I’ve written about why I dislike cryptocurrencies. Everything I’ve written there is an accurate conveyance of my views.
However, today I’d like to write about why I like cryptocurrencies (and blockchain technology). I don’t see these views as contradictory, simply pragmatic.
If you aren’t already familiar with terms like blockchain, cryptocurrency or Bitcoin check out this explanation: What is Bitcoin?
Let me give you an example to illustrate why it doesn’t really matter if there are things I dislike about cryptocurrencies. If you know a lot about art this won’t work. Lets say I created the following piece of artwork. Say it’s something I painted when I was in seventh grade.
I try to sell it. How much do you think it would go for?
I’m guessing somewhere between nothing and a few bucks. Personally I don’t think it is very good. I don’t like it that much. The paint and canvas could be purchased for a few dollars but they might be worth more unused.
But guess what, it’s actually a Pablo Picasso painting called “Femme Assise” and someone paid $63.7 Million for it in 2016.
I don’t particularly care for this piece of art but people are willing to spend millions for it. So If I knew a lot about art and spotted an original Picasso at a garage sale for $20 I would buy it knowing I could sell it to someone else for much higher.
Just because I don’t particularly like much of Picasso’s artwork doesn’t mean it isn’t highly valued by other people. Just because I think there are fundamental flaws with cryptocurrencies that prevent it from being a good long term store of value doesn’t mean they won’t rise in price–at least in the short to medium term.
Whenever money is pouring into a sector or industry that is an opportunity for profit. And so I view cryptocurrencies as a speculation rather than an investment. But given all of that there are several things I like about cryptocurrencies.
1) Cryptocurrencies are great for Speculation and Trading
On 28 April 2013 the market cap of all cryptocurrencies was $1.59 billion. It’s currently nearly $28 billion.
That is a tremendous inflow of money in a period of just four years. Cryptocurrencies are a rapidly growing market and it’s easy to pick a winner when everything is going up, wether it is stocks or cryptocurrencies.
The price of cryptocurrencies also tends to fluctuate dramatically and that sort of volatility is great for trading.
2) Cryptocurrencies aren’t Controlled by the Government
I’m sure some people go into government because they want to do good and make a positive change in the world.
However, on the whole government, at least in the United States, seems to mainly work to perpetuate itself. One way the US government has been able to stay in power is by going into debt and printing money.
This has resulted in a significant devaluation of US dollars.
While I think most cryptocurrencies are fairly centrally controlled the people in control of these cryptocurrencies have motivation to work for the long term good of the currency and technology since there are hundreds of other cryptocurrencies out there that people could easily adopt instead.
I think the inspiration and popularity of cryptocurrencies is at least in part due to this reckless government spending which is itself inflation and the cause of price inflation.
Many (but not all) of the cryptocurrencies including the largest, Bitcoin, are designed to be deflationary in nature.
3) Potential Widespread Adoption
A cryptocurrency or blockchain technology could be widely adopted as a replacement for one or more parts of the legacy financial system.
A Replacement for Dollars or Euros or Yen…Etc
While billions of dollars have flown into cryptocurrencies over the past several years there still isn’t widespread adoption by consumers. You don’t go into the local quick mart to pay for gasoline with DASH or Bitcoin. Amazon.com doesn’t accept Monero or Zcash as payment.
Spending dollars online and in the brick and mortal world using technology like Paypal or simply a credit card works great. The technology for spending fiat currency is mature and works fine in most use cases.
An Outside Catalyst
For some reason the average consumer in America (and perhaps people around the world too) doesn’t really about inflation, at least not directly. They care their rent goes up each year and things are getting more expensive, but they don’t think about the cause of rising prices (other than unfairly blaming “greedy business owners”).
Right now inflation is “only” 2-8% per year. Even though that represents a tremendous loss of purchasing power over time it is low enough that people aren’t really concerned about it. As long as price inflation is relatively low and stable I think people will continue to use government issued fiat currency.
But if inflation really started to take off (as I think it will some day) I anticipate the appeal and adoption of cryptocurrencies would take off as well and with it the price.
Weakest Elements of the Legacy Financial System
However international wire transfers are rather slow and somewhat expensive. And I’m not aware of an online cash-like payment system that existed before Bitcoin. So international settlements and online cash-like transactions are two areas within the legacy financial system that leave room for cryptocurrencies and blockchain technology to step in as a superior alternative.
Blockchain technology like Ripple, which has been sponsored by numerous large banks around the world, could very well replace certain elements of the international financial system.
Cryptocurrencies like Zcash and DASH, which are better than Bitcoin when it comes to speed and privacy, could very well gain large marketshare as a way to make cashlike transactions online.
4) Blockchain technology
In addition international settlements there are a variety of other applications for which Blockchain technology, one of the fundamental technologies behind cryptocurrencies, could be transformative. Areas like stock ownership, smart contracts, digital voting, and cloud storage could be revolutionized by blockchain and cryptocurrencies.
Cryptocurrencies and Blockchain Technology
I don’t see these technologies going anywhere. They could very well revolutionize many sectors in the financial world.
For all the reasons I’ve listed before, I don’t know that buying into a cryptocurrency is going to be a good long term store of value.
However, the technology itself is powerful and there is the potential for profit if one makes some daring (and correct) speculations.
I want to give credit to Bitfinex. They paid back all their IOUs by redeeming 100% of all BFX tokens.
These BFX tokens were issued as a placeholder for Bitfinex account holders who received a haircut of 36% when 119,756 BTC was stolen from Bitfinex on 2 August 2016.
Back in January I sold my remaining BFX tokens for .55 USD per token. If I had held onto them today I would have gotten 1 USD per token.
With the benefit of hindsight that was not the best call.
However, it’s pointless to evaluate a decision based on information that wasn’t available at the time. I don’t think I could have known that Bitfinex was going to aggressively redeem the IOUs at such an accelerated pace.
With that in mind I made the best decision I could with the information available to me at the time.
I have a
love/hate like/dislike relationship with cryptocurrencies. But one thing I feel confidently about is that Bitcoin is not the future of cryptocurrencies.
By market capitalization Bitcoin is currently sitting in the #1 position as the largest cryptocurrency.
But it isn’t there because it’s the best. It’s there because it was first.
There is something to be said for the network effect but Bitcoin has several fatal flaws that leave it vulnerable to being overtaken by newer and better technology.
Bitcoin Transactions take “forever”
A screen capture from bitcoin.org. I don’t consider 10-30 minutes fast unless we’re talking about glaciers or the the average US bureau of motor vehicles
If I buy something digital online I want to be able to download it instantly.
Imagine buying a song on iTunes but having to wait 10-30 minutes to start downloading it. If Apple used bitcoin instead of credit cards that’s probably how long you’d have to wait.
Or what if you want to buy a latte on the way into work? Would you want to wait 10-30 minutes in the coffee shop before you can leave with your drink?
But why is Bitcoin so slow?
Bitcoin takes 10 minutes per block. A block is a set of transactions. So at best Bitcoin takes 10 minutes to confirm a transaction. Most vendors however, require 2-3 confirmations before they consider the bitcoin transferred, which means 20-30 minutes of waiting.
Bitfinex requires 3 confirmations before it considers Bitcoin transferred
You need a Trusted Third Party to make Fast Payments
Websites like Overstock.com accept Bitcoin as payment. However, they do so by utilizing a trusted third party, like Coinbase, to serve as a middleman.
No doubt they do this to avoid the issue of double-spending, refunds and transactions taking thirty minutes.
But the fact that overstock.com uses a trusted third party pours cold water on the idea Bitcoin has “Fast peer-to-peer transactions”.
Bitcoin has Scalability Problems
In addition to confirmations being slow, Bitcoin has issues with scalability of the network, or the number of transactions the network can process. There are competing camps about how to resolve this issue but there has been much more debate than action.
This could lead to hard forks of the cryptocurrency. More on that later.
Bitcoin Transactions aren’t Anonymous
One of the previously oft touted benefits of Bitcoin was anonymity in transactions. While Bitcoin transactions are pseudonymous, unless you buy bitcoins in cash from someone on the street, there are links back to the exchanges and thus bank accounts.
I’m sure there are ways to purchase Bitcoins anonymously but it’s not easy or safe. If you know how to do this I’d value your input in the comments section below.
Bitcoin is Centralised and the Centralised Powers don’t have Their Act Together
A screen capture from the Bitcoin Foundation (bitcoinfoundation.org) website
Despite propaganda that Bitcoin is decentralised–it is in fact controlled by the Bitcoin Foundation in conjunction with the Bitcoin Core developers and the larger miners who can afford the expensive application specific integrated circuit hardware required to successfully mine Bitcoin.
In sort of an Orwellian double-speak both the Bitcoin Core developers and Bitcoin Foundation talk about how they keep Bitcoin decentralised.
The Bitcoin Core development team is not very big.
I don’t see how a group of 3 “maintainers” and a dozen or so contributing developers is “decentralised”.
If I wanted to be really mean I would compare the Bitcoin Foundation to the Federal Reserve and the miners to the big wall street banks.
But I won’t do that.
The main advantage Bitcoin has over the Federal Reserve is that the number of Bitcoins that will be created is fixed at 21 million whereas there is no limit to how many dollars the Federal Reserve can conjure from within the shady halls of the Eccles Building.
A screen capture of a written statement from bitcoin.org/en/bitcoin-core/
However, if Bitcoin forks, like Ethereum did, then the number of Bitcoins will effectively double.
I don’t necessarily have a problem with a cryptocurrency being centrally controlled.
While I have a general bias towards decentralisation and subsidiarity (when possible)–I think that a benevolent dictatorship can be good–provided it is easy to jump ship if the centralised power becomes corrupt.
Bitcoin is Squandering it’s First Mover Advantage
But despite large issues with Bitcoin the Bitcoin Foundation and the Bitcoin Core developers haven’t gotten it together to make progress in fixing the aforementioned systemic issues with Bitcoin.
Could these problems be fixed? Sure. Smart, motivated individuals working together towards a common goal can accomplish amazing things. But I don’t see the Bitcoin community taking these problems seriously.
For these reasons I believe that Bitcoin is not the future of cryptocurrencies.
But similar to what I’ve stated before, just because there are things I don’t like about cryptocurrencies doesn’t mean I won’t use them and profit from them.
I also choose to partake in the Bitcoin market through USD margin funding on Bitfinex and arbitrage on BitBays, which can be done without any exposure to the underlying cryptocurrency itself.
BitBays has a proven track record of security and the USD arbitrage fund doesn’t involve any exposure to Bitcoins or crypto.
If you are interested in purchasing Bitcoins, if only to transfer value to an exchange like Bitfinex or BitBays I show you how to buy Bitcoins on Coinbase.
I didn’t post any April Fool’s Day articles but I did read several that I enjoyed.
I was completely taken in by this Lunar Gold Storage article for a full three minutes before I realized what date it was! What can I say? It was the first thing I read this morning and I was still groggy!
Some other articles I got a chuckle out of:
All Irish to receive 1 Ounce Free Gold
Kangaroos Released in Wyoming
Happy April Fool’s Day!