My Cryptocurrency Rant

Indulge me for a bit and allow me to slam cryptocurrencies. There is just too much time devoted to studying initial coin offerings and while the blockchain is game changing, most digital currencies serve no economic purpose. I’m no Luddite but just because something is digital, doesn’t make it legit

Earlier on, I commented that I don’t see bubbles anywhere within the investible universe. That is accurate because I do not put cryptocurrencies in my bucket of things that I believe are investible. I feel that cryptocurrencies are rapidly heading into bubble territory because the narrative has run so far ahead of the definable economic worth, that you will continue to see crashes like you saw this week. Be it ICO’s (initial coin offerings), be it bitcoin itself, the account is the same: if the sole utility of an asset is the prospect of selling that asset to another person at a higher price, eventually the value of that asset will collapse. Bitcoin has legitimacy but dozens of other cryptocurrencies do not and as such, they are nothing more than digital tulips.

I am not a luddite. I am a realist who has seen too much excess in his career not to spot a bubble when I see it. The Chinese regulators have this right when they ban ICO’s this week citing illegal activity. Don’t get me wrong, the blockchain is amazing and I do believe that there is a place for a seamless way to transact. The problem is that bitcoin started its life as the conduit of choice for terrorists and drug dealers and has now morphed into a money laundering tool for Chinese investors. Of course, there are legitimate investors in bitcoin who are using it as a store of value but the chances of you being able to use bitcoin on Amazon anytime soon is remote because governments around the globe are going to require regulation to ensure that the sources of these digital currencies are legitimate. Let us not lose sight of the fact that global drug cartels, ISIS, Al Qaeda, human traffickers and the North Koreans have all used digital currencies as a means of avoiding the law.

Now before my libertarian friends throw a fit (on your way back from Burning Man), please remember that for digital currencies to become mainstream, you do need official support. Sad but true. You won’t be able to walk into Wholefoods anytime soon and buy stuff because Wholefoods won’t be able to pay suppliers or their taxes with cryptocurrencies. Unfortunately, that isn’t coming anytime soon without governments around the world becoming convinced that they can stop the bad guys from using it. There is no way of stopping corruption but the anonymity of cryptocurrencies makes it so much easier. Law enforcement will resist the broad use of digital currencies until they can mitigate the risk that bitcoin won’t be used to fund the next 9/11. This is just the way it is.

So, as we stand today, cryptocurrencies are a bubble and you will see more actions from global regulators similar to what you have just seen in China. If ICO’s want to be legitimized, they have to accept regulation and unfortunately, this regulation will expose many of the sponsors as empty vessels.

Just because you make something digital, doesn’t necessarily mean its legitimate.

I will be on the bid in bitcoin at $1000 if anyone is interested.

Comments (23)
Ken_Dyks
Ken_Dyks

Editor

@conversation

The Kin ICO was a success. Hopefully we will learn more soon about how their ambitions pan out. Would be great if they can really become a self-sustained platform, free of ads.

Cindy Ponder-Budd
Cindy Ponder-Budd

Editor

Martin Chorzempa from the Peterson Institute believes that the recent crackdown by China on cryptocurrencies is a needed step to eliminate fraud; but will only be temporary. https://piie.com/blogs/china-economic-watch/why-china-cracking-down-cryptocurrencies-and-icos

Rupert Mitchell
Rupert Mitchell

Editor

Now this is an idea I really like. Doubt there will be much dispute about Gold as a long term store of value

Ken_Dyks
Ken_Dyks

Editor

I think a big issue is Utility. Regulation would increase BTC utility in mainstream, not necessarily its value (tomato / tomato) @DannyAnders .

Regulation would increase its utility for, among others, (small) intercontinental/currency transactions. Yet those transactions would still be at BTC-spot. You would hedge your JPY/USD, and then on the day of payment use BTC to change from JPY to USD, at minimum friction. No need to hoard BTC beforehand.

The current increase in value (in USD) seems driven by capital flight, amplified by trading, BTFD, and FOMO. Increased regulation decreases the appetite for capital to flee into BTC. Hence the Chinese dumping. BTC makes (made) capital flight easier for the “little” guy, who can’t buy a house in Toronto. With regards to crypto in China, NEO (Ethereum of China) will be interesting to track, from a Utility standpoint.

So, more regulation increases Utility, and should logically decrease capital flight, thus speculation, thus Vol.

Regarding Crypto as infrastructure for a society, Kik Messengers’ Kin is interesting to track. @AlexBergo . The Kik network has 300mln registered users, and it will be very interesting to see how their ambitions pan out.

DannyAnders
DannyAnders

@robscott. The value, just like any other asset, is based on supply and demand. BTC and ETH have different things affecting supply and demand.

BTC has an increasingly limited supply, so as long as there is increased use, you will see and increase in price. This is in stark contrast to, and a huge benefit over, fiat currencies; where central banks can manipulate the money supply. This is probably the GREATEST value of bitcoin and what will lead it to win in the end. It's what will eventually provide greater stability than the dollar. It's also what drives the demand. BTC is the defacto currency for which other crypto currencies are pegged. Think about that. It's not the dollar. So anyone getting involved in this new world of transactions and ICOs converts primarily to bitcoin. It is by far the easiest to acquire with fiat. As more and more things are able to be purchased with BTC, so will it's demand continue to increase.

ETH follows the same logic, except is use is different. ETH is used for more for smart contracts. There is far more uses for smart contracts than exchange of value. So as more and more people continue to build with smart contracts, they will continue to be demand for Ether. Although they have a huge lead in the smart contract space because of their first mover advantage, there are lots of companies building blockchains with better architectures, but none have achieved a critical mass of users to create a real market for the use of their coins. It remains to be seen. But its early in the race.

Finally remember that the dollar at this point is the biggest bubble of all. The printing of money by the federal reserve, the ever increasing national debt, and ever decreasing value being created will eventually lead to that bubble bursting in a much bigger and badder way than anything you've ever seen. I wonder what haven people will move to when that bubble bursts? Euro? Gold? or BTC? Look at Venezula, Japan, Russia, and Korea for a hint.

Rupert Mitchell
Rupert Mitchell

Editor

great to have you on board @RonnieXP ! Your insights on this hugely valued given your new fund.

RonnieXP
RonnieXP

I generally agree 99% of what is out there will tend to 0 but the rest will be game changing on a global scale. The volatility is just a function of an early stage market which has massive velocity given 24/7 trading, that does not define the asset class as uninvestible, you just need to know how to do it. It will continue to overshoot on the downside and upside. I think it a weak argument to say that because criminals have used bitcoin or other digital currencies that is a reason against continued growth. KYC/AML needs to be improved for sure but frankly we are nowhere near the scale of laundered money that is allowed to flow through the traditional banking system. I agree with @BillTai regulation is a good thing and will drive more institutional awareness and capital - entertaining to see worlds collide on this chat @Rupert_Mitchell @DannyAnders @RobScott @BillTai

AlexBergo
AlexBergo

I also think it isn't unreasonable to question the ICO's, I agree that in its current form it is speculative but digital currencies can serve good purposes.
Digital currencies can certainly serve purposes for large multinational corporations as a translator between currencies where the company stands as a guarantor. It can mitigate some risk in fluctuating valuations in the value chain.
A second and bit more out there thought is that having a currency is critical to establishing any society. Being able to create currencies can serve as a great service exchange unit for collaborative societies without the need to involve and depend on outside regulated units like national currencies. A society then becomes a more loosely coupled unit to national state, but a closer knit community. In stead of the Feds you'd have social contracts that via blockchain is transparent and verifiable by design. As geographical borders are more and more meaningless and new societies can be established the need for for digital currencies will increase.

psmoore
psmoore

Glad to see this discussion. The article is right. Even if distributed ledgers are widely adopted, there are no good arguments that stockpiling cryptocurrencies will be necessary to use them. I've tried to find good arguments! Some blockchain services like Storj will accept their tokens for payment, but of course they also just accept credit cards! Take a look for yourself. And even Ripple: Its cryptocurrency can help eliminate credit checks at each step of a money transfer, but one can convert from USD to XRP to KRW instantly during a distributed ledger money transfer from the US to Korea, with no need to stockpile XRP for a longer period and make a currency bet that might swamp your bet on your main business, where you actually might have a competitive advantage that you don't have in currency speculation. Also, there is not a good argument that cryptocurrencies will be used widely to transact goods and services outside blockchains, because their very design makes it impossible for them to have stable inflation relative to real goods and services, which is the most important property of a currency. Unless someone invents a cryptocurrency that is managed like the Fed manages the USD (Libertarians, go ahead and puke now). However, there is a logical argument that some percentage of what is parked in gold as a "store of value" may be parked in cryptocurrencies (probably just one or a few winners), for whatever reason people park it in gold, despite it not having utility for facilitating transactions in real goods and services or anything else (other than aesthetics in the case of gold itself). And of course there is a valid argument for those that really want anonymity. Those two valid arguments (valid for some smallish population at least) probably got the momentum going, and now all kinds of invalid arguments are being trotted out.

Paul Krake
Paul Krake

Editor

@BillTai : There are plenty of small, efficient yet broadly irrelevant markets for goods and services. True scale is key and that requires governments to accept payments for taxes and tariffs on good.

Paul Krake
Paul Krake

Editor

I am not quite sure what critical mass means when defining a cryptocurrency. Retail investors in China being able to transact easily with limited slippage is one thing. Large scale commerce is another and we certainly aren't there yet. Large scale commerce only occurs with the support of governments. For exmple, exporting a car for Europe to China only works if tariffs etc. can be paid with the same digital currency. I suspect the benefits of block chain will dramatically outstrip the utility of the digital currencies themselves.

Paul Krake
Paul Krake

Editor

@DannyAnders I agree completely with the argument about regulation making a digital currency more valuable because it allows it to go mainstream. There is little doubt that with broad acceptance, it would be a much more efficient system. The is something ironic about how the narrative has changed. Early days of bitcoin were dominated by the libertarian argument of anonymity which definitely encouraged an illegal element to gravitate towards its use. Now, the efficiency and transparency of the block chain is now the hook which should eventually encourages regulators to embrace it. Fundamentally, the technology is the same, just the narrative has changed.

RobScott
RobScott

The reasoning seems pretty sound ... but I am still getting my head around crypto. What is really holding up the value of BTC and ETH, other than perceived future appreciation?

BillTai
BillTai

Markets exist when there are differing views on what an asset is worth. There IS a robust market now for the main crypto in Bitcoin and also in Ether. I do not disagree that for the most part that the uplift in ICO tokens may be largely a speculative vortex - in my opinion - built around the large and rapid rise of aggregate ETH value where holders are seeking to diversify. All that said, I do not think that the main units BTC and ETH are going away. I don't see Litecoin or Ripple going away either. and per @DannyAnder's comment above - I totally see that too, While regulatory moves will introduce friction, the right kind of regulation will increase trust and thus increase the durability of crypto as a means of exchange.

DannyAnders
DannyAnders

Mostly accurate. Except the perspective lacks vision.

Regulation does not make cryptocurrwncies less valuable. It makes them more valuable because it legitimizes them and reduces uncertainty; thus allowing businesses and consumers to use it in legitimate ways.

The question should be weather a blockchain based technology creates more efficiency than the current systems controlled by incumbents. And if so, how do you get a critical mass of users to displace said incumbents.

Bitcoin and ethereum have both managed to achieve a critical mass of users and established legitimate uses. Bitcoin is not yet more efficient than legacy systems, but does have some other appealing qualities.I can't really say the same for many other coins yet. Maybe Ripple.

Rupert Mitchell
Rupert Mitchell

Editor

This site is aggregating the various bitcoin obituaries over the past few years

Rupert Mitchell
Rupert Mitchell

Editor

one thing is for certain. people are on the hunt away for stores of value away from traditional financial assets. never been much of a gold bug but suspect if you $1000 bid in BTC is hit, XAU will be a lot higher than $1330....

Rupert Mitchell
Rupert Mitchell

Editor

100% onside on this one. However, 2 thoughts: 1. there may well be something to do with the picks and shovels of BTC (i.e. Nvidia) 2. saw an interesting article yesterday about Delaware allowing share registers to be kept on a blockchain. got me thinking. is blockchain over complicating the task of maintaining a share register?

Paul Krake
Paul Krake

Editor

@Rupert_Mitchell, welcome your thoughts on my rant



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