After a furious climb in December 2017, the price of bitcoin $BTC, the mother of all cryptocurrencies, dropped by 60% in January from its previous peak. Other cryptocurrencies, which are for all intents and purposes linked to the bitcoin, suffered even greater losses.
BitBucks from the digital agency FUF // Frank und Freunde in Stuttgart takes stock after the explosive price rises of digital currencies last year.
Many see a connection between the incredible rise at the end of 2017 and subsequent crash early in January to the futures contracts that were launched by the U.S. futures exchanges CBOE and CME in December.
If prices were, in fact, pushed up artificially by investors who bought aggressively only to bet on a drop in the price at the peak with futures contracts, then the subsequent unwinding of the bets would have realized profits of immense dimensions. With fear, the bitcoin community looks to Wall Street, the traditional finance economy, as the force behind the events. But, the phenomenon known as pump & dump has, in fact, been part of the digital currencies scene for long — even though it is highly questionable.
In the meantime, the view held by many, namely that the price of bitcoins will continue on its unprecedented climb, and will reach $50,000 sometime this year, was dumped as completely unrealistic. The opposite scenario is now more likely to materialize.
Even though — in its tenth year of existence — the bitcoin has the highest acceptance level and most active supporter base of all cryptocurrencies. And mining, the process whereby more bitcoins are created out of nothing, has, for instance, developed into a real industry, thanks to subsidies on electricity offered by the state in China.
But, that doesn’t change anything to the fact that the bitcoin has arrived at its outer limits — technologically speaking.
The trade and distribution of coins on the exchanges (such as Coinbase, Bittrex and Binance) alone had pushed bitcoin to its performance limits. This resulted in high transaction costs (in some cases over $30 U.S.) and transaction confirmation times of up to several hours.
With such performances, one cannot even start to consider using bitcoin for regular payments. Against this backdrop, the bitcoin community split last year, and Bitcoin Cash, a copy of the bitcoin, appeared on the market. Larger blocks speeded up payment and made transactions cheap again.
But, Bitcoin Cash came under fire for making it more of an effort to operate Fullclients, the so-called nodes, where the entire blockchain, including every single transaction, is documented. Consequently, only a few users can afford to operate nodes, and so help keep the Bitcoin network up and running. And this, while the bitcoin draws its power from the decentralized and distributed account.
Since it is easy to replicate the bitcoin with the open-source software underlying it, a myriad of bitcoin clones appeared on the market.
Acceptance level dropping
Given the little hope that the bitcoin will be adapted for payments, the fluctuating price and high transaction costs (which has in the meantime turned into a real issue), the currency’s acceptance level is on the decline. Recently, Stripe, a provider of payment services, stopped accepting the bitcoin (-> link).
When Visa card issuer WaveCrest stopped accepting bition as a payment option, one of the few available ways of paying with bitcoins in the real world fell away. Bitpay still offers a payment alternative for online shopping. However, after the sharp increase in transaction costs, it introduced a minimum order value of $100 U.S. for paying with bitcoins.
“Hodlers” remain loyal to bitcoins
Yes, the typo is intentional! In the bitcoin community, there are so-called holders. They are the true bitcoin fans, who have gone through numerous ups and downs with their currency.
In the numerous forums of the community they have come to be known as “hodlers,” due to their frantic typing (and mistyping) on latest price moves, threatening government regulation, or other breaking news.
After rising to almost $1,200 U.S. at the end of 2013, the price dropped to between $200 U.S. and $300 U.S. and drifted around those levels until 2016. Even in these difficult times, the so-called hodlers remained loyal and stood by their bitcoins.
Some of them had acquired big numbers of bitcoins at a time when they could be bought for a few dollars each, or even cents. Today, they are paper millionaires, some even billionaires, and the big fishes in the bitcoin community, where they are known as whales.
When transactions on the blockchain led to the realization that the bitcoin “on chain” has no chance whatsoever of becoming the payment method of the future, the community resigned the bitcoin to the role of value store — a kind of digital gold.
Given the always existing — and currently even higher — volatility of the bitcoin price, it is, of course, complete nonsense to call the cryptocurrency a store of value. Who wants to invest his savings in an asset class which may lose 50% of its value in the next week?
Lightning to boost bitcoin
Some tout so-called second-layer technologies, such as the much-vaunted Lightning, to reinvigorate the grand old lady bitcoin. These proponents hope to close the gap to modern cryptocurrencies on speed and transaction cost with transactions that do not take place on the blockchain.
The model is quite complicated, however, and introduces additional roles to the bitcoin concept. From a regulatory point of view, there is at least one more aspect that still needs sorting out.
Lightning transactions are one level more anonymous. But, the transfer isn’t made exclusively peer-to-peer — between two individuals — any longer. Other network participants are involved as third party.
The hopes associated with Lightning are already discounted in the bitcoin price. Setbacks in the dissemination of the idea will most certainly not be positive for the price.
Furthermore, critics also point out that the Lightning technology is supported by companies, which takes the coin quite far from its independent, open-source character.
Ether — the 2nd generation coin
Ether justifies its label as the second generation of cryptocurrencies, with its “programmability” on the corresponding platform Ethereum. In principle, automated payments can be set up and executed with it, which opens up a multitude of new possibilities. To date, the most famous and, of course, absolutely superfluous, application on the Ethereum platform, has been the game CryptoKitties. Here, the player has to accumulate digital kittens.
As much as the game CryptoKitties has helped us understand the automation possibilities of Ethereum, it also showed us the performance limits of Ether. Here again, it showed that performance is the intrinsic weakness of the blockchain technology.
Unlike Bitcoin, Ether is considered to be more centralized. In 2016, Ether crashed massively, when a mistake in automation caused coins with a total value of $50 million to vanish. The inventor of Ether, Vitalik Buterin, then decided to copy Ether and to reverse the error in the copy.
The Ether known today is, in fact, the copy of the original Ether. The original is still on the market under the name Ethereum Classic, a reference to the fact that it is the original.
The altcoin avalanche
All the cryptocurrency successors of the pioneer bitcoin are grouped under the label altcoins (“alt” is short for alternative). As we have already seen, it is possible to copy and clone coins with little effort. In the past, that has led to a veritable avalanche of altcoins onto the market.
Most of these bitcoin followers are based on Ethereum and the so-called ERC20 token standard.
All of them try to present a distinctive profile. As far as the technology is concerned, only a few parameters distinguish them from the original. As a result, they also cannot open up fundamentally new vistas.
Instead, they try to offer a unique profile, a special image, a regional reference, or to specialize in a specific industry. The only way to do this is with marketing.
You may ask what use a coin has for a vertical market. It’s a justified question. If the infrastructure was protected, or the performance guaranteed, these could have been seen as benefits. But, whether one can invest in such a coin, is highly questionable. Unless, of course, the investor is a conscious and active supporter of the popular “get-rich-quick” activity called pump & dump.
ICO’s in the focus of the regulator
The biggest need for regulation probably exists in the area of initial coin offering (ICO). In Asia, and specifically China, we saw the first interventions by states in the area of ICO. In the industry, the ICO is viewed as a modern alternative to the traditional instruments of corporate funding. In fact, there is absolutely nothing to be said for copying an existing coin to create the next altcoin.
Everything that the original coin had as value — a user base, stock exchange listing, software, etc. — inevitably gets lost in copying. What remains, are empty promises and vague prospects. This is, of course, quite similar to shares, where the future is also traded on the stock exchange. In contrast, however, altcoins often have no value. As a rule, the money spent on brand and marketing exceed the development costs of the coin many times.
But, a gigantic profit beckons the issuer who convinces others of his coin’s great story, and suddenly sell large numbers of the reserved coin for real money, or in most cases, for bitcoins.
Driven by the hope that the newly released coins (contemptuously referred to as sh*t coins) will repeat the success story of the bitcoin, and enjoy the same, incredible price rises very quickly, huge speculative bubbles develop.
In principle, these are ponzi schemes. Those who bought when a coin was first issued, profit big-time when the coin is listed on the first stock exchange. In turn, the first buyers on the stock exchange realize big profits, if the price can be moved by what are often manipulated messages.
People who buy the coin at this point — in anticipation of further rises — are the ones who pay for the profits of the sellers.
Pump & dump
We have referred to the practice of pump & dump several times. On the internet and in chat apps, such as Telegram, (which incidentally, is also preparing its ICO), there are countless groups, some with thousands of members.
Here the prices of individual coins listed on exchanges are actively manipulated. After identifying a specific coin to focus on, the members of a pump & dump group undertake to buy it until the price finally trends higher. Once this happens, other market participants jump on the bandwagon. They are driven to buy solely by FOMO - the fear of missing out on “the next big thing” - and without knowing the background to the rise.
For the participants in the pump & dump scheme, the only thing remaining is to get out at the highest point. And, to determine the highest point, a technical analysis as known from conventional stock trading, is made. The losers, or more specifically, the loss-bearers, are the misguided buyers.
Technology evolves and breaks with the original idea
The third-generation coin is the pinnacle of technological development. Well-known representatives of this generation are EOS ($EOS), and Cardano ($ADA). Compared to Ethereum, they are based on more powerful technological platforms, which are expected to open up still undreamt of application possibilities in future.
Charles Hoskinson is behind Cardono. He was also one of the driving forces behind Ethereum. Even though Cardano has just emerged from the concept stage (to date only the token exists, and nothing of the forward-looking technological platform), the coin has already achieved a computational market capitalization of at least $20 billion U.S. — roughly the same as a small S&P 500 company.
In the meantime, one of the founders of Ripple, a blockchain-free cryptocurrency, can also count himself among the richest people in the world — even before a single, serious application of the digital currency had been identified.
This undreamt of performance — compared to bitcoin — was made possible by breaking away from the blockchain technology.
Also, it is possible to issue new coins with Ripple and Stellar. They are still only traded and exchanged as debt securities — as happens in our existing currency regimes — and not as “defacto” values, such as the bitcoin.
From the bubble back to the roots — the Bitcoin
We are definitely in a bubble. In itself, this is not necessarily all bad. In the Dot.com boom, the young sector was also given capital before the bust, with which it later financed its enormous growth.
To date, the regulator only stands on the sidelines in most countries — and waits. The community responded consistently positive to the recent meeting of supervisory authorities in the United States. The cryptocurrencies attracted attention, and the statement by a regulator, namely that one doesn’t want to take the toy away from the young, euphoric generation, was celebrated.
In reality, the new technologies were disparaged by this comment. If the supervisors were serious about the new technologies, they would have made different sounds.
Sooner or later, however, there will and should be an active intervention, which may even be triggered by a single event. In the area of altcoins, it is already clear that many coins lack any reason to exist.
The traditional finance industry also knows how to prevent the rise of serious threats. Against this background, we already see the collapse of interfaces in the payment area — especially in the area of credit cards.
Many of the new concepts — including the bitcoin Lightning technology — obviously share too many features of our current money and payment systems to remain permanently unaffected by regulation. Ultimately, however, the interpretation of the supervisory authorities will be decisive.
In the field of cryptocurrencies, technical advances are made by stepping away from the original core characteristics, such as decentralization, peer-to-peer technology and resistance to censorship.
In contrast, bitcoin still has the largest community, the longest history and the largest industry behind it. Perhaps, the classic peer-to-peer money of Satoshi Nakamoto (white paper) will win through one day, and allow us to transfer money without the need for confirmation by third parties.
Third parties who, in other systems, can (at least potentially) prevent an intended payment at any time.
A situation analysis from BitBucks by the digital agency FUF // Frank und Freunde in Stuttgart
