Bitcoin peaked about a month ago on December 17, hitting a high of nearly $20,000. As I write, the cryptocurrency is below $11,000… a 45% loss. This is more than 150 billion dollars in lost market capitalization.
Aim for a lot of hand-wringing and gnashing of teeth in crypto-commentary. It’s neck and neck, but I think the “I-told-you-so” crowd has the upper hand over the “excuse makers”.
Here’s the thing: unless you just lost your shirt to bitcoin, it doesn’t matter at all. And the “experts” you may see in the press likely won’t tell you why.
Actually, the bitcoin crash is wonderful… 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. Here’s why.
Bitcoin is the product of justified frustration. Its designer explicitly said that the cryptocurrency was a reaction to the government’s abuse of fiat currencies like 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 degraded since there was a finite number of them.
This dream has long since been discarded 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 pizzas or gas there.
Besides being a terrible way to transact electronically – it’s agonizingly slow – bitcoin’s success as a speculative game has rendered it useless as a currency. Why would anyone spend it if it appreciates so quickly? Who would accept one when it is rapidly depreciating?
Bitcoin is also a major source of pollution. It takes 351 kilowatt-hours of electricity just to process one transaction, which also releases 172 kilograms of carbon dioxide into the atmosphere. That’s enough to feed a US household for a year. The energy consumed by all the bitcoin mining so far could power nearly 4 million US homes for a year.
Paradoxically, the success of bitcoin as a fad speculative game – not its intended libertarian uses – has attracted government repression.
China, South Korea, Germany, Switzerland and France have implemented, or are considering, bans or limitations on bitcoin trading. Several intergovernmental organizations have called for concerted action to curb the apparent bubble. The US Securities and Exchange Commission, which once seemed likely to approve bitcoin-based financial derivatives, now appears hesitant.
And according to Investing.com: “The European Union is implementing stricter rules to prevent money laundering and terrorist financing on virtual currency platforms. It is also investigating limits on cryptocurrency trading.”
We may one day see a functional and widely accepted cryptocurrency, but it won’t be bitcoin.
… But a boost for crypto assets
well Beating bitcoin allows us to see where the real value of crypto assets lies. Here’s how.
To use the New York subway system, you need tokens. You can’t use them to buy anything else…even you I could sell them to someone who wanted to use the subway more than you.
Indeed, if metro tokens were in limited supply, a lively market could emerge for them. They might even trade for much more than they originally cost. It all depends on how many people to want to use the metro.
This, in a nutshell, is the scenario for the most promising “cryptocurrencies” other than bitcoin. It’s not money, it is tokens – “crypto-tokens”, if you will. They are not used as general currency. They are only good within the platform they were designed for.
If these platforms provide valuable services, people will want these crypto-tokens and that will determine their price. 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 something that people value. This means that you can reliably expect a stream of income or services from holding these crypto-tokens. Critically, you can measure this stream of future returns with the price of the crypto-token, just as we do when we calculate a stock’s price-to-earnings (P/E) ratio.
Bitcoin, on the other hand, has no intrinsic value. It has only one price: the price set by supply and demand. It can’t produce future income streams and you can’t measure anything like a P/E ratio.
One day will be worthless because it won’t get you anything real.
Ether and other crypto assets are the future
The safe crypto-token Ether looks like like a coin It is traded on cryptocurrency exchanges under the code ETH. Its symbol is the Greek character Xi in capital letters. It is mined in a similar (but less energy consuming) process to bitcoin.
But Ether is not a currency. Its designers describe it as “a fuel for operating the Ethereum distributed application platform. It is a form of payment that clients of the platform make to the machines that execute the requested operations.”
Ether tokens give you access to one of the most sophisticated distributed computing networks in the world. It’s so promising that big companies are falling over each other to develop practical, real-world uses for it.
Because most of the people trading it don’t understand or care about its true purpose, the price of Ether has bubbled and frothed like bitcoin in recent weeks.
But eventually Ether will return to a stable price based on demand for the computational services it can “buy” for people. This price will represent real value which can be valued in the future. There will be a market for futures and exchange-traded funds (ETFs), because everyone will have a way to assess their 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 bitcoin.
My advice: get rid of your bitcoin and buy ether on the next dip.