The past year has been a turbulent one for Bitcoin, but then again, what year isn’t? Bitcoin is disruptive and real disruption means that there’s bound to be significant volatility.
In this article, I’m going to examine what’s happened in the past year and how it has affected Bitcoin, specifically with respect to the rest of the market surrounding it.
At its core, Bitcoin is a social innovation. Money itself is a social convention and introducing a new money is a social innovation and can fairly be called a social movement. As a social movement, Bitcoin has started to distinguish itself in 2018.
To the general public, 2017 was a year when Bitcoin was lumped together with every other “cryptocurrency” and treated as the same class. This is still true to a large extent today, but the events of the past 12 months have put some daylight between Bitcoin and all the other coins.
The reasons for this change in perception are many, but it starts with the obvious. So many ICOs, altcoins and the centralized teams that run them have simply not delivered. Their predictions on how their coin would be used have not come true, their expectations about price growth have not come to pass and their tech wasn’t as easy to make as they said.
The centralized teams are discovering that raising money, particularly in a bull market, is a lot easier than building a real product that has a market fit. The ICO token buyers are discovering that tokens don’t go up forever and that economic models which depend on continuous new money have stopped working. The traders are realizing that most of these tokens have very little to no liquidity and have stopped trading them to the degree they once did.
The lack of building and the hype surrounding all of these projects are clear in hindsight and this has caused a significant change in perception. Bitcoin works today and continues to build services that people continue to find valuable. Everything else is looking for a use case.
As a result, what we have now are altcoin teams that have lost their credibility. This is reflected in the lack of desire by people to hold these coins, which causes a significant dip in price, which we’ll get to in a bit. But before we go there, let’s take a look at the technical activity.
Bitcoin continues to build services that people are using. The lightning network has grown exponentially in the past 12 months and the demand for lightning based hardware, software and services continue to grow.
Furthermore, there’s been significant progress on privacy in the form of MuSig, Taproot, Graftroot, Dandelion, Neutrino and other projects. These are all real innovations with real developers that have delivered. In addition, Segwit adoption has continued to grow from 2017 as exchanges, users and businesses have begun to recognize the economic incentives at play.
In other words, Bitcoin has been in the enviable position of allowing the market to determine what’s desirable instead of some central authority. This is another point in which Bitcoin’s advantage as a decentralized system shows itself.
Altcoins continue to use a centralized model of development which too often results in products and features the market doesn’t want or need. One of the very few ICOs that at least delivered something is Augur, which after 2 years finally launched in July. Augur hit a peak of 265 users on July 10th and have only proceeded to lose users since then. They average around 25 users a day on their platform, which is a crazy $3.65M of market cap per daily user. Amazingly, this is one of the success stories for an altcoin/ICO!
What we saw in 2018 is that having lots of “developer activity” is not the same thing as producing something the market wants. Bitcoin has distinguished itself by releasing features that are actually used, and not duds that aren’t like so many altcoins.
The biggest movement in 2018 has been the price. Bitcoin has dropped 85% from its all-time high and there may be more dropping to go. The volatility in Bitcoin, however, is nothing compared to almost every other altcoin. Ethereum, Ripple, BCH/ABC and EOS, which are the next 4 “cryptocurrencies” in terms of market cap, have all dropped over 90% from their all time highs in terms of BTC. The lack of liquidity, the lack of delivery, the lack of security and so on may have contributed, but more importantly, the hype on these assets were off the charts during 2017.
Bitcoin had a lot of hype going into December of 2017, but that paled in comparison to the relative hype seen in so many of these altcoins that have failed to hold their value. What this led to was a lot of malinvestment which is currently being culled. Because so much of the money ended up in the centralized organizations of these coins, many have had to lay a lot of people off.
The result has been that Bitcoin has been less volatile than these altcoins, which is crazy to say given how volatile Bitcoin has been!
Ultimately, the drop in price has shaken out a lot of weak hands that came in to Bitcoin during 2017. The people that have Bitcoin at this point are less susceptible to hype, more attuned to real utility and more aware of what actually matters.
In a sense, Bitcoin has on net gained more true believers and gotten rid of all the people that didn’t believe. In other words, Bitcoin has gotten rid of the bad investors.
ICOs and altcoins, on the other hand, have centralized teams where it’s not so easy to get rid of bad leadership and so continue to pursue paths that are sub-optimal. In addition, they continue to have large burn rates and a shrinking runway. To make matters worse, their legal status is not clear and the conditions look ripe for shenanigans of one type or another.
What this past year showed is what Bitcoin Maximalists have been saying all along. Bitcoin is different because Bitcoin is decentralized. The advantages of decentralization are often subtle and easy to dismiss, but they are real benefits.
In Bitcoin, entrepreneurs decide what innovations will happen with their money and effort. In altcoins, central committees decide what innovations will happen. In Bitcoin, individual actors create products that use it. In altcoins, central committees commission other entities to build things for them.
Bitcoin has separated itself from the other cryptocurrencies and will continue to do so going forward.