Bitcoin peaked nearly a month ago, on December 17th, at around $20,000. As I write, the cryptocurrency is below $11,000… a loss of about 45%. This is more 150 billion dollars in lost market capitalization.
Cue much hand-wringing and gnashing of teeth in crypto-commentary. It’s neck and neck, but I think the “I told you so” crowd trumps the “excuse makers”.
Here’s the thing: unless you lose your shirt on bitcoin, it doesn’t matter. Most likely, the “experts” you see in the media are not telling you why.
Actually, it’s cool that bitcoin is crashing… because it means we can all stop thinking about cryptocurrencies altogether.
The death of Bitcoin…
In about a year, people won’t be talking about bitcoin in the grocery store or on the bus like they are now. Here’s why.
Bitcoin is a product of righteous frustration. Its designer has made it clear that cryptocurrency is a reaction to government abuse of fiat currencies such as the dollar or euro. It had to provide an independent, peer-to-peer payment system based on virtual currency, which would not be reduced because there was a limited number of them.
This dream has long been dismissed 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 have it because they want to buy pizza or gas with it.
Besides being a terrible way to transact electronically—it’s excruciatingly slow—bitcoin’s success as a speculative play has made it useless as a currency. If it appreciates so quickly, why would anyone spend it? Who will accept it when it depreciates rapidly?
Bitcoin is also a major source of pollution. It takes 351 kilowatt-hours of electricity to process just one transaction – which releases 172 kilograms of carbon dioxide into the atmosphere. That’s enough to power a US household for a year. The energy consumed by all bitcoin mining to date can power nearly 4 million US households for a year.
Paradoxically, the success of bitcoin as of old speculative game – not their intended libertarian uses – attracted government repression.
China, South Korea, Germany, Switzerland and France have implemented or are considering bans or restrictions on bitcoin trading. A number of intergovernmental organizations have called for joint action to curb the apparent bubble. The US Securities and Exchange Commission, which once looked set to approve bitcoin-based financial derivatives, now appears hesitant.
And according to Investing.com: “The European Union is imposing tougher rules on virtual currency platforms to prevent money laundering and terrorist financing. It is also exploring restrictions on cryptocurrency trading.”
We may someday see a functional, widely accepted cryptocurrency, but it won’t be bitcoin.
… But Boost for Crypto Assets
Good. Going through Bitcoin allows us to see where the real value of crypto assets lies. Here’s how.
A token is required to use the New York subway system. You can’t use them to buy anything else… though can sell the subway to someone who wants to use it more than you.
In fact, if metro tokens were in limited supply, there could be a vibrant market for them. They may even trade at a much higher price than their original value. It all depends on how many people there are I want to use the subway.
This, in short, is the scenario for most promising “cryptocurrencies” other than bitcoin. They are not money, they are signs – “crypto-tokens” if you will. They are not used as common currency. They are only good on the platform they are designed for.
If these platforms provide valuable services, people will want those crypto-tokens and that will determine their price. In other words, crypto-tokens will have value to the extent that people value what you can get for them from their related platforms.
This will make them real assetswith intrinsic value – because it can be used to get something that people value. This means that you can reliably expect a stream of income or service from owning such crypto-tokens. Critically, you can measure future revenue streams against the price of a crypto-token, just as we do when we calculate a stock’s price/earnings (P/E) ratio.
Bitcoin, on the other hand, has no intrinsic value. It only has a price – a price determined by supply and demand. It can’t generate future income streams and you can’t measure anything like a P/E ratio for it.
One day it will be worthless because it doesn’t get you anything real.
Ether and Other Crypto Assets Are the Future
Crypto-token ether is sure it seems like currency. It is sold on cryptocurrency exchanges under the code ETH. Its symbol is the Greek capital letter Xi. It is mined in a similar (but less energy intensive) process to bitcoin.
But ether is not a currency. Its designers describe it as “the fuel to power the distributed application platform Ethereum. It’s a form of payment made by the platform’s clients to machines that perform 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 falling over each other to develop practical, real-world uses for it.
The price of ether has bubbled and frothed like bitcoin in recent weeks because most of the people who trade it don’t really understand or care about its true purpose.
But eventually, ether will return to a fixed price based on the demand for computing services that people can “buy”. This price will represent real value may be evaluated in the future. There will be a futures market and exchange-traded funds (ETFs) for that, because everyone will have a way to estimate its underlying value over time. Just like we do with stocks.
What will this value be? I do not have any idea. But I know it will be more than bitcoin.
My advice: Get rid of bitcoin and buy ether at the next dip.