Understanding The Cryptocurrency Boom (And Its Volatility)

Authored by Charles Hugh Smith via OfTwoMinds blog,

Speculative booms are often poor guides to future valuations and the maturation trajectory of a new sector.

I recently came across a December 1996 San Jose Mercury News article on tech pioneers’ attempts to carry the pre-browser Internet’s bulletin board community vibe over to the new-fangled World Wide Web.

In effect, the article is talking about social media a decade before MySpace and Facebook and 15 years before the maturation of social media.

(Apple was $25 per share in December 1996. Adjusted for splits, that’s about the cost of a cup of coffee.)

So what’s the point of digging up this ancient tech history?

-- Technology changes in ways that are difficult to predict, even to visionaries who understand present-day technologies.

-- The sources of great future fortunes are only visible in a rearview mirror.

Many of the tech and biotech companies listed in the financial pages of December 1996 no longer exist. Their industries changed, and they vanished or were bought up, often for pennies on the dollar of their heyday valuations.

Which brings us to cryptocurrencies, which entered the world with bitcoin in early 2009.

Now there are hundreds of cryptocurrencies, and a speculative boom has pushed bitcoin from around $600 a year ago to $2600 and Ethereum, another leading cryptocurrency, from around $10 last year to $370.

Where are cryptocurrencies in the evolution from new technology to speculative boom to maturation? Judging by valuation leaps from $10 to $370, the technology is clearly in the speculative boom phase.

If recent tech history is any guide, speculative boom phases are often poor guides to future valuations and the maturation trajectory of a new sector. 

Anyone remember “push” technologies circa 1997? This was the hottest thing going, and valuations of early companies went ballistic.  Then the fad passed and some new innovation became The Next Big Thing.

All of which is to say: nobody can predict the future course of cryptocurrencies, other than to say that speculative booms eventually end and technologies mature into forms that solve real business problems in uniquely cheap and robust ways no other technology can match.

So while we can’t predict the future forms of cryptocurrencies that will dominate the mature marketplace, we can predict that markets will sort the wheat from the chaff by a winnowing the entries down to those that solve real business problems (i.e. address scarcities) in ways that are cheap and robust and that cannot be solved by other technologies.

The 'Anything Goes' Speculative Boom

Technologies with potentially mass applications often spark speculative booms. The advent of radio generated a speculative boom just as heady as any recent tech frenzy.

Many people decry the current speculative frenzy in cryptocurrencies, and others warn the whole thing is a Ponzi scheme, a fad, and a bubble in which the gullible sheep are being led to slaughter.

Tribalism is running hot in the cryptocurrencies space, with promoters and detractors of the various cryptocurrencies doing battle in online forums: bitcoin is doomed by FUD (fear, uncertainty and doubt) about its warring camps, or it’s the gold standard; Ethereum is either fundamentally flawed or the platform destined to dominate, and so on.

The technological issues are thorny and obtuse to non-programmers, and the eventual utility of the many cryptocurrencies is still an open question/in development.

It’s difficult for non-experts to sort out all these claims. What’s steak and what’s sizzle?  We can’t be sure a new entrant is actually a blockchain or if its promoters are using blockchain as the selling buzzword.

Even more confusing are the debates over decentralization. One of the key advances of the bitcoin blockchain technology is its decentralized mode of operation: the blockchain is distributed on servers all over the planet, and those paying for the electricity to run those servers are paid for this service with bitcoin that is “mined” by the process of maintaining the blockchain.  No central committee organizes this process.

Critics have noted that the mining of bitcoin is now dominated by large companies in China, who act as an informal “central committee” in that they can block any changes to the protocols governing the blockchain.

Others claim that competing cryptocurrencies such as Ethereum are centrally managed, despite defenders’ claims to the contrary.

Meanwhile, fortunes are being made as speculators jump from one cryptocurrency to the next as ICOs (initial coin offerings) proliferate. Since the new coins must typically be purchased with existing cryptocurrencies, this demand has been one driver of soaring prices for Ethereum.

As if all this wasn’t confusing enough, the many differences between various cryptocurrencies are difficult to understand and assess.

While bitcoin was designed to be a currency, and nothing but a currency, other cryptocurrencies such as Ethereum are not just currencies, they are platforms for other uses of blockchain technologies, for example, the much-touted smart contracts.  This potential for applications beyond currencies is the reason why the big corporations have formed the Enterprise Ethereum Alliance (https://entethalliance.org/).

Despite the impressive credentials of the Alliance, real-world applications that are available to ordinary consumers and small enterprises using these blockchain technologies are still in development: there’s lots of sizzle but no steak yet.

Who Will The Winner(s) Be?

How can non-experts sort out what sizzle will fizzle and what sizzle will become dominant?  The short answer is: we can’t. An experienced programmer who has actually worked on the bitcoin blockchain, Ethereum and Dash (to name three leading cryptocurrencies) would be well-placed to explain the trade-offs in each (and yes, there are always trade-offs), but precious few such qualified folks are available for unbiased commentary as tribalism has snared many developers into biases that are not always advertised upfront.

So what’s a non-expert to make of this swirl of speculation, skepticism, tribalism, confusing technological claims and counterclaims and the unavoidable uncertainties of the exhilarating but dangerously speculative boom phase?

There is no way to predict the course of specific cryptocurrencies, or the potential emergence of a new cryptocurrency that leaves all the existing versions in the dust, or governments’ future actions to endorse or criminalize cryptocurrencies.  But what we can do -- now, in the present -- is analyze present-day cryptocurrencies through the filters of scarcity and utility.


Prisoners_dilemna 83_vf_1100_c Fri, 06/30/2017 - 20:11 Permalink

"But what we can do -- now, in the present -- is analyze present-day cryptocurrencies through the filters of scarcity and utility."   http://moneyandstate.com/bitcoin-libertarian-introduction-used-care/"No really, WHY is Bitcoin valuable??? At this point, skeptics should say, “okay fine, you can store and spend Bitcoins without interference, but what gives them initial value? Why do they have a price?” It’s a very good question, and even expert economists have struggled with the answer.But really, the answer is simple. Bitcoins have value because A) they are useful and B) they are scarce. Combine those two attributes in any asset and you will discover it has a price."

In reply to by 83_vf_1100_c

aminorex quintus.sertorius Sat, 07/01/2017 - 03:19 Permalink

Dash "masternodes" are all hosted on Amazon, so there Is no anonymity as the NSA records all the traffic in and out. Besides, it is a ponzi scheme.  That's what you get when the development is controlled by one scammy guy named Duffield. Zcash has a 20% tax on its users that goes straight into the developer's pockets.  That's what you get when the code is developed by a corporation, including Mossad SigInt specialists. Monero is very, very different.  

In reply to by quintus.sertorius

SILVERGEDDON Cordeezy (not verified) Fri, 06/30/2017 - 15:18 Permalink

Crypto currencies will be the monetary equivalent of social media's MySpace. 5000 years later, humanity stil recognizes the value, and relevance of silver and gold as a hedge against inflation, governments, et fucking cetera. Speculate all you want, for fun and games with money you can afford to lose.But , stack desirable commodities if you want to live out your retirement or pass any of your heritage on to your descendants. . 

In reply to by Cordeezy (not verified)

Manipulism Cordeezy (not verified) Sat, 07/01/2017 - 03:52 Permalink

Blockchain will be the ultimate tool for the technocratic elite to gain control over everything.A wet dream.Like saurons ring.I stumbled across a book in german - Trendradar_2030 - from an obsure  organisation- http://www.betterplace-lab.org/en/ -.and financed by German Federal Ministry for Economic Cooperation and Development (BMZ) There you can read their "Visions" about the world tomorrow all in alignment with Agenda 2030. Who would have tought.Everything will be organised with blockchain technology and you will not be able to do anything without this.Your whole live will be in a block chained.They sell all this of cource as great innovations for the greater good of mankind but but then here are gems in this book like this:  " If we want more globalisation, we must either give up a little democracy or a little national sovereignty. To act as if we can have all three at the same time leaves us in an unstable no-man’s land. Demo- cracy, as the multi-party process we take it to be, is counterproductive at this point in our history. "With the large push in cryptocurrencies valuations and a lot of stories about get rich fast they will get the acceptance of this techno trough greed as motivator. "Hey I knew a guy who know a guy who have made millions with bitchcoin. I will do it too."Look who is by now in it and you know where the journey is going.When your whole live depends on blockchain THEY can block your chains at any time.

In reply to by Cordeezy (not verified)

aloha_snakbar Crypto-World-Order (not verified) Fri, 06/30/2017 - 15:46 Permalink

Bitch, I have forgotten more about technology than you are ever likely to know in the near term. I think the blockchain is fascinating stuff, but what part of *legal tender* confuses you? Do you think the largest criminal enterprise ever, Uncle Scam, will just stand down and say, "welcome, Bitcoin...the waters fine, come on in, brother" ? If so, you are even dumber than you appear...

In reply to by Crypto-World-Order (not verified)

aloha_snakbar Crypto-World-Order (not verified) Fri, 06/30/2017 - 15:55 Permalink

Who says I am broke, stupid? Do *broke* people have time to sit at home in the comfort of their office and wind up morons like you, to see them fly off into space? And being stupid, like you are, is no excuse for not realizing that Uncle Scam is EVERYONES problem... and further, that virtually everywhere on the planet has their own Uncle Scam in power...

In reply to by Crypto-World-Order (not verified)

Decay is Constant natronic Fri, 06/30/2017 - 15:25 Permalink

Same here. My son gave me a Ledger wallet a few years ago as a gift. I HAD to play with it and bought a couple hundred worth of bitcoin. Forgot all about it until March and was surprised to see it more than double in value. Since then, bought a handful of Ether when it was at $20. Wish I would have bought as much as I could. Have some in Litecoin now.

If anything out there right now will scale to a larger number of transactions, Litecoin will. I've played with transferring between wallets. Bitcoin is way too slow to be practical. Maybe better after the upgrade. Ethereum is way faster, but unlike bitcoin is not really designed to be a currency since the number one of coins produced is not finite. Litecoin transfer from wallet to wallet is nearly instantaneous. Also, like bitcoin only a fixed number will be made. Four times as many Litecoin as bitcoin.

I don't see any of them replacing fiat real soon, but it's a fun market to learn and play with.

Bitcoin and Litecoin - fixed number of coins to be "printed". Could be used as an exchangeable currency.

Ethereum - a variable number of coins that can be exchanged but are also used as a resource (gas) to power the smart contracts and myriad other "coins" that are popping up.

In reply to by natronic

Iconoclast421 Fri, 06/30/2017 - 15:09 Permalink

It's not a cryptocurrency boom. EVERYTHING is as overvalued and pumped up as a $400 ETH coin. You think a share of AMZN is worth any more than a crypto coin?