On Auroracoin: Extreme Caution Advised

According to data from Coinmarketcap, the Icelandic cryptocurrency Auroracoin has now passed Litecoin in market capitalization. This would make it the second most valuable cryptocurrency after Bitcoin, following a massive spike of interest from investors during recent days. The virtual currency is now trading at around $58 per coin, giving it a total market capitalization of around $ 600 million. But the apparent success of Auroracoin is a lot more fragile than it might seem. There are several reasons to approach this coin with extreme caution.

Premined

Auroracoin is based on Litecoin 50 percent premined. The team behind Auroracoin states that all premined coins will be distributed among the entire population of Iceland, meaning that every Icelander would receive 31.8 Auroracoins. At current rates this would be more than $1,800 per person. Auroracoin promotes itself as Iceland’s National Currency, but it should be noted that it is in no way backed by the Icelandic government. In fact, both Icelandic banks and politicians are calling it a “monetary scam.” Given that almost all coins in existance are currently privately owned, there’s not a real guarantee that Icelanders will actually receive their coins. But that’s not the only concern.

Misleading market capitalization

Coinmarketcap is currently showing a total market capitalization for Auroracoin of around $600 million. This is the price of about $58 times the number of mined coins, which is currently a little over 10.6 million. As stated before, 10.5 million of these coins are premined and will supposedly be handed out to the population of Iceland. The distribution will commence March 25th 2014. This means that the current price is based on a mere 100 thousand coins actually being traded. The price is thus not representative for the actual value of an Auroracoin, and makes investing extremely unpredictable and highly speculative.

Once the distribution of the premined coins would commence, this could potentially unleash a very strong downward pressure on the current price level. There is no infrastructure that allows the gifted Auroracoins to actually be used by the Icelandic population. This is a concern that was expressed by the project team on Twitter earlier today: “In order for #Auroracoin to be worth anything at all it needs infrastructure. Direct resources to that, not speculation.” With the deadline fast approaching, setting up the required infrastructure in time seems like a difficult challenge. Due to this, it could be the case that many will try to cash out their free $1,800 gift. This could even trigger a rush to be the first to sell, as the fastest ones would receive the most in return. In this sense, the fear of a drop in price could become a self-fulfilling prophecy.

Caution advised when trading

Considering the previous, it is advised to think twice before putting your money into Auroracoin. The rise of this coin has been one not yet seen before even in the crytptocurrency world. But in the end, the project might be nothing more than a speculative bubble that will disappear as fast as it came. If you like to gamble now would be a good time to start buying, but otherwise this coin is best left alone for now.

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