I believe nearly all asset classes are in over-leveraged, debt-fueled bubbles. I believe BitCoin and cryptocurrencies are no exception.
When my folks talk about moving money to BitCoin without much understanding of the technology and its goals such as decentralization and scarcity, I think a market peak has been reached.
The whole “keeping up with the Joneses” mentality leads to people overvaluing certain assets. Housing is a typical example. It is seen as something in perpetual demand. The assumption that it has nowhere to go but up becomes mainstream. Asset classes reach bubble levels because those that feel late to the party need to join or else be left behind. Technical fundamentals be damned.
The block chain algorithm is great for its purpose of not creating a centralized agency to manage transactions and control supply. These are the main problems with central banks and fiat.
The problem with the block chain algorithm when attempting to become a utility for money, is that algorithms and software inherently aren’t good at creating scarcity. Cryptocurrencies are thwarted by one of the greatest features of software: software is meant to be easily extensible and duplicated. Trying to create something scarce by software is anathema to software itself.
Even if BitCoin is the largest block chain network at the moment, it doesn’t guarantee it is the only network for eternity. Software is meant to be cheap to reproduce. It is meant to be easy to extend and improve upon old algorithms. Inevitably, BitCoin will be superseded by technology with higher perceived value.
Speculating in BitCoin should be treated like speculating in a startup software company — a company whose chief product is a virtual crowd-sourced accountant (albeit an honest one).
BitCoin, when it started up, essentially issued 21,000,000 company shares. Shareholders are now transacting with those shares with one another with the crowd-sourced accounting software.
That “initial public offering” already illustrates a fiat-like problem — it created 21,000,000 shares out of thin air. In reality its market cap is based on the perceived value of the accounting software. If other knock-offs like Ethereum pop up, more shares are created out of thin air based on the value of its software and how much the shareholders trust it.
The supply of cryptocurrencies can easily outpace demand. Cryptocurrencies are not like usual tech companies that require a team of thousands of employees to churn out a very specialized product (human capital is more finite than crypto coins). New cryptocurrency “companies” can duplicate and improve upon the existing open and widely-shared algorithm, in hopes of building a bigger network of users that will trust its accounting software, by taking away users of an existing cryptocurrency network like BitCoin.
All asset classes are subject to the same supply and demand principles. If a new precious metal suddenly was discovered, it would dilute the value of gold. The more precious metals discovered, the more supply in the asset class will outpace demand. If the public no longer desires gold, it will also lose its value. Cryptocurrencies are not an exception. The problem is, how many new precious metals are being discovered every month, compared to how many new cryptocurrencies are being started every month?
It is clear that BitCoin has poor economic fundamentals to be sustainable over the long run; thus, BitCoin will only have as much value as public opinion will value it. The fact my folks are talking about it without giving it a single thought about the technical shortcomings makes me think the public perception of cryptocurrencies has reached its peak.
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