A cashless society, a true alternative money, an asset backed currency as opposed to fiat money. That and other hopes filled the jackpot expectations of many. But what is the true value of a crypto currency from a fundamental point of view. Yes, blockchain technology is useful, an elegant solution to securely verify a transaction on decentralized ledgers.
So, using Bitcoin as an example, does it really matter if Bitcoin is traded at $0.1 or $1000’000? Does that momentary perception of market capitalization bear any real meaning? Let’s ask the question differently; what was Bitcoin made for? One might argue it was created to be a currency, indeed to purchase goods and services, to sell goods and services. Is that really taking place? Fact is that it’s real free trading ‘float’, the actual amount of bitcoin that is truly performing it’s function as a currency, is almost insignificant. Most of Bitcoin is locked and bolted in investor wallets. So even the amount available to investors, the amount that is actively traded is formidably thin. This very limited supply in circulation, the limited active float is the basis for this dramatic volatility over the last months.
Going back to the initial statement, does it really matter what Bitcoin is traded at? Not really, what really matters is if Bitcoin is fulfilling it’s true function, namely that of a currency. So far, that part is negligible.
Making things worse is the amount manipulation going on. It seems about 40% of the Bitcoin is held by a few investors. And some key players have publically stated for example that they sold large amounts of Bitcoin and bought large amounts of Bitcash. After that the crowd followed suite and did the same and bought Bitcash. By then the whale was happy to sell and again exit Bitcash. This is a classic example pump and dump, actually not exactly legal in regulated markets. So at large, Bitcoin has attracted allot of estranged characters trying to hide cash in an unregulated market, similar to the blindpools in the 80s.
On top of all this, the Cboe allowed bitcoin futures to be traded on its exchange. This almost felt like a legitimisation of Bitcoin as a true currency. Problem is, in 1637 futures were used on tulips in Holland, a feat that actually accelerated it’s downfall; when the futures market went short tulips.
So we have an almost amusing case, where the futures market is regulated, but it’s actual underlying, namely bitcoin is not! That rings another bell from memory lane. In 2007 CDO derivatives wrapped and re-wrapped a similar almost worthless underlying, namely dubious real-estate. The futures market could also accelerate the sell-off of cryptos like Bitcoin.
The fundamental issue is that the value of Bitcoin cannot be determined solely on its scarcity, there must be more to it. What’s left is our nursery game of ‘musical chairs’, who is last to hold the bag, who is left without a chair will fall.
Does that mean that there is no future for Bitcoin or Altcoin or Blockchain technology? Certainly not, there are just a couple more parameters that must fit to justify value. Blockchain technology will certainly revolutionize the way we operate on a contractual level and eventually some crypto currencies will begin to increase their real float, hence fulfil its core function. From that perspective, one could argue that many of the altcoins are more fairly priced, namely ‘almost’ nothing.