The "Experts" Are they getting crypto wrong

Bitcoin peaked about a month ago, on December 17, at a high of nearly $20,000. As I write, the cryptocurrency is below $11,000… a loss of about 45%. That’s more than 150 billion dollars in lost market capitalization.

Notice a lot of hand-wringing and gnashing of teeth in the crypto-comments. It’s neck and neck, but I think the “I told you so” crowd has an edge over the “apology makers”.

Here’s the thing: unless you just lost your bitcoin shirt, it doesn’t matter at all. And chances are, the “experts” you might see in the press aren’t telling you why.

Actually, the Bitcoin crash is wonderful… because it means we can all stop thinking about cryptocurrencies in general.

The Death of Bitcoin…

In a year or so, people won’t be talking about Bitcoin in line at the grocery store or on the bus like they are now. That’s why.

Bitcoin is a product of justified frustration. Its designer has explicitly said that the cryptocurrency is a reaction to government abuse of fiat currencies like the dollar or the euro. It was supposed to provide an independent peer-to-peer payment system based on a virtual currency that could not be devalued because there was a limited number of them.

That dream has long since been discarded in favor of raw speculation. Ironically, most people are interested in Bitcoin because it seems like an easy way to get more fiat currency! They don’t own it because they want to buy pizzas or gas with it.

In addition to being a terrible way to do electronic transactions—it’s agonizingly slow—Bitcoin’s success as a speculative game has rendered it useless as a currency. Why would anyone spend it if it’s going up in price so quickly? Who would accept it when it depreciates rapidly?

Bitcoin is also a major source of pollution. It takes 351 kilowatt hours of electricity just to process one transaction – which also releases 172 kilograms of carbon dioxide into the atmosphere. That’s enough to power an American household for a year. The energy consumed by all the bitcoins so far could power almost 4 million American households for a year.

Paradoxically, Bitcoin’s success as an old-fashioned speculative game – its unintended libertarian uses – attracted government repression.

China, South Korea, Germany, Switzerland and France have introduced or are considering bans or restrictions on bitcoin trading. Several intergovernmental organizations have called for concerted action to contain the apparent bubble. The US Securities and Exchange Commission, which previously seemed likely to approve bitcoin-based financial derivatives, now appears hesitant.

And according to “The European Union is implementing tougher rules to prevent money laundering and terrorist financing on virtual currency platforms. It also addresses restrictions on cryptocurrency trading.”

We may someday see a functional, widely accepted cryptocurrency, but it won’t be Bitcoin.

… But a push for crypto assets

Okay. Breaking Bitcoin allows us to see where the real value of crypto assets lies. This is how.

To use the New York subway system, you need tokens. You can’t use them to buy anything else… even though you could sell them to someone who wanted to use the subway more than you.

In fact, if metro tokens were in limited supply, a lively market could arise for them. They may even trade for much more than they were originally worth. It all depends on how many people want to use the metro.

This, in a nutshell, is the scenario for the most promising non-Bitcoin “cryptocurrencies”. It’s not money, it is tokens – “crypto-tokens” if you will. They are not used as a common currency. They are only good within the platform they are designed for.

If these platforms provide valuable services, people will want these crypto-tokens and that will determine their price. In other words, crypto-tokens will have value to the extent that people value the things you can get for them from their associated platform.

That will do them real assetswith intrinsic value – because they can be used to get something that people value. This means that you can reliably expect a stream of income or services from owning such crypto-tokens. Crucially, you can measure this stream of future returns against the price of the crypto-token, just as we do when we calculate a stock’s price-to-earnings (P/E) ratio.

Bitcoin, by contrast, has no intrinsic value. It only has a price – the price determined by supply and demand. It can’t generate future revenue streams and you can’t measure anything like a P/E ratio for it.

One day it will be worthless because it brings you nothing real.

Ether and other crypto assets are the future

The Ether crypto-token is secure It seems as currency. It is traded on cryptocurrency exchanges under the code ETH. Its symbol is the Greek capital letter Xi. It is mined in a similar (but less energy intensive) process to Bitcoin.

But Ether is not a currency. Its designers describe it as “the fuel to run the Ethereum distributed application platform. It is a form of payment made by the platform’s clients to the machines performing the requested operations.”

Ether tokens give you access to one of the most sophisticated distributed computing networks in the world. It’s so promising that major companies are pitted against each other to develop practical, real-world applications for it.

Since most of the people trading it don’t really understand or care about its true purpose, the price of Ether has swelled and frothed like Bitcoin in recent weeks.

But eventually Ether will return to a stable price based on demand for the computing services it can “buy” for people. This price will represent real value which can be evaluated in the future. There will be a futures market for it and exchange-traded funds (ETFs) because everyone will have a way to estimate its underlying value over time. Just like we do with stocks.

What will this value be? I have no idea. But I know it will be much more than Bitcoin.

My advice: Get rid of your bitcoin and buy ether on the next dip.