No doubt that cryptocurrencies throughout 2017 were a massive bubble of euphoria and unrealistic promises of unlimited application and disruption. In December of 2017 Bitcoin peaked just shy of $20,000 USD and throughout 2018 saw a decline of ~80%.
Bitcoin fared well in comparison to most of its peers, with Ethereum (ETH), Ripple (XRP) and Litecoin (LTC) all drawing down ~90% within the same period. Even worse were some of the more obscure coins that saw declines upward of 95%.
While I am by no-means in the camp that cryptocurrencies are going to swallow up the financial system anytime soon, the price action in Bitcoin and its affiliates recently has caught my attention.
In the chart above you can see that Bitcoin seems to have bottomed in December of last year and is now breaking through the prevailing downtrends to possibly establish upward movement.
The reasons I believe Bitcoin has no real future as a financial substitute for any major currency comes down to: network capacity, energy consumption and agency problems. If you know anything about Bitcoin you probably know that its max network capacity is ~7 tps (transactions per second). For comparison, the Visa network is said to handle an average of 1,500-2,000 tps with a theoretical limit close to 50k. (source)
Energy consumption: currently, well below its peak, the Bitcoin network consumes about as much electricity (annually) as Bangladesh. For comparison, 1 transaction on the Bitcoin network takes ~421 Kilowatt-hours of electricity. The Visa network consumes ~151 Kilowatt-hours for 100,000 transactions. Disgustingly unsustainable. (source)
Finally, the agency problem with Bitcoin: due to its decentralized nature, Bitcoin does not have a singular point of attack (centralization) like the Visa network, or any other classical institution. This decentralized aspect is part of the great attraction, along with the encryption of transactions. The virtue of its decentralization is also its point of failure; without principles to develop on the network (backed by capitalistic incentive), there is unlikely to be significant progress in the capacity and consumption issues states above. Yes, people ARE working on solutions like the Lightening Network, but its progress and incremental benefits are slow and minimal.
A decentralized network, while eliminating any single point of attack, requires the majority of nodes to accept any change to the network model.
This is all I know of Bitcoin, I don’t want to bet against innovation, but the issues at present tell me that there is no real utility for Bitcoin as a classical currency. I know less of Ethereum except that it is the backbone for many of the other cryptocurrencies and projects. I would not be surprised to see block-chain innovations which solve the issues I have addressed, but I don’t see them now.
Back to Speculating:
Just because I’m not bullish on the utility value of Bitcoin doesn’t mean I cannot speculate on the Bull side of the price. When I look back to the meteoric rise and fall in the price of Bitcoin its reminds me of the classical bubble template as depicted below:
The template would maintain that we are now heading out of despair and should be returning to the mean. Maybe the path-of-lease-resistance is upward, I don’t know. But I do know that the chart is starting to look Bullish and it maybe time to reconsider whether Bitcoin deserves any space in the speculators portfolio.
Thanks for reading