Bitcoin peaked about a month ago on December 17 at a high of nearly $20,000. As I write, the cryptocurrency is below $11,000… a loss of about 45%. It’s more than that 150 billion dollars in lost market capitalization.
There is often wringing of hands and gnashing of teeth in crypto commentaries. It’s a no-brainer, but I think the “I-told-you-yes” crowd has an edge over the “justifiers”.
Here’s the thing: Unless you just lost your shirt on Bitcoin, it doesn’t matter at all. And most likely, the “experts” you see in the press won’t tell you why.
Actually, the Bitcoin crash is a great thing… because it means we can all stop thinking about cryptocurrencies altogether.
The death of bitcoin…
In a year or so, people won’t be talking about Bitcoin in line at the grocery store or on the bus like they are now. That’s why.
Bitcoin is a product of justified frustration. Its designer has clearly said that cryptocurrency is a response to government abuse of fiat currencies such as the dollar or the euro. It was supposed to provide an independent peer-to-peer payment system based on a virtual currency that could not be devalued because there was a limited amount of it.
This dream has long since been abandoned in favor of crude speculation. Ironically, most people care about Bitcoin because it seems like an easy way to get more fiat currency! They don’t own it because they want to buy pizza or gas with it.
Besides the fact that Bitcoin is a terrible way to transact electronically – it’s very slow – Bitcoin’s success as a speculative play has rendered it useless as a currency. Why waste them when they get expensive so quickly? Who will accept such a thing if it is rapidly depreciating?
Bitcoin is also a major source of pollution. It takes 351 kilowatt-hours of electricity to process one transaction, emitting 172 kilograms of carbon dioxide into the atmosphere. That’s enough to power one US household for a year. The energy consumed by bitcoin mining to date could power nearly 4 million US households for a year.
Paradoxically, Bitcoin’s success is old-fashioned speculative game – not for purported libertarian purposes – attracted government repression.
China, South Korea, Germany, Switzerland, and France have introduced or are considering banning or restricting Bitcoin trading. Several intergovernmental organizations have called for concerted action to contain the apparent bubble. The US Securities and Exchange Commission, which previously appeared to approve bitcoin-based derivatives, now appears to be wavering.
And as Investing.com reports: “The European Union is introducing tougher rules to prevent money laundering and terrorist financing on virtual currency platforms. It is also considering restrictions on cryptocurrency trading.”
Someday we may see a functional, widely accepted cryptocurrency, but it won’t be Bitcoin.
… But the incentive for crypto-assets
Good. Breaking Bitcoin allows us to see where the true value of crypto-assets lies. Here’s how.
To use the NYC subway system, you need tokens. You can’t use them to buy anything else… though you could sell them to someone who would like to use the subway more than you.
In fact, if there were a limited supply of metro tokens, there could be a booming market for them. They may even trade for much more than they originally cost. It all depends on how many people there are I want use the subway.
In a nutshell, this is the scenario for most promising “cryptocurrencies” other than Bitcoin. They are not money, they are tokens – “crypto tokens” if you will. They are not used as a common currency. They are only good in the platform they were designed for.
If these platforms provide valuable services, people will want these crypto tokens and that will determine their value. In other words, crypto tokens will have value to the extent that people value the things you can get for them from their associated platform.
This will make them real assetswith intrinsic value – because they can be used to get what people value. This means that you can confidently expect a stream of income or services from owning such crypto tokens. The important thing is that you can measure this future revenue stream against the price of the crypto-token, just like we do when we calculate a stock’s price-to-earnings (P/E) ratio.
Bitcoin, on the other hand, has no intrinsic value. It only has a price – a price set by supply and demand. It can’t produce future streams of income, and you can’t measure it with anything like a P/E ratio.
One day it will become useless because it will not bring you anything real.
The future is behind Ether and other crypto-assets
Crypto token Ether is sure it seems as a currency. It is traded on cryptocurrency exchanges under the code ETH. Its symbol is the capitalized Greek symbol Xi. It is mined through a similar (but less energy-intensive) process to Bitcoin.
But Ether is not a currency. Its designers describe it as “fuel for the Ethereum distributed application platform. It is a form of payment that clients of the platform make to the machines that perform the requested operations.”
Ether tokens give you access to one of the world’s most sophisticated distributed computing networks. It’s so promising that major companies are jumping at each other to develop practical, real-world uses for it.
Since most of the people trading it don’t really understand or care about its true purpose, the price of Ether has skyrocketed and frothed like Bitcoin in recent weeks.
But eventually Ether will return to a stable price depending on the demand for the computing services it can “buy” for people. This price will represent real value which can be evaluated in the future. There will be a futures market and exchange-traded funds (ETFs) for that, because each will have a way to estimate its underlying value over time. Just like we do with stocks.
What will this value be? I have no idea. But I know it will be much more than bitcoins.
My advice is to get rid of bitcoins and buy ether the next time it drops.