Is This Bitcoin's Fatal Flaw?

Tyler Durden's picture

Authored by John Rubino via DollarCollapse.com,

Bitcon has been rocketing higher lately, as it gains widespread official approval and more people figure out how to use it.

As the first of its kind to emerge, bitcoin has become synonymous with “cryptocurrency”. But lately it’s been joined by a lot of others – which together now account for more than half of the cryptocurrency ecosystem:

For First Time, Bitcoin Accounts for Less Than Half Of Market Cap Of All Cryptocurrencies

(Forbes) – For the first time, Bitcoin’s market capitalization as a percentage of all cryptocurrencies has dropped to below 50%.

 

It is a symbolic turning point for the first cryptocurrency, which for a long time accounted for more than 90% of the value of all blockchain-based assets combined, particularly through a period when so-called alt-coins that were only minor tweaks to bitcoin proliferated.

 

Its market capitalization then comprised over 80% of all cryptocurrencies for years, a range that held true until two months ago when it dipped below 80% and not only did not recover but did a quick dive straight down.

 

 

 

Several factors are driving the drop from its status as the clear leader.

 

1. Bitcoin’s development is stalled.

A more than two-year-long saga has left progress on its network stymied. With the various factions unable to compromise and no clear method for moving beyond the impasse, the network has been stuck staring down the same question of how to expand the network to accommodate more transactions that it first faced in early 2015. Meanwhile, as no decisions get made, transaction fees have risen from about 11 cents a year ago to $1.70 now, and the time to confirm a transaction has nearly doubled to almost 20 minutes. Because the community has been unable to resolve its divisions, some of the technological advances people were excited to see on bitcoin will be adopted on other tokens, such as Litecoin, which could emerge as the payment token, while bitcoin evolves more into a digital gold, because its software will only ever release 21 million units.

 

2. Ethereum continues to grow.

Ethereum has, for a while, been the cryptocurrency with the second-largest market cap, but in recent months, its greater rise has further has eroded bitcoin’s dominance. While throughout 2016, its share of the market cap of all cryptocurrencies was in the single digits, it has, in the last couple months, inched closer to 20% as its price has risen from $8 in early January toward $100 in recent days.

 

3. New ICOs add value to the crypto space every day.

Third, a wave of new cryptocurrency launches in crowdsales called initial coin offerings has so far raised $380 million for new networks that have functions beyond just currency. For instance, a few new storage coins aim to facilitate payments between computers needing more storage space and computers with excess drive space to offer in networks like Filecoin, Sia and Storj. Meanwhile, Golem Network Tokens are used for payments between computers that need extra computing power to, say, train a machine-learning algorithm, and computers that have spare GPU and CPU cycles to offer while its owner sleeps. So many new tokens with uses different from bitcoin’s are bound enlarge the pie, but still narrow its dominance.

 

4. Speculation is driving up the value of all tokens.

Because the ICOs are proving to be such an easy way to crowd fund, they are also being used just as that — as an easy way to raise money — for projects for which tokens don’t even particularly make sense, as well as scams. Speculation is also running rampant as investors who don’t understand the technology or what makes a token valuable snatch up both promising as well as poorly conceived tokens. One project that raised eyebrows recently was a crowdsale of Gnosis tokens, which, because of the way the ICO was designed, left Gnosis, which is only in beta and doesn’t yet have a product to offer consumers, with a valuation of $300 million right after its ICO. Now, speculative trading has now multiplied its valuation to $1.2 billion.

 

5. Ripple is seeing a big spike.

While the other trends have been driving bitcoin’s share of all cryptocurrency market caps down broadly, what appears to have finally tipped bitcoin below the 50% mark is the 24% surge of XRP, the token of the Ripple network, in the last 24 hours. Since Chinese regulators began enforcing basic know-your-customer, anti-money-laundering procedures earlier this year, Japan has overtaken China as the country with the highest crypto trading volume. XRP is popular in Japan, and one writer surmises it is because of the work Ripple does in Japan, such as through its joint venture, SBI Ripple Asia, with SBI Holdings.

 

7. Tezos is about to launch.

Okay, so this last one might not have pushed bitcoin below the 50% threshold, but it is likely to help keep it below that threshold. Tezos may be one of the most anticipated ICOs, about to launch in June and stay open for two weeks. The code is written in OCaml, a language that has the ability to formally verify smart contracts to ensure that they execute as the creators intended them to. Tezos is also generating excitement because the software has, built into it, a mechanism for resolving issues such as the scaling debate in bitcoin. Therefore, even if bitcoin exceeds 50% market share for now, it will likely again fall under that threshold once the Tezos ICO begins.

Those increasingly common predictions of bitcoin going to $20,000 or more are premised on the fact that its algorithm limits its supply. There are many more ounces of gold, for instance, than there are bitcoins, which implies that bitcoin should ultimately trade at a (possibly substantial) multiple of gold’s price.

But if bitcoin is just one of many cryptocurrencies in circulation, it makes sense to consider their aggregate supply – and the growth rate of that supply. Which is where it gets scary.

The number of new “ICOs” now in the pipeline implies that barriers to entry in the cryptocurrency space are laughably low. Apparently anyone with relevant coding skills can create and launch another Ethereum or Litecoin.

With both demand and supply soaring, it’s possible that cryptocurrencies will go through a 1990s tech stock-style boom/crash cycle in which their usage rises but their average price falls.

This is a brand-new concept (it’s not clear, for instance, how governments will react to bitcoin being the ransomware currency of choice), which means there’s no way to predict what share of the global currency market cryptocurrencies will eventually capture or which cryptocurrencies will end up dominating. So there’s no way at the moment to trace out a base case trend for bitcoin’s future value.

But low barriers to entry do create some very obvious risks.

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Yen Cross's picture

  In the States, unless you want to carry a rocket launcher, to avoid being ripped off, be prepared for some serious disclosure.

Pinto Currency's picture

Rubino reads ZH (although no reference):

"... Bitcoin is a fraud.
Wait until the next 5 'special' virtual currencies are introduced - then people will realize they are just special nothings. Just like fiat.
In the meantime, load up fools. ..."

http://www.zerohedge.com/news/2017-05-15/vancouver-house-sale-only-2099-...

38BWD22's picture

 

 

Yes, there is a lot of risk in Bitcoin.  If you buy, only buy less than 1% of your net worth.

But, at $1879 now, it has had one big ride since its last crash.

I have never seen the Au:BTC ration at 0.67, never has gold been so low relative to Bitcoin (gold is cheap vs. BTC).

Beam Me Up Scotty's picture

So is Bitcoin overpriced?  Or gold underpriced??

bitcoin-bitchez's picture

Bitcoin is not controlled by kike banksters, gold is. End of story.

Beam Me Up Scotty's picture

Sure it is. They just create another "Coin" and dilute the "Coins" already in existence.  They only control the price of gold with paper gold.  They can create infinite paper gold.  The charade ends when paper gold isn't accepted anymore.

bitcoin-bitchez's picture

You have no idea what you are talking about, This is not gold, the coins are not created to subdue other coins LMAO..smh. When the fuckers are all dead then the charade  in gold ends.

SMG's picture

While I'm happy for people who gained on this, in the end all these all these "cryptocurrencies"  are fiat, and will be valued as so.

Notveryamused's picture

Bitcoin decreasing in dominance is generally good. A currency on a subsistence island would account for 90%+ of the value like Bitcoin did in the beginning. A currency on an island where the Facebook, Apple etc. of the future are growing will account for less of the total value in the island but be far more valuable if it is the main currency. Which is why you see BTC hitting new highs.

So this Bitcoin dominance metric is useless because you have to distinguish between projects that are adding value to the ecosystem but aren't a direct threat to BTC's reserve currency status (which actuallly make BTC more valuable) & those which could dethrone it.

Even Ethereum becoming larger than BTC would not supplant BTC's status as digital gold because they fulfill different roles. BTC does have a scaling problem so may ultimately be threatened by LTC or similar.

ebworthen's picture

"Ethereum", cracks me up everytime I see the word.

Ether + eum = A volatile, highly flammable liquid, C4H10O, derived from distilling ethyl alcohol with sulfuric acid, used as a reagent and solvent, and formerly used as an anesthetic + accusative masculine singular of is.

Pinto Currency's picture

The keys to why Bitcoin fails are items (5) & (6) below - Bitcoin does not possess value in itself and virtual currencies they are unlimited. You end up with hundreds of virtual currencies with virtual value. It can be created without limit.

(1) It must be durable, which is why we don’t use wheat or corn or rice.

(2) It must be divisible, which is why we don’t use art work.

(3) It must be convenient, which is why we don’t use lead or copper.

(4) It must be consistent, which is why we don’t use real estate.

(5) It must possess value in itself, which is why we don’t use paper.

(6) It must be limited in the quantity that is available, which is why we don’t use aluminum or iron.

(7) It should have a long history of acceptance, which is why we don’t use molybdenum or rhodium.

https://www.milesfranklin.com/the-seven-characteristics-of-money/

LOAD UP. VIRTUAL NOTHINGS ARE SO VALUABLE.

Jay's picture

Databases have intrinsic value, so bitcoin has intrinsic value. Bitcoin is limited by it's algorithm. The other coins do not dilute the value of bitcoin as the article suggests. Did the hyperinflation of the Zimbabwe dollar dilute the value of the Euro or American dollar? No. If anything, it made those currencies rise in value. 

daveO's picture

Zim. dollar was/is backed by terrible management. Sounds about the same as Bitcoin's lack of management and why it's also losing market share.

Multi's picture

"But low barriers to entry do create some very obvious risks"

Which are? Too much competition is a bad thing now?

Dabooda's picture

Ways in which Bitcoin is BETTER than gold: (numbers refer to the points you make above.)

2.  It is almost infinitely divisible -- and conveniently so.  Wanna make change on a 1 oz. Gold Eagle?

3. It is MORE convenient (and safer) to transport, assess, store and use than gold.

4. It's MORE consistent than gold, which comes in varying purities -- and  plated over tungsten.

5.  It does NOT possess any value except as a medium of exchange, which means its utility as money will not be diluted or enhanced by manufacturing usage (gold jewelry, silver and platinum used in electronics and catalytic converters, etc. etc.)  Its monetary value derives strictly from its monetary utility -- its limited quantity, its infinite divisibility and its convenient and secure electronic transportibility.  This is the key point that Mises and the Austrians never envisioned: all the ideal monetary characteristics scarcity, divisibility, transportibility and convenience can be artificially created.  Exactly why should intrinsic value be a sine qua non? As long as governments and bankers can't print the stuff or easily steal it, that makes it ten steps above any paper money, and two steps above gold.

6. It is precisely limited in quantity -- no asteriods full of BTC are going to be discovered.  No new mining discoveries will affect the supply.

As for the other two qualities, durability and historical precedent -- The first is mostly valid, granted, since electronic code can be lost or forgotten or erased fairly easily.  As for historical precedent -- I just wanna know if anybody thinks these computer thingies aren't gonna be around for awhile. 

 

Pinto Currency's picture

There will be limitless virtual currencies created. Without limit. Bitcoin is a twist on fiat.

Gold is money.
Bitcoin is fluff.

Dabooda's picture

Gold is money.  Paper dollars are money.  Any medium of exchange is money.  So Bitcoin is money, too  - moronic sloganeering to the contrary notwithstanding. 

The important thing is: How good a medium of exchange is Bitcoin -- or gold? 

Face facts: we live in a world of global trade, and transactions are largely done electronically.  And they aren't done using gold.  It's not safe or convenient or even possible for me to try to buy stuff from a Chinese supplier using gold coins.  We need a medium of exchange to do business.  Fiat currencies are constantly degraded by governments and banks -- so what medium do YOU prefer using in e-commerce? 

Yes, there are many different digital currencies being developed and offered -- that doesn't mean the supply of any ONE of them is unlimited (although watch out if a government or a big bank starts offering something NOT strictly limited in quantity, like Bitcoin is).  There will NEVER be an unlimited supply of Bitcoin, or any other e-currency which is designed with limits. The market will sort out which ones have the most utility, and customary use will take it from there.  It will all take awhile to shake out, but as long as e-commerce is here to stay, SOME electronic means of exchange is going to be the wave of the future.  Bitcoin itself may be one of the failures that can't ride the wave for long -- it doesn't give enough privacy and transaction times are too slow.  Something better will likely come along . . .

I'd like it a lot if there were some trustworthy way to do e-commerce using gold -- but who are you going to trust to hold the gold?  Banks?  Governments?  Private vaulting companies (which could be robbed, or seized by governments)?  Insoluble problem, I fear.

Pinto Currency's picture

Paper dollars are not money.
Money has those 7 special characteristics (all of them) - paper dollars do not qualify.

Bitcoin and fiat dollars are temporary media of exchange.

TwelveOhOne's picture

You are correct, it is an insoluble problem -- not necessarily because they can be robbed by external parties.  More, that they can be robbed internally -- "let's print more certificates than we have gold on hand, we'll be rich!"  This tends to always happen; it's why coins have ridges on the edges.

dark pools of soros's picture

my fluff buys your dead weight and spits out change

Pinto Currency's picture

For a while until even the fools wake up.

Teja's picture

There will be limitless virtual currencies created. Without limit. Bitcoin is a twist on fiat. Gold is money.

Does the fact that there is Platinum, Silver and lots of other metals like Copper, Iron, Mercury dilute the value of Gold? Each of those metals has got a value assigned by the market, and various roles, from technical uses to store of value. If one or 100 new "metals" were discovered, this would not really affect the role of Gold directly. Like for virtual currencies - new virtual currencies would not directly affect the price of bitcoin, only indirectly, and that could go in both directions - bitcoin is often used as base to purchase those new currencies as a fiat money exchange is more regulatory effort than a virtual currency exchange.

Of course, if there would be a widely adopted new virtual currency with technical properties much better than bitcoin, that would long term lower the value of bitcoin. But to hedge against this should be relatively easy by spreading virtual portfolios. Maybe an index coin would be an interesting construct, defined by a pool of virtual currencies kept decentrally in multi-currency wallets.

Mementoil's picture

You consider the fact that Bitcoin "does NOT possess any value except as a medium of exchange" (no. 5 on your list) as an ADVANTAGE??!!!!
Are you nuts?
Having industrial use gives the PM a price floor. We know that their price will never go to zero, even if for some reason all monetary use of them stops. Bitcoin, on the other hand, has no other use other than as a medium of exchange, and if for some reason people stop using it (for instance, because a new and improved cryptocurrency emerges), then its value can indeed go to zero, and in that respect it is not different from any other fiat currency.

 

Dabooda's picture

I do see your point(s), but I'm going to stick with my characterization of digital currencies' lack of intrinsic value as an advantage.  In these respects:

1. its intangibility makes it harder to steal (from competent users), and affords potential privacy.

2. Lack of commodity value frees it from upward and downward price spikes triggered by industrial uses, accidents, wars, mine closures, government confiscations, supply gluts and shortages . . . anything that can go wrong with the monetary commodity can cause its value to fluctuate. 

3.  Any commodity that can be traded on a futures market which allows unlimited short-selling and doesn't guarantee physical delivery can be played like a violin.  I like gold, myself.  I own gold, myself.  But I can see it being manipulated.  Is this your ideal of sound money?

So while it's vaguely comforting to think that my "money" has a price floor based on intrinsic value, I've got to admit that as a usable medium of trade, gold does leave a few things to desire.

Your final point about Bitcoin possibly going to zero is very well taken.  Not enough privacy, and not enough speed confirming transactions leaves the door wide open for something better to come along in the e-currency realm.  But it won't be gold.  E-commerce doesn't work when transactions must be settled in physical metal -- and there are NO trustworthy intermediaries to hold and transfer the metal.

beaker's picture

What happens to your bitcoin account if there's an EMP?

Dabooda's picture

Nothing, if you've got a paper wallet.  Probably not much if it's on an unplugged USB in a steel safe.

More likely: you'll lose your password.

Mark777's picture

While BitCoin and similar crypto currencies are in some ways a more secure kind of fiat currency, time will tell, I agree that cryptos have no intrinsic value in themselves.  They're worth only as much as people value them.

DownWithYogaPants's picture

Ok maybe funny to you but not technically accurate.

It's named after the ether which is what they thought light traveled through.

All though there were implying a certain whispy nature and that my dear sir is truly funny. Whispy it be.  

cheka's picture

the deriv market will swamp it (like pm) whenever skype decide to pull the trigger

stacking12321's picture

stop. just...stop.

if you don't understand what the word fiat means, don't try to use it, you'll just hurt yourself.

SMG's picture

OK, so if say the internet turns off, what exactly can you exchange a bitcoin for?

stacking12321's picture

that's got nothing to do with the question of what fiat is.

here's a great video by renegade economist which explains what fiat means (2 min 24 sec):

https://www.youtube.com/watch?v=K5rVz9RzEvQ

 

bitcoin is not backed by any government, it is not fiat.

Mementoil's picture

I think it is you who doesn't get what "fiat" means.
fiat means "let it be so". And it doesn't have to be the government that dictates it. Even if it is a private initiative the result is the same.
Fiat currencies are artificial constructs, not based on any tangible good, and that is their fatal flaw.

Advoc8tr's picture

... only because until recently there was no bullet proof way to limit supply of anything man made - it was something only nature could do despite the best efforts of the alchemists.  Bitcoin and some other cryptos have hard limits. 

Is it more likely quantum computers that can hack current crytography arrive before the molecular scientists figure out how to transform Pb to Au efficiently is the question ?

Multiple competing non-government currencies is exactly what the doctor ordered. Demand born of utility, integrity and resiliance will determine the winners and price as it should.

stacking12321's picture

no, i think it's you who doesn't get it.

you say fiat currencies are "artificial" constructs, but what does artificial mean? it means man-made.

ALL constructs are artificial constructs.

whether something is backed by a "tangible good" has exactly SQUAT to do with whether it's fiat or not. if each dollar were backed by a leaf, would it be more valuable, or would it no longer be fiat? hell, no.

you need to understand that basic distinction, before you can even hope to discuss what fiat is.

mmanvil74's picture

Lots of new competing cryptocurrencies is not necessarily bad for Bitcoin.  Just like with any industry ,we will see a few major cryptocurrencies and many - surely thousands and eventually millions - of cryptocurrencies.

In the same way that today we have a few popular websites that attract most of the world's internet traffic and millions of websites that attract very little traffic. New upstart websites have a hard but not impossible task of becoming a leading website, same story with cryptocurrencies. This is the natural evolution of any industry.

Will Bitcoin always be the leader? Who knows, but the cumulative amount of money, assets, and representations of value residing on blockchains globally will grow exponentially. The market will determine which blockchains emerge as leaders. May the best coin(s) win.

Dirtnapper's picture

If the Internet is "turned off" the only thing worth a damn is going to be lead.  JIT distribution to payments require the Internet.  It goes does for more then a couple of days and it's Mad Max time. 

daveO's picture

That's not even the real concern, imo. Competition is what will stop it. Bankers will block it or co-opt it.

dark pools of soros's picture

if the internet turns off we all win our freedums back.. viva la 70's 

 

Mr.Bigfoot's picture

Exactly!  By definition Bitcoin is NOT fiat.

A82EBA's picture

btc's not created out of thin air, must consume energy to produce them. not like your fiat except that its digital

meta-trader's picture

you can add an extra 1500/USD week after week in your income just working on the internet for a couple of hours each day... check this link... http://bit.ly/2jdTzrM

MalteseFalcon's picture

Lycos :: Google

as

Bitcoin :: NSA_We_Know_Everything_You_Are_Doing_Coin

DownWithYogaPants's picture

I've investigated BTC.  NSA / no one is going to be able to track bitcoin users who use a modicum of operational security.

MalteseFalcon's picture

Exactly.

That's why NSA_We_Know_Everything_You_Are_Doing_Coin will ultimately be the standard.

aurum4040's picture

You have no clue what you are talking about. Ethereum for example is not just another coin - it's a development platform that could litterally run probably 50% of all businesses in existence today. My name is aurum and I am telling you Ether has more intrinsic value then gold. If you could buy a piece of a hypothetical Java 2.0 that had 100000 times the capability of the Java 1.0 before 2.0 even came to market, would you? Yes, you would. There's a reason why 220 corporations worth trillions upon trillions of dollars are backing and developing Ethereum and, I don't know about you, I am going to be on that side of the trade. And I've been. Along with Ripple. 

Bunga Bunga's picture

Gold value was never significantly diluted by platinum, palladium, silver aso. Platinum has even better properties as store of value than gold, but gold perserved the status as the best PM currency. Gold was just ahead of other metals, Bitcoin is ahead of other cryptos. The network effect explains why alts will never replace Bitcoin and other PMs never gold.

GodHelpAmerica's picture

I shall devalue your bitcoin; not with more bitcoin, but with new crypto currencies

DownWithYogaPants's picture

True dat.

It is very similar to bank notes in the 1800s.  You know where each bank had their own.

 

Bunga Bunga's picture

Quantity ratio is 280:1 while price ratio is 1:1.5.  Either gold is overpriced or Bitcoin is underpriced.