Dec

12

To the extent that Bitcoin has any fundamental value other than speculation it is as an alternative private means of transaction payment. One of its main attraction is the limited amount of bitcoins that can be created. From what I have read the validation process relies on complex computer programs that become more expensive to run over time running up more costs for electricity, etc. for those maintaining the records. Eventually the finite limit is reached when no more coins are created.

What then will be the incentive for any players to continue to run the block verification system? And even before then, if the value of bitcoins does not increase sufficiently, will it still pay so many to try to mine bitcoins. If transaction fees become necessary and if the cost of validation is not linked to the value of the transaction, will it not become uneconomical to engage in modest sized transactions? And if that is the cast would not its real purpose of another means of paying for transactions be defeated?

While the amount of bitcoins may be limited, what is to stop other players from coming up with their own systems? While there is a limit to the amount of bitcoins and newly created coins, there would appear to be no limit to the number of cyber coins that can be created, in essence creating many competing currency. What then is to prevent cyber coin inflation that reduces the purchasing power of all such coins. And if cheaper verification methods are not created would not that increase the cost to sellers of goods and services of transacting in so many different currencies whose relative values might fluctuate violently?

Might not this wild speculation turn out to be the tulip bulb bubble of the 21st century eventually?

Andy Aiken writes: 

Rudy, yes, new cryptocurrencies and digital assets may be issued, but there is no reason to expect that this will weaken the value of bitcoin. Digital assets are unique and non-fungible. When the Venezuelan government hyper-inflates the bolivar, it doesn't affect the purchasing power of a dollar. In fact, it may even bolster the dollar's value, and we see a similar phenomenon in cryptocurrency. During times of relative risk aversion, the % of the total crypto market cap that bitcoin represents (referred to as bitcoin dominance %) increases.

There are different types of digital assets:

1. Platform coins

Ethereum is an example of a platform, but there are others. Companies can issue tokens on the platform easily and use them for governance or stakeholder management. Although the most visible type of token issuance is through ICOs, there are many companies that will use them internally/privately only. The growth of usage of the platform will necessitate the use of the "gas" that powers transactions, which in the case of Ethereum is ether. Demand for ether will rise as the network grows, but in my view upside from here may be limited until some of the companies/apps based on the platform start delivering on their promises. Ether isn't a strict cryptocurrency like bitcoin, although it may be used as a currency. It is the transaction token for the Ethereum platform. The rise of this platform has led to the emergence of prominent competitors, each with a similar transaction token. Some of these are EOS, NEO, Aeternity, and Lisk. In my view, purchasing a platform token is a way to benefit as an investor from the success/growth of the platform. But this is a messier/more volatile investment due to the inherent risks.

2. Tokens used within a specific blockchain-based application

There are specific tokens/coins that allow participation in a unique blockchain use case. For example, Augur is a decentralized prediction market launching next year. The tokens entitle the holder to a share of all transaction fees from the prediction markets, as well as voting rights to settle disputed prediction outcomes. Users of the platform can create markets at will, and operate as market maker. The blockchain basis ensures privacy/anonymity for participants while ensuring quick, accurate settlement. There are other interesting applications of the technology with an associated token, such as Golem (distributed computing), Air and Civic (identity verification), Storj and Sia (distributed storage).

Many of these business models will fail, and the associated tokens will decline to zero. Those that succeed could increase in value significantly, perhaps even surpassing the value of the associated platform token.

3. Currencies

Bitcoin itself is the reserve currency for cryptocurrency, and I believe it will continue to play this role indefinitely. There are others that intend to play the strict role of currency, such as a. Privacy coins (DASH, Monero, Zcash). The networks for these coins use strategies to obscure sender/receiver of transactions, or blind the transactions themselves. b. Credit system coins (Maker, X8currency (not yet released), Decred). These coins attempt to build a non-debt based credit system for cryptocurrency. The business model is of critical importance here, so much DD is necessary before investing here.


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1 Comment so far

  1. Andre on December 12, 2017 6:12 pm

    i wonder if winklevoss twins have orchestrated the largest pump and dump in history a la the Hunt Brothers.

    www.wallincharts.com

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