Cryptocurrencies. Bitcoin has been around since 2009 and Ethereum since 2015. And there are thousands of other cryptocurrencies – or cryptos for short. Many of them died during the alt-coin apocalypse. Others have managed to hodl on and barely keep themselves afloat.
Not every digital token is a cryptocurrency. Some are security tokens – typically backed by real-world assets. Others are nothing more than glorified loyalty points that have zero underlying value – and yet, some people are still willing to buy and sell them for real money.
Lately, there is a lot of talk about ‘central bank’ digital currencies. Most of which will have absolutely nothing to do with cryptocurrencies as they will be 100% centralised and not distributed. When the crypto community goes nuts about how bitcoin is going to benefit from China adopting a central bank digital currency, the rest of the world rolls their eyes.
Cryptocurrencies were intended to be the ‘people’s currency’. Records were to be kept in a way that was decentralised, distributed and immutable. The entire network, including the ledger data, was to be fully transparent and open for inspection by anyone as part of the architecture of trust.
So what happened?
Before listing the top 5 reasons why crypto is never going anywhere, let me dispense with the noisiest of the evangelists and their top arguments.
Bitcoin has a market cap today of $183,176,653,494. That’s $183Bn. So what. 4% of those addresses own 95% of that market cap. So much for being decentralised!
With such a tiny number of wallets holding all of that value, the chance for market manipulation is massive. The idea that bitcoin is a haven for stock market volatility – a non-correlated asset – is being disproved every passing day.
Bottom line: Bitcoin was great for some early adopters and tech-savvy speculators. Institutional investors are still incredibly wary (with very good reasons) because ultimately bitcoin has no inherent value – and neither does it have backing by the state or achieved any utility in the market.
Why then, are cryptos a waste of time?
- No one needs them. Cryptocurrencies, in their current form, do not solve a problem. Consumers are perfectly happy trusting their bank with their money. (Except in some extremely volatile markets). The user experience for crypto is horrific. No one understands public and private keys. They hate the accountability that comes with having no one to call if you lose your keys or your password. They hate the volatility of the price. They can’t find merchants who will accept the currencies because of the volatility. The transaction speed is slow, and the transaction cost is variable. These limitations apply to bitcoin, ethereum and any other crypto out there trying to position themselves as a ‘fiat killer’.
- They are lousy for securing investment. Even after the car-crash-TV series of events in 2017, there are still people trying to raise money with crypto. Initial Coin Offerings (ICOs) became Security Token Offerings (STOs) and then ‘evolved’ to Exchange Token Offerings (ETOs). At every step away from the nirvana of an unregulated ICO, it became more and more apparent: It is easier to raise funds traditionally.
ICOs are inherently worthless. They’re nothing more than people giving money to a project and then trying to find a secondary market to dump their tokens. STOs are backed by shares in the company, but often give you far less control than actual (ie real) share ownership. And ETOs were just pumped up STOs supported by an exchange – basically, a traditional IPO with a book that makes only the uber-rich richer.
- People who buy tokens today have no idea what they are doing. And when the price tanks they freak out. And all they hear back is, “Hey. It’s Crypto. You knew what you were getting into.”
The average retail investor wants a tip from Jenny or Robert down at the pub as to what crypto to buy so they can get rich. They don’t want to take time to investigate what they are buying or the mechanics of the market or the risks involved. Depending on the crypto, many are unregulated. No regulation means no safety net. As much as people want to moan that the financial products that make the most money are exclusively accessible by the rich, it’s the rich who also take the risk when the price tanks.
As with gambling, never put in more than you can afford to lose. It’s the three day Vegas rule.
- The hype can be deafening. The best things in the world grow organically. Crypto is a whole different kettle of fish: It’s all about the shills and the shysters. There are plenty of people who will debate if any given crypto is a Ponzi scheme. Truly decentralised there is no ultimate winner so in that way it fails. But if you look at the behaviour of everyone else who is “in the tent”, all they can do is shout about how amazing things are going to be. Why? Because they know they need more people to come in and to buy so the value of their tokens goes up.
To be clear: There is nothing about crypto that is “investing”. An analogy is people randomly buying tokens, for a laundromat that hasn’t been built, in a neighbourhood that doesn’t need a laundry, by people you don’t know and hoping to sell those tokens for more than you paid before someone figures it all out!
I don’t see how anyone can call that investing.
- There isn’t any liquidity. Aside from bitcoin and ethereum – and perhaps one or two others – there isn’t nearly enough liquidity in the market. There are too many exchanges that do not share liquidity pools. Companies or projects behind smaller coins add and remove liquidity to manipulate the price. If you’re not going to hodl you’re screwed. And with the current financial situation from the double threat of both COVID-19 and Brexit, people are going to want their fiat back to pay for things like their mortgage. (FYI, your bank won’t take your crypto).
Bitcoin is built on a blockchain. And blockchain is one of a family of technologies that are still developing. Even today the next version of Ethereum is nearing release. Cryptocurrencies made a lot of this progress possible.
That is the only reason crypto was not a complete waste of time – but that time has passed.
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Troy Norcross, Co-Founder Blockchain Rookies