E The Bitcoin Bubble Will Burst. Then It Will Go Back To Exponential Growth

There are still a lot of confusion and controversies around cryptocurrencies in general. So I think it's better to lay some foundation first. Please feel free to skip ahead (as in, of course). This is meant to be a conceptual discussion, not a technical primer. Bitcoin Wiki is perhaps the most reliable source of technical information in human languages. If you feel like diving straight into the belly of the beast, check out Bitcoin Github.

Cryptocurrencies Are Money

Money is a notational device people use to exchange goods and services. If two kids agree to use a particular type/flavor of candy to exchange access to toys, then that particular type/flavor of candy is the currency to them, at that time. If a million people agree to use something, anything, to exchange stuff on an ongoing basis, then that something is as real and solid a currency as any.

Fiat currencies sanctioned by governments and supposedly backed by governments' credit, is but a relatively recent experiment, with repeated, disastrous, and ongoing failures, in the history of money. There is no reason to believe it's the only viable form of money, nor the best one. It will certainly not be the last one unless humanity ends soon.

Contrary to the common misconception, money is not s store for value. Assets are. Yes, making and saving money is necessary. But this is a very misleading abbreviation. Money is only a notational device. You don't invest in money. You use the money to invest in assets.

Cryptocurrencies Are Ideal Money

Cryptocurrencies are not only money, but ideal money, for the following reasons:

  1. They have zero intrinsic value.
  2. They require zero intrinsic cost for storage, transport, and transfer.
  3. They are practically indestructible.
  4. They are practically impossible to counterfeit.

I'll expand on the above for the rest of this section.

Currencies before the invention of paper money were all commodities, from shells to gold nuggets to silver dollars. They have intrinsic value, which inevitably changes due to factors having little or nothing to do with their function as money, e.g., new industrial application of silver. There may be disruptive changes in their supply due to advancement in technology, e.g., the discovery of a new coast full of shells, or a mineable asteroid rich in gold. And they are expensive to store, transport, and transfer. Look at a gold vault -- what a ridiculously inefficient idea.

Fiat currency was a breakthrough in the evolution of money. It had little intrinsic value. It's much cheaper to store, transport, and transfer. But it's easily destructible and relatively easy to counterfeit. And, whatever little intrinsic value they have, the problem is laid bare by the copper pennies in the US and the billion-dollar notes in Zimbabwe. As fiat currencies inevitably inflate, controlled or otherwise, a non-zero intrinsic value will present problems sooner or later.

If you're not familiar with cryptocurrencies, yes, they're indestructible. Whatever medium/wallets you use to store them are. But the true storage is in the blockchain, stored separately among millions of nodes around the world. As long as you retain the private key, your dog does not pose a danger to your thumb drive wallet. You can easily get another wallet and reclaim your balance.

Yes, it costs electricity to mine cryptocurrencies. Currently, for bitcoin it's more expensive than the market value at normal electricity rates in most parts of the world except for China which, as the running joke there goes, is beyond the jurisdiction of logic, math, physics, even economics. But this is the cost of production, not intrinsic value.

Bitcoin Is The Best Cryptocurrency

The world can only take a finite number of cryptocurrencies. The number could be high if governments adopt the framework to replace the current fiat format. But, in its current decentralized form, I doubt more than two or three could ever flourish; it will remain a niche in the world of currencies, serving a small but necessary part of the demand.

Bitcoin, being the first and most well-known, widely adopted cryptocurrency, will surely remain the top choice for the foreseeable future. If there were only be one successful cryptocurrency, it'd have to be bitcoin. On the other extreme, ICOs make CDO-squared, the crown jewel of the 2007 financial innovation disaster, look like grandpa's shoebox; you invest angel money to some nobody you never heard of and having nothing beyond a stack of powerpoint slides, and get hot air in return. I could not bring myself to recommending ICOs to my mortal enemy. As to the second-tier contenders such as bitcoin cash and ethereum, we'll have to let the market decide. A few of these could very well survive.

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Disclosure: I am long UUP.

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