The coming crash of bitcoin is inevitable
So before you BTC advocates jump, let me start with what might sounds like a contradicting statement (But actually isn't), Block chain is probably the most important technology of the last 100 years.
We are in what seems to be a great Bitcoin/ Crypto Currencies / Block chain mania, Some might say the biggest mania ever and I hear bitcoin around me all the time (Never thought it will get that far, that fast), I see more and more people struggle with the question: Is it real ? So I decided to write this post, Not that anyone can predict mania direction and volume but at least will be able to frame a discussion on what seems to be very vague technology.
I first learned about Bitcoin in the Peter Schiff show, The BTC value was 10c if I remember correctly, I went and read the white paper and was pretty fascinated by the concept, So fascinated I participated in open source BTC wallet and released the first Israeli BTC wallet, Back in the days when it made sense to store the entire block chain on mobile phone. I also coded a BTC debugger to learn the underlying technology into depth, my (past) peak technological path was when I tried (unsuccessfully) to push for ComputeCoin inside Intel, A coin that actually uses the compute needed for cryptocurrencies into valuable data center usage while generating coins .On the more personal notes I am pretty familiar with the Fiat money concepts, Inflation manipulations, debt issues, currency wars and future growth impact. I am stating these things because I don’t want you to take the discussion in to the technological matter or the vision,I am pretty familiar with both and these are irrelevant to the rest of this post , We are here to discuss business, The Block chain business.
So why BTC is going to crash ? It starts with the very nature of technology in general, Technology hypes and then crashes until we (as society) learn how to generate and capture the value it offers , The most famous example is the Dot Com bubble, Most of the concept in the Dot com bubble were actually great business cases and no body would argue the Internet has changed the world, It just took 20 years while the bubble inflated in 5. The famous hype cycle from Gartner is exactly about that:
Expectations are hard to measure, therefore its pretty hard to say where we are at that chart but one thing I am pretty sure of, BTC Disillusionment will come. Anything from this point is a wild guess on the why and when, don’t use it to decide whether to go in or out, you might as well toss a dime for your decision if this is what you are after.
These days I spend quite some time thinking on cost, value and pricing at dataloop.ai , these question are part of any startup or new venture and are in the heart of determining whether you have a solid business model, so I enjoy the practice of doing it to many things around me and try to reflect the result on my company. So what is the Bitcoin value ?
If you want to measure value there are two main common paths, top down or bottom up. bottom up : what are your costs and desired margins ? top down: What are the customers willing to pay and does it leaves you proper margins, at the end both should meet, They can’t contradict.
So what is Bitcoin value , Can we answer what is the bitcoin cost and take it from there ?
One of BTC pillars is that is it a safe store of value, Governments cant devalue it (incorrect) and that it is kind of digital gold (Also misleading). But the biggest question on the table remains , what is the value of BTC ? My 5 year old is playing with a drawing shop(worth another post, I learn from him a lot) by trying to sell his drawings,like his dad he struggles with the question : “What is the price ?”, My constant answer is “what ever someone is willing to pay you”, Its very hard to estimate value but the other side of the price coin is much easier, What is the production cost ? This is a question every technology developer struggles with daily , We (kind of) know how to calculate our costs but how much do we charge ? Totally different ball game, We need to charge whatever we can (competition enters here) with the hope to get good (excellent) margins. So what is the bitcoin value ? Can we drive it from its cost + margins ?
Bitcoin cost is easy to calculate, The expenses in generating bitcoin are around electricity, Direct and indirect (compute and cooling), At any given moment bitcoin has s well defined production cost, cost that comes from the amount of compute you need to put into work to win BTC, or win a block. But there is a trick, Through time the cost is changing, usually when BTC value goes up more miners join and the network adjusts. in other words, Generating bitcoin cost goes up with its coin price, pretty weird creature, isn't it ?
Now, Lets try to take it top down. What is the market willing to pay ? Its sounds like we just hit the point where we started because the market is willing to pay amount we cant validate. Not really, At this point we need to ask about the product and competition, What is the product Bitcoin offers ?
Unlike gold which holds intrinsic value (you can make jewelries, electronics and other stuff with it), Bitcoin doesn't, I once heard someone say bitcoin holds a beautiful number inside of it while I can agree SHA with a bunch of zeros in it is cool, I personally think PIE is much more beautiful and you can get it for free, so holding beautiful number inside of it is not a strong value proposition in my mind, definitely not one justifying the mania we see. So what is the product ? The way i see it people who hold bitcoin hold the right to transact on the bitcoin network with other people, kind of buying bandwidth on a communication network. What is the value of this “bandwidth”, It depends on what do you use/need the network for, Anyone need the ability to hide transactions from governments can see the value pretty fast but most of BTC buyers these days don’t go in for these reasons.Bitcoins offers the ability to do financial transaction and for most of us that goes pretty fast to Paypal, VISA or Master card. So we got we got our competition and market, a good point to start our top down analysis.
Before you BTC lovers jump, I am choosing the easiest market BTC can intercept , I am well familiar with block-chain supply management, smart contracts, energy markets promises and many other things BTC can be used for but at this point we are at “sales and marketing” office, “vision and strategy” is down the hall, left door. So, if anyone think there is an immediate other significant market BTC can intercept rapidly in the coming year or two I will be happy to play with it as well.
So what can bit coin offers in the transaction market ? The value of the product in this market is focused around the these features:
- Transaction Security
- Fraud protection.
- Transaction speed.
- Transaction price (The fees)
Security
Bitcoin transactions are secured, At least at the moment, If the guys keep playing with forks it might explode but at the moment the only weakness bitcoin has is the 51% attack , An attack that actually decrease in risk as the network goes larger. I am sure there are government that are playing with the idea of hidden forks but at current network growth and pace it will become harder, wouldn't say impossible but very hard.
Securing the BTC coins you already have is pretty hard on the other side, anyone with hold on your keys has you BTC. So you have to be very careful, way more careful then with your credit cards.
Fraud protection
If your BTCs are stolen that its bye bye time, The network is decentralized and no one is in-charge, Even if you can prove someone stole you BTC, The best action you can take is asking them back nicely.
Credit cards on the other hand offers a lot of fraud protection, from real time purchase analysis, cancellation in case of theft and insurances on loses.
Transaction speed
Bitcoin is slow, Very slow. Single block confirmation is 10 min and for large deals you should have 4-6-block confirmation. So buying a coffee to go with BTC is pretty hard.
Our regular payment methods are almost zero time, VISA can process thousands of requests per second (47K is the peak) compared to BTC of 7.
VISA (without the rest) has about 7000X BTC network capacity, That means that if BTC want to ever reach that level of usage then it has a lot of development work ahead.
Transaction fee
Currently the fees for BTC transactions are as following (They keep doubling every 3 months or so)
- Next Block Fee: fee to have your transaction mined on the next block (10 minutes).$19.98
- 3 Blocks Fee: fee to have your transaction mined within three blocks (30 minutes).$19.98
- 6 Blocks Fee: fee to have your transaction mined within six blocks (1 hour).$19.03
This is how competition fees looks like:
- MasterCard1.55% — 2.6%
- Visa1.43% — 2.4%
- Discover1.56% — 2.3%
- American Express2.5% — 3.5%
taking 2% as market benchmark this makes any BTC transaction under $950 more expensive compared to competition, and the real bummer this number is going up as the BTC value goes up.
Lets score and summarize:
So the competition kills the product for any deal smaller then $1K, and at this rate this number will keep doubling every 3 months.
So bitcoin is good for large deals only, where you can allow the time and want the attractive fees.
The average credit card transaction size is less then 250$
This puts BTC in tough position, It offers value only to a small part of the market.
This pin point to the main issue with the BTC network, Its in-ability to process high volume of transactions, fast and cheap, Diminishing its market as it moves up with coin price.
No news here
Bitcoin community struggles with this pain so hard it actually forked the network and constantly debating for solutions, I hope they manage to find one before the network renders itself useless or falls due to voluntarily inserted in one of the coming changes. How much time will it takes to fix it ? Hard to tell but a decade doesn't sound too wild to me, This is a reasonable time to stabilize technology at that scale.
Extracting and capturing blockchain value will take time and the path to it will have governments fall, Financial institutions bankrupt and currencies collapsing, This is not dooms day prediction, this is was BTC was designed to do in its birth from the ground up after 2008 crisis. So fast BTC adoption not only have technological blocks but social ones as well.
But wait …
What about swift and other large transaction mechanisms ? Two part answer here:
A.These markets are not big enough, Swift made around 50M$ last year , To small market to move the needle for BTC at this point.
B.You want all the banks to agree and adopt BTC at once, really ?
But wait #2…
We go into Etherium, Litcoin, <your favorite crypto goes here>
If one thinks BTC will crash while the others stay happy campers I would advice to check cryptocurrencies correlation with BTC, The herd is not rational on the way up and it is likely wouldn't be rational on the way down.
The hope
BTC was born out of 2008 crisis, It was born to put the checks and balances on those who proved they cant do it by themselves and it will do just that.
I believe its all for the good, This change is by no mean small but don’t expect it to go without pain, Revolutions never are.
With BTC or not, Blockchain will change the world, We just need patience.
Summary
In its current status BTC has little value, definitely not one justifying the current trade volumes. It is mainly powered by pyramid effect (rather then pyramid scam), It is likely to go up in the short term (less then 12 months would be my guess, its not better then your guess), I don’t see the protocol catches up fast enough to justify the volumes on the longer run.
I can imagine a world where people are desperately seeking for BTC to buy goods, I hope we wont get there.
I took a bold or stupid shot at estimating the status of the bitcoin and Ill finish with sentence I am telling many people in the last years:
“The moment you understand BTC price has no meaning is the moment you understand its power”.
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