Tag Archives: bitcoin

Cryptocurrencies under attack

In the past month Bitcoin and other cryptocurrencies saw a sharp decline in value. It caused its criticasters to repeat their mantras. Again we heard about the comparable bubbles from the past  (tulip bulb) (Internet year 2000), the comparison to pyramid or ponzi schemes.

Cryptocurrency contained in their opinion no intrinsic value and there was no other way than the cryptocurrency market ending in a bloodbath op epic proportions. The price of cryptocurrencies would ultimately dwindle to zero. The sharp decline witnessed in January 2018 was of course the definitive proof of the pudding of their argumentation. If we dive deeper in these sound bytes we can learn that their argumentation is at least very arguable and suspicious. It could as well be that their argumentation is intensely tightened to an agenda of different proportions.

‘It’s a bubble!”

Comparing the January 2018 events to any previous bubble is for a number of reasons  difficult. First of all, because in January there was a sharp decline in prices and market capitalisation (from its top at 800 billion in December 2017 to around 400 Billion in early February) but this market capitalisation is still very substantial (it is half of the market value of Apple, one of the largest companies in the world). From this perspective it is impossible to state now that “the bubble has burst“. You can only make such claims in hindsight long after the market really collapsed and no significant signs of life are visible or measurable. Looking at following table we can see that the price increase has only a very recently start and therefor it is too early to draw any conclusions.

 

We can not neglect the fact that the enormous rise in pricing in the second half of 2017 gave people ideas on how to cash in on this new phenomenon. There have been ICO’s (new initiatives within the cryptocurrency space) that were aimed at obtaining a maximum revenue from the token or currency issuing. After the launch these currencies would very soon become irrelevant as an impressive white paper could not be substantiated in delivering a valuable product. This is however a rather typical sign of a new and booming industry. The road to maturity will be paved with  ‘accidents’ as can be seen in any new disruptive industry. The internet bubble of 2000 saw the down fall of many .com companies, but also ignited the spectacular rise of companies like Google and Amazon.

‘It’s a fraud, a plain right scam!’

This is the collection of same type arguments when it comes to the accusation of cryptocurrencies being a ponzi scheme, pyramid scheme or scam. These arguments have in common that there is some sinister complot involved by luring people into spending their money into something that thrives on ever increasing higher prices. These higher prices need the attraction of ever new ‘victims’ until the system fails to do so and the system collapses when people who want to get out and get -at least- their invested money back. It is very curious and remarkable how this argumentation is made over an over again in respect to cryptocurrencies even by people who supposed to have the brightest minds concerning economic matters.

First of all, there is a simple deal if you get into cryptocurrencies. Mostly you sell fiat currency and in return you get (part of) a cryptocurrency: you sell 9.000 dollars, you get 1 Bitcoin (considering February 2018 prices). There is no one who has knowledge about what you will receive in fiat currency, might you decide at a later point in time to convert your cryptocurrencies back into fiat currency. Over the past 10 years the only fact that can be proven is that if you are wiling enough to hold on to your Bitcoin long enough, there is a high probability that the Bitcoin has reached a higher level of pricing compared to when you bought your Bitcoin. But there is not an single guarantee that this will be the case when you decide to buy or sell your cryptocurrencies.

This is fundamentally different from pyramid and ponzi schemes where investors are lured with attractive future prognoses of returned values of their investments. In these schemes there is usually also an ‘evil’ initiator who has thought out the scheme, has knowledge about its practices and will keep the scheme in place as long as possible.

There are people who do make claims about future prices and those people might even have a cult following who will act in accordance to these price predictions. For smaller cryptocurrencies it could be possible to manipulate the market through a so called pump-and-dump. A strong party in the market buys a big stake of a certain currency inflating the price, usually in combination with the spread of fake news to promote the currency and its associated products or services. This attracts new buyers willing to invest. When the price reaches  a high level, the strong party suddenly dumps its cryptocurrencies leading to a sharp decline in price because of the distorted supply and demand balance.

There are two aspects to be recognised. The first being that the pricing is always in relation to the conversion of fiat currency. The new buyers may have a bad feeling about the situation but they still hold the intrinsic value of their cryptocurrencies. Secondly with a cryptocurrency like Bitcoin having a market capitalisation of around 150 billion (in February 2018), it is difficult to manipulate the market by a pump-and-dump.

Actually the fact that when you bought a Bitcoin in 2013, forgot about it and decide to  look up its status in 2018, you will find that it is still there. This may sound like a simple fact, but that we as humans have been able to set up a system of value with no central (physical) guard where you currency is parked safely is actually pretty amazing.

‘There is no intrinsic value, it’s just ones and zeroes and the final outcome is that the price will be zero!’

The intrinsic value argument in combination with the digital one/zero argument can be applied to lots of things and situations. You can take for example the intrinsic value of an Apple iPhone, mainly consisting of materials like a screen, memory, processor etc. with software running on top of it. Individuals could decide to obtain the materials by themselves and to assemble their own phone with their own operating system. They could create their oen social media platform like Facebook and write applications to facilitate that.

Yet people are prepared to pay a price buying the iPhone or think of Facebook as one of the most valuable companies in the world and are prepared to use the platform, being aware and take for granted that they themselves become the product for Facebook. So there is an intrinsic value in an iPhone or social media platform like Facebook. The intrinsic value of cryptocurrencies can be reasoned along similar lines.

The value is that cryptocurrencies represent state-of-the-art technology that has been developed over the past decades (amongst them using public key cryptography, proof of work, digital cash) and the culmination of these independent technologies have been applied to set up a working digital, peer to peer cash system that is safe and has no central authority or trust. So instead of making the same invention over and over again, people rather rely on using an existing product that has proven to be trustful and working and therefor to be valuable.

So why these heavy attacks against cryptocurrencies?

There are a number of reasons why there is heavy opposition to the use of cryptocurrencies that have nothing to do with the previous arguments. First of all there is the matter of control. If a government and its central bank do not have absolute control over the monetary system that means there is a direct threat concerning the regulation of (international) transactions and tax collection in particular. It becomes more difficult to determine someone’s taxable wealth. Actually, cryptocurrencies give the ‘normal’ citizens a level of self determination spending their incomes and saving, comparable to the evasion routes that the high an mighty are using to store their wealth in tax free havens.

Secondly there is a more psychological element in play where economists and politicians simply can not think in terms of a construct that is now on the rise where money can be stored and spent without a central and physical guard. And of all this happens in a fast, secure and cheap way (certainly in comparison to the private banks that have missed the capability to innovate along these lines).

It is almost a certainty that many nations will put heavy sanctions on the use of cryptocurrencies in months and years to come. They will make it difficult to transfer fiat currencies into crypto currencies, they will heavily regulate or even ban ICO’s and maybe go as far as ban mining, the processing power behind cryptocurrencies. This will at the same time open great windows of opportunities to countries who embrace these innovations instead of banning them. Which in the end will be a much better approach as it will certainly lead to mighty economic stimuli.

After all radios did not disappear when televisions were introduced and televisions did not disappear when the internet appeared. Cryptocurrencies can and will exist in coexistence with more traditional forms of monetary systems and regulations.

Ewald Kegel, Nootdorp, February 2018

 

 

Crypto currency and market capitalisation

Over the past months I became interested in the possibilities that crypto currencies have to offer. At first I became interested in the idea that crypto currency could play an important role in (international) money transfers, replacing traditional currency like dollar, euro and pound and replace traditional bank-to-bank transferring methods. At the same time I realised that  there still are causes that will prevent crypto currencies to become intensively used in money transferring.

The crypto currency market, especially the one for Bitcoin has known many up and down swings over the years since its introduction in 2009. Although there were some near-meltdowns along its path over the years, 2017 proved to be a kind of ‘break through’ year where the price half way 2017 soared from $ 1.000  to $ 3.000. The potential prospect of soon to be realised gains for simply holding on to ones crypto currencies will create an effect where the owners of their crypto currencies rather not want to use them in transferring scenarios. Yet if the owner of a crypto currency would want to use his digital cash for transferring purposes he or she will be faced with many complications. There are still relatively few people (ask the ones around you)  owning an ewallet which would allow them to receive or send digital cash. There is no way that different types of crypto currencies are interchangeable. And last but not least there are few (web) shops that accept crypto currencies for paying goods or services.

When diving in the technology behind the crypto currency you will find the block chain technology that can be considered as a transparant, autonomous and highly secure way of storing  data. The comparison to a world wide operating virtual ledger or spreadsheet is often made. The blockchain technology is what drives and enables crypto currency but blockchain technology can actually be applied for many other purposes.

We are witnessing a revolutionary way in which administrative (economical) processes will be changing over the coming years and decades. The concept can even be applied to concepts beyond administrative processes (for example to identity management and asset registration). Without going into detail too deep in the underlying technology we will witness the emerge of an autonomous, transparant, de-centralized infrastructure that offer possibilities in which we currently are using banks, clearing institutes, accountancy and administrative firms to perform most of these activities. With blockchain technology all these activities come under one roof, but without the boundaries and middle men that are usually associated with those activities.

If you look at the developments from this perspective than investing in Bitcoin, Ethereum or one the hundreds of alternative altcoins becomes like investing in a company -like investing in stock-, although lacking the traditional centralized management that we usually associate with the ‘traditional’ companies. It then becomes obvious that the market capitalization of (for example) Ethereum does signal something about its economic relevance and may be compared to those traditional companies. That is why 2017 also saw the break through of ICO’s (Initial Coin Offerings) which somewhat can be compared to the virtual launch of an IPO (Initial Public Offering), the most usual way for a company that is going public by issuing stock and entering the stock market.

Let’s take for example a ‘traditional’ company, Apple, which had in June a market capitalisation of app. $ 675 billion, making it the company with the largest market capitalisation in the world. Ethereum had at the same time a market capitalisation of approximality $ 30 billion. So Apple as a 40 year old company producing computer related products and services is at the moment 20x the size of Ethereum, a highly advanced initiative that takes the Bitcoin blockchain technology to the next level with its abilities of incorporating development tools in its own block chain technology.

From such a perspective  it is justified to believe that Ethereum one day will become bigger than Apple, measured by its market capitalisation because its added economical value will become at least as significant as Apple’s (and probably much more important). It may be tempting to make calculations about what the pricing of one Ether (Ethereum’s crypto currency) could be like in such a scenario, but one can assume that the current price of ca. $300 is just a fragment of its pricing potential. Others have been less witholding about their predictions about what the the pricing for crypto currencies could become like.

All in all investing in crypto currencies is at the moment more like earning a stake in a promising new technology enabled by an initiative that could be typed as a ‘virtual’ company. The traditional lines between stock and currency are blurring as you might one day use that stake (your Ethers, Bitcoins or other altcoins) for actually using it as digital cash. And that would be something that would be impossible to do with regular stock from the ‘traditional’ companies.

On the other hand take in consideration that this whole blockchain industry is still in its very early stages. The pricing of the crypto currencies are extremely volatile, because nobody really knows where things are heading. There is always the probability that reading this article in three years time the content seems to be out of date because the playing field has completely changed.

If you want to have a good introduction to crypto currencies and blockchain technology I advise you to read and see the following links:

6 interesting introduction videos:

Watch all six episodes of the series Trust Disrupted: Bitcoin and the Blockchain

Vilarik Buterin (the inventor of Ethereum) explaining Ethereum:

https://coincenter.org/entry/what-is-ethereum