Undoing the Crypto Hype

DISCLAIMER: I hold less than 2 BTC and I have no short position. I have no vested interest in BTC price falling.

Following on from my recent post of an article appearing in Entrepreneur.com, I wanted to share some context that is missing from the article. There is entirely too much unsubstantiated hype as to "Why bitcoin is going to increase in value and go 'ToTheMoon'".

I think Bitcoin has done an amazing job of bringing awareness of issues within the financial systems. Some of these are by design from both a government and capitalist perspective and some of them are pure market inefficiencies. In any case, this isn't intended as a take-down on Bitcoin. This is intended as a reality check for some of the people who are out there hyping Bitcoin.

Tim Draper

We know he bought 30,000 BTC for US$18M in 2014. So he has a bit of a vested interest in keeping the price up. Right?

Tim believes the world is ready for a financial and banking transformation. That's probably true. And rafts of companies and engineers are working hard to make new products that will bring bitcoin to general use and distribution.

BUT: If you solve most of the problems associated with Bitcoin (issues of consumers losing their keys, unpredictable transaction costs and transaction speeds, bitcoin price volatility) - You will inevitably move closer to traditional banking. Effectively you remove the core features that make Bitcoin attractive. Or - you will wind up making an alt-coin which is no longer bitcoin.

Draper asserts that there will no longer be a reason to pay 2.5% to 4% for every transaction and that Bitcoin transactions are frictionless.

BUT: This is all down to acceptance not by consumers, but by merchants. Merchants have some real challenges until governments agree on how to handle cryptocurrency. And this applies to consumers as well. If you have to figure your capital gain/loss every time you spend crypto (effectively using the merchant to convert it to fiat) there is a world of complication.

He then references three cryptocurrencies other than Bitcoin and claims that as they become more prevalent, their value will increase, followed by his $250,000 BTC price prediction by 1Q2023. 

BUT: The only thing driving the value of BTC or any cryptocurrency is speculators in the market. The "usefulness" of a cryptocurrency is in direct correlation to its price stability - not the guarantee that the price will go "to the moon".

Judd Rosenblatt

It's the opening line that kills me:

"Whether you invest in crypto now should depend on whether you believe in the potential of blockchain technology."

BUT: These two things are UNRELATED. The potential of blockchain technology is in industries and applications far beyond cryptocurrency. And the majority of cryptocurrencies are UNATTACHED to the value of the underlying company. The company and its share could be worth billions, and there is no direct correlation to the price of the company's coin. The only reason to invest in crypto is if you believe that you can play as good of a game (or a better game) than the speculators out there. Crypto is essentially worth only what the speculators make it worth. It has no underlying assets. 

And to say that investing in crypto is like buying either Amazon shares or Betamax recorders is NOT a valid comparison. With Amazon shares, you're buying equity in the company, and with a Betamax recorder, you at least get hardware. With crypto, you get NOTHING but the promise that you might be able to redeem it for fiat currency in the future.

Judd is clearly excited about the future potential of new protocols but then flubs it when he says that the way to capitalise on this potential is to invest in crypto.

The way to capitalise is to invest in SHARES of companies who have the best potential to monetise their technology. 

N.B.: There are some efforts now to tokenise shares and so buying tokens is in effect buying shares, but these are exceptions, and they are no cryptocurrencies - they are tokenised securities.

Lorenzo Pellegrino

I agree with him that to go from a white paper in 2008 to a multi-billion dollar market cap is impressive. I hesitate to call it an asset class. And frankly, the "craze" is more reminiscent of a Ponzi scheme than it is of a real market opportunity. Everyone keeps "hyping" the crypto market, hoping that the investment they make keeps going up. One day the whales will cash out, and the suckers will be left holding crypto wallets of worthless coins. Nothing is supporting these markets other than hype from the crypto Twitteratti. 

I also agree that countries are now looking at blockchain technology to provide an infrastructure for their sovereign currencies. These currencies (like the Chinese renminbi) will be backed by the government and as stable as the underlying fiat currency. No chance for wild growth. The technology (which may or may not be blockchain) will drive efficiency in the market, reduce time and fees and reduce the need for intermediaries - but that isn't going to make speculators rich. And these currencies will be centrally controlled and thus are not actual cryptocurrencies.

Dan Shatt

You know what? I agree with much of what he says. Bitcoin won't necessarily die - and there are clear needs for a trustless, borderless, transparent system of finance. 

Johann Polecsak

Johann starts off strong, "... encourage making decisions based on real market value instead of speculation..." But then suggests that you can measure the "... value of a token..."

Whoa. Whoa. Whoa. Unless the token is directly tied to a share of the underlying company, there is no correlation. Even tokens which provide a utility function (like Ethereum is needed to execute smart contracts) you can't correlate demand with investment. If the price goes to high, the demand for the token will crash. If the utilisaton of the platform goes wild, the price will go up and the utilisation will crash. Listen. Tokens have ZERO value other than what people hope they will get when they sell them. There is no correlation to return or dividend or dividend in kind (and if there is then they are security acting as a proxy for a share and that's no longer crypto).

And finally...

Alex Althausen

Alex thinks the Bitcoin halving (which is coming in May 2020) may change the supply-demand equation for Bitcoin. 

The Bitcoin halving will decrease the rate at which miners earn bitcoin for their efforts. Currently the equivalent price for mining just to break even is around $US 6,500. If we cut the number of bitcoin generated in half the price would need to be US$13,000 just to keep the same level of mining.

The biggest demand for bitcoin is from ruthless speculators and hapless punters (average consumers). And neither one of these groups will even know the halving is happening other than by reading it from Twitter... and the serious players have already priced this in.

So - there you have it. In a nutshell.

1) The people who push crypto/bitcoin the hardest have the most to lose if it fails. They will give their version of the potential all day long to get more people to buy it. That doesn't make it all factual. A lot of what they say is hopeful speculation.

2) The idea that broad adoption will drive the price of BTC is not totally off the mark. However, the issues of adoption are real and there are no easy solutions. It is far more likely that some other cryptocurrency will come along and be more broadly adopted.

3) Coins/Tokens are worthless - unless they are backed by an asset such as a commodity, share of a company or other. The performance of a company has no bearing on the companies token without this connection. Do not confuse cryptocurrencies and utility tokens with digital versions of equity, security or commodities.