Bitcoin, what’s next?

The promise of bitcoin was a decentralized, autonomous, anonymous and trustless form of money that would make banks obsolete. In reality the original bitcoin evolved to be centralized around its foundation and group of “miners” who are effectively running the bitcoin “blockchain” engine. Throughout the short history of bitcoin it has proven that even if bitcoin itself is trustless the interfaces of bitcoin with people and currencies require trust that has often been abused. The illusion of anonymity was also broken by the development of tools for helping law enforcement connect bitcoin to IP addresses and identify suspicious transactions. In the U.S. every crypto-currency player is required to provide such tools as well as monitor and report suspicious activity. This brings us to the banking killer myth. Every crypto-currency player, which is regulatory compliant becomes similar to a banking player. Whether banks adopt bitcoin technology or bitcoin technology companies become regulatory compliant we get a similar animal.

Most crypto-currencies are “pump and dump” scams. The few exceptions, in my view, are:

  • Stellar, which is an advanced payment and remittance system.
  • Ethereum, which is a blockchain-based transaction platform.
  • Safenet, which is a decentralized Dropbox-like system.

However, even these truly innovative platforms involve a coin, which is designed to appreciate with the adoption of the platform and enrich its founders and investors. The problem with this appreciation is that these coins are also used for transaction fees and as they appreciate, they make transactions costly. This is a very unattractive feature from the perspective of the banking industry. In addition, inflexibility of the quantity of coins, which is determined in advance, makes it hard to balance fluctuations in the value of the coins. These sharp fluctuations make it impossible for such coins to become units of account in which prices of goods are set. Being able to serve as a stable unit of account is a basic requirement from any commodity with monetary aspirations.

There are Ethereum-like platforms, such as Corda, that provide the banking industry with a modular blockchain transaction platform without the burdens of a coin and public ledger. Free.

As to the recent bitcoin craze, it seems to have started as a Yuan short when the Yuan began to depreciate against the U.S. dollar. Then came the Indian move to ban cash, which pushed bitcoin further up and it turned into speculative frenzy. Lately, however, the Yuan has appreciated against the USD and if that trend continues it may pull the rug under the bitcoin price.

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