Cryptocurrency, as a concept, we don’t think is going away. Will Bitcoin be the beneficiary of that or not? Who knows? It does have a first-mover advantage, and it has significant adoption already. But how much value does that create? It is time to consider it.
Lately Cryptocurrencies have been hitting the headlines.
Somebody will post a video about Cryptocurrencies, you look through the comments, and the next thing you are talking about how you are going to lose your entire investment. On the other hand, you have the other half that is rejoicing because the value is reaching $50,000 per coin. Seems like that is polarizing. Incidentally, you're either one or the other, and you don't find many people in the middle.
Let’s look at the word itself…when you call something a currency, it has the actuality or quality of being generally accepted in use for payment. The first part of the word, Crypto, implies cryptography, the study of sending and receiving encoded messages.
So, for cryptography example, you have individuals Andy, Cathy and Jim. Andy wants to send a message to Jim without Cathy's possibility of receiving anything in the transfer, which may alter the conversation. In 2009, Satoshi Nakamoto discovered you could combine cryptographic methods with a design for a deflationary unit of value, which would solve the digital double-spend problem. Double spend is where there is a risk that the holder could make a copy of the digital token, send it to a receiver/merchant and keep the original. And when you combine cryptography with currency, it becomes the sending of a means of exchange or value.
Cryptocurrency is not a currency like gold, it is a digital currency. But like the dollar, it has come a long way since its creation ten years ago. One Cryptocurrency, Bitcoin, sometimes described as digital gold, has generally been viewed as a risky speculative investment for short term profits. Gold, for the meantime, has always been deemed a dependable asset.
But for cryptocurrency to be a valid currency, at least something like Bitcoin, it would require several layer-2 solutions over the top of it, and that's just a function of some of the network constraints. However, for Bitcoin to solidify as a currency of value, it would require wider adoption. But is Bitcoin just a speculative bubble?
The first Bitcoin bubble occurred in 2011, when there was a news article and a popular online magazine about it, and so the price of Bitcoin went from pennies to $1.
The second bubble for Bitcoin also happened in 2011. Where a subsequent article detailed Bitcoin's use in dark markets. The price went from $1 to $29 before eventually settling back to around $2 each. Most people are familiar with the bubble in 2017 when it went from under $1,000 to upwards of $20,000 and then fell back down. That is a cycle we will and are continuing to see.
What is the cause of these bubbles?
The whole concept of a bubble is when valuation detaches from any fundamentals. Whether you call it speculative pricing or a bubble, you're saying the same thing. To see the price of something rise so dramatically and then crash back down is a good indication that it was a bubble. And there is no specific reason why the value did what it did, or why the bubble happened.
Compared to the gold market, Bitcoin is a gold substitute as part of the value proposition, so it's not a little thing. View it in that same context and let’s say we have a Bitcoin. This Bitcoin achieves the goal of becoming a recognized substitute for gold, and how it might capture some of that market share. And so, some of the currently allocated value in gold is pushed over to the Bitcoin side.
In a way, Cryptocurrency assumes that something is going to happen, but this definitely is not necessarily a safe assumption.
So, do you have any idea of what percentage of people are looking at Bitcoin as a wealth preserver? Or as a way to hedge against inflation or store value. And how many people are looking at it as a wealth generator, and how huge swings can make money on the way up, etc. Part of the speculation needs to start looking more like gold and using it as the value store.
Bitcoin itself has a market in which you can trade it for other currencies. But some currency, for example the US Dollar, has a bigger status. So, the US Dollar's status as a reserve currency is a function of some resource that everyone needs that they can only obtain in US Dollars.
There's nothing like that with Crypto or any of the cryptocurrencies, including Bitcoin. While that's an argument against Crypto as a reserve currency, it's also an argument for it. From a US-based perspective, Americans are content to have that status, the rest of the world not so much. Many have a vested interest in finding an alternative to the US Dollar to not have such a grip over the global economy. Whether it's Bitcoin or some other type of Cryptocurrency, of course, they want to see something succeed in that capacity. Will Bitcoin Be it? May be just a little too early to tell.
Many tech platforms are valued based on their scale of the network effect and have nothing to do with revenue. Bitcoin could be following that same suit.
But what is the network effect? Network effect talks about how the more widely something is adopted, the more valuable it is. Some examples include PayPal, Google Wallet, Payoneer, etc.
When one person uses the currency, it's worth is not very well known. But when large groups of people use it, it leads to more adoption, sizable gains, and the worth increases. The same analogy can apply to social media companies, Facebook, Instagram, etc. The more widely adopted it is, the more valuable it becomes from a user standpoint. And the more capacity there is to monetize the attention that it garners.
We are not sure if the same argument applies necessarily to the valuation of Cryptocurrency or a Bitcoin, but it applies to the utility of Bitcoin from a value perspective. Economists use that word to talk about how valuable a thing is. As people use Bitcoin more and it becomes an accepted medium of exchange, it becomes more useful to anyone who has it.
Companies like Amazon, Facebook, Uber, Google, and Venmo haven't yet monetized their networks. They've prepared their networks to coercively extract value from our time and attention. So the argument for Bitcoin is not that someday there will be a way to only monetize the network, but that it is a durable network and that it has a divisible, verifiable, and a scarce coin that allows for confident transactions.
A reason to buy Bitcoin is that as adoption increases, the value is likely to increase, but Bitcoin does not increase in value. If we look at Everett Roger's theory of diffusion of innovations curve, where innovators make up the first 2.5% of end-users and the next 13.5% of end-users are called early adopters, we're still in the very early stages of this technology. I think Bitcoin adoption in the US is estimated to be roughly 5-6%. Nobody knows what the future holds. Bitcoin is a relatively new technology, and therefore speculative, and subject to incoming new technologies that could be better or improve upon it. But suppose you look at Everett Rogers model. In that case, the window of opportunity for profit in this new technology will exist, at least until we get to the 50% adoption rate. That has been through every new technique including 5g, the telephone, the internet, social media, and more. It's pretty constant.
Let’s take a look at similarities between Cryptocurrency and the “.com” movement, where it seemed like everybody was chasing the newest thing and there were all types of speculation as to who was going to make it or not? What’s going to happen with Cryptocurrency is similar where some cryptocurrencies will make it, and some won't.
In the 90s, we had the beginnings of the internet, and we had all these companies jumping on the internet bandwagon building massive valuations. Many companies died-off, and the winners took all the gains. In contrast, cryptography has been around as long as the internet, maybe even longer. Because the technology isn't necessarily new, it's the combination of a currency with the technology that is new, and we think that unless there is a fatal flaw to Bitcoin, it has a governance structure that will allow it to adapt to the changing needs of society over time.
So that brings us to the question…at what point do you start speculating, or when is the point where you feel comfortable not only for you to invest but where you would start looking at this as an investment for clients?
Cryptocurrency, as a concept, I don't think will be going away. Will Bitcoin be the main beneficiary of this? Who knows? It does have a first-mover advantage, and it has adoption already. That's significant. But how much value does that create? It's time to consider it.
Let's take a look 50-years into the future, where every country has a central bank based on digital currency. Do they have the ability to control it? Where are the funds, where do they go? How are they reconciled?
Yes, Central Banks can track cryptocurrencies since transactions are public, and through that data, they can ultimately figure out who you are. Moreover, other alternative currencies will spring up, there are no natural barriers to entry of a new cryptocurrency. And when something like that develops in the black market, people will find a way around it.
Suppose the cryptographic method validates the transaction data. Theoretically, the other exciting thing is that you could restore all the value held in Bitcoin, from a single node, out of the 10’s of 1,000’s of devices that maintain the network. The same cannot be done for US Dollars in banks, credit, or maybe even China's central digital coin.
That's why so many in the banking system have taken an interest in blockchain as a technology for that layer of redundancy. Added to this is the potential additional security that it might provide, at least in concept.
One piece of advice – do not put all your eggs in one basket. You can consider Ethereum along with Bitcoin or any of the other 4,000 Cryptocurrencies. Ethereum is the digital version where you no longer need the middle person to form the contracts. That'll be an exciting space. There's also the BAT coin, which moves away from advertising as a browser business model.
Let us know your views on Cryptocurrencies. We think all of us collectively still agree that it's still in the speculation phase. Don't put money into it if you are not willing to lose. Nonetheless, please tell us your opinion.
Can cryptocurrency replace the legal currency of a country in the future?
It is unlikely that any of the cryptocurrencies in the future can replace the legal currency of any country. The factor could vary from the limited supply of crypto or devalue of cryptocurrency, price volatility, non-traceable from sender to receiver, or misuse by unwanted forces.
Let's start with Bitcoin, the first virtual currency created back in 2009 by Satoshi Nakamoto. Bitcoin is a digital currency that allows online payment directly to be sent from one party to another without any involvement of a financial institution. The supply of Bitcoin is limited, which makes it impossible for any central authority to issue in the quantity that devalues it. But a limited supply of Bitcoin makes it impossible to control deflation. On the other hand, virtual currencies like Ethereum or any virtual currency which can be generated the quality the central authority wants, such currency can be easily devalued and weaken the economy.
Why many countries reluctant to accept cryptocurrency as a legal currency? The future of cryptocurrency is unpredictable and highly volatile. Any country typically aims to have a highly stable currency rather than an appreciating but volatile currency. A legal tender of any respective country is stable than the latter. This volatility and limit of Bitcoin or devaluation of other virtual currency stopping the digital currency to accept as the medium of exchange in daily use.
The other major factor stopping the countries is to accept cryptocurrency as a legal tender is its non-traceable feature. Bitcoin’s holders in the past have a record of losing a large sum of money to fraudulent third parties. This reminds us of the famous incident that happened back in 2013, the theft of $460 million worth of Bitcoin held in Mt. Gox Bitcoin exchange. The Bitcoin was allegedly transferred to the Bitcoin address as there is no way to know who owns the Bitcoin address.
How are criminals misusing the digital currency? Back in 2017, a notorious online ransomware attack "WannaCry." The malicious malware attacked over 150 countries, which targeted computers running the Microsoft Windows operating system by encrypting data and demanding ransom payments in the Bitcoin cryptocurrency. The demand was in Bitcoin as it was impossible to trace the identity of the receiver.
Despite having many hitches in accepting Bitcoin or other virtual currencies in the form of the country's legal tender. Virtual currency can solve transferring of money from one country to another instantly.
If a person chooses Bank to transfer money from one country to another, a Bank holiday, technical problem, political crisis, strike in Bank or country can affect the transferring of money.
The simple way to transfer money from one country to another country fast and at less charge is by transferring money in the form of virtual currency. A person can buy a cryptocurrency and sends it to the recipient address which usually receives within few hours of transferring the virtual currency. The recipient can use any cryptocurrency exchange of the country to sell the crypto and receives the amount in their Bank account.
Unlike Banks, the sender has not to pay any flat rate for the transfer based on the speed of receiving like MoneyGram or PayPal, no exchange rate will be charged for an overseas or international transfer, no hidden charge if you transfer money internationally, or no commission to an agent to accept in that country's legal currency.