ought not to be a problem if the business in question isn’t vulnerable to fiat/crypto volatility – but it might still be a problem anyway. Investors aren’t always rational, and if they are, they may take into account the fact that other investors aren’t rational. I know that an asset like MMNXT won’t lose NXT if the price rises – its accounts will still be just as well funded as they always were. But what happens if you suspect a significant number of existing investors are intending to sell their MMNXT and cash the NXT sale proceeds out to fiat? Then I’ll be reluctant to buy, knowing that MMNXT will likely drop in value. I might even sell it myself to anticipate the fall.
This is why it is rare for an asset to appreciate in NXT terms at the same time that NXT appreciates in BTC terms, at the same time that BTC appreciates in fiat terms. A rise in asset prices tends to correspond with a fall in NXT prices, and a rise in NXT prices tends to correspond with a fall in asset prices. The same with NXT/BTC.
Nxt has an odd counter-cyclical property built into it, whereby the seeds of the next bull market are sown during the crash of the previous bear market. It’s an interesting dynamic, and one that might be unique to Nxt. Over the next year, we’re likely to see whether it’s a problem. If it is, we’ll need to wait until the next bear market for businesses to attract major rounds of new capitalisation. That will be hard to stomach at the time. But it will be very good news for the next upturn.