Cryptocurrency - why we're still early and why you should be excited
Recently Bitcoin hit a new all-time high price, as did the cryptocurrency market cap as a whole. At a total cryptocurrency market cap of almost $3 trillion, this is a huge accomplishment and cryptocurrency is something that is no longer being ignored. In this article I will explain why I believe that we are still early in terms of the overall cryptocurrency market maturing and developing and why you should be excited by this.
Progress is being made
Although a lot of progress has been made, as it stands the biggest cryptocurrencies are not as user-friendly as one would like. Taking Bitcoin and Ethereum as an example, fees are high and transactions can take a long time. The user experience for any regular user can be somewhat tedious. It does add to a negative sentiment telling someone that their money of the future takes $30 for a single transfer.
Attempts are being made to fix this. ETH2.0 should decrease Ethereum's fees, while Bitcoin has the Lightning Network
The Lightning Network (LN) is often put forward as a potential solution for scaling Bitcoin. Effectively the LN is an overlay network powered by Bitcoin smart contracts that enables almost instantaneous Bitcoin payments.
In it's current form LN is still in a developmental phase; although it works well there are several attack vectors that the developers are working on mitigating.
With El Salvador making Bitcoin legal tender earlier in the year and the decision to implement the LN as the payment network the development and growth overall will only increase.
The El Salvadorian government for example had to create a new app, Chivo, and this app allows the residents of El Salvador to access the LN on Bitcoin. So LN is a layer to something that sits atop Bitcoin’s layer one infrastructure. Lightning is needed here to facilitate all the small payments, and the speed of transactions is needed for something like the size of a nation to transact on top of Bitcoin.
In the month after Bitcoin was adopted as legal tender close to one-third of Salvadorans have begun using the official wallet. For perspective, more citizens are using the wallet than any other bank in the country.
Bitcoin as a store of value
We're also still early in terms of crypto as a store of value, despite the lofty valuations crypto is already seeing.
Institutions *want* a better store of value than gold. Gold's flaws are well known, from physical security costs to yearly inflation to possible supply inflation in the long run through sea/asteroid mining. The world is ready for a digital store of value.
Billionaire hedge fund manager Paul Tudor Jones has cited that he is betting on crypto as a hedge against inflation, which he has called “the single biggest threat to financial markets.”
The founder of Tudor Investment Corp. has stated that he prefers digital assets over traditional hedges like gold, and has declared that he holds crypto in single digits in his portfolio.
We're moving into an increasing digitized world, clearly there's a place for crypto, and clearly it’s winning the race against gold at the moment.
Many would say Bitcoin is the frontrunner for a digital store of value. It very well might be, currently. Yet some people in the traditional financial sector argue that as a store of value, it leaves much to be desired for institutions.
Bitcoin and financial institutions
The dream for crypto investors is to see pension funds, institutional investors and even countries holding crypto as a reserve asset. So why not Bitcoin?
Although in 2021 we have witnessed the likes of Tesla and Micro Strategies, which are both publicly listed companies, declare that Bitcoin is held as a treasury asset on their balance sheets, other institutional investors have stated where they stand. Bank of America published a report about this subject earlier in the year, titled "Bitcoin's dirty secret". In this piece, they identify some inherent, but controversial drawbacks.
They argue that Bitcoin lacks an underlying use case. Originally envisioned as a way to allow borderless, cheap transfers, Bitcoin nowadays is expensive and slow to use. Its only purpose seems to be for "number to go up".
As an example, Bitcoin's security comes from decentralization. At the same time, mining Bitcoin comes with economies of scale due to the way Bitcoin is designed. In other words, Bitcoin is designed to encourage centralization over time.
To provide a counter argument here one could say that the purpose of holding any asset, including precious metals, is that you want the price to appreciate over time, so I really think that point is quite mute, especially given that cryptocurrencies have proven themselves to be the best appreciating assets ever to exist.
Furthermore in owning digital assets such as Bitcoin it allows for self sovereignty in owning property, which is in itself extremely valuable in a world today where we have witnessed a steady erosion of civil liberties and personal freedoms.
With regards to centralization, this is a point that is often mentioned as being counter intuitive to the ethos of cryptocurrency and should in fact be an insult to any project associated with it. In the minds of many in the cryptocurrency community, centralisation has a negative connotation of elites (particularly in the form of government and banks) possessing far too much power.
Admittedly centralisation can be damaging if put in the hands of bad actors, however consider the likes of Amazon, Tesla, Microsoft and other multi-billion dollar companies that have individuals owning a large percentage of the company shares. Do you think that those companies would have become so successful if the large shareholders had chosen to act irresponsibly with their shares? In fact by having a centralised ownership it has probably helped with both stability and the price appreciation of the shares as well as the value of the companies overall.
The green agenda
A hot topic in 2021 has been the focus on Bitcoin's immense energy usage. Similarly ESG and a 'green agenda' is very much a consideration for many large organisations. In fact it is doubtful that there is a single serious investor without an ESG board nowadays. On the face of it Bitcoin would appear to not pass even the most cursory inspection.
It's not just CO2 emissions. Bitcoin mining is also reliant on ASIC mining hardware, which can lead to generous amounts of electronic waste.
The views and opinions put forward by BAML are very one dimensional and perhaps have a tinge of politically motivated rhetoric. What they fail to take into consideration is the ever changing and adaptive landscape in the cryptocurrency space.
Earlier this year China, which held the highest concentration of Bitcoin mining, banned it which set off a migration of miners around the globe seeking cheap sources of energy to run their miners. This migration will take 12-18 months to play out. During this time, the U.S. and others have the opportunity to compete to make their locations the most attractive for miners and most of which I would imagine would be utilising some form of renewable energy.
Already, bitcoin mining is concentrated amongst conglomerates. This is an opportunity for the U.S. to encourage the location of large bitcoin mining operations next to large energy opportunities. Bitcoin miners can locate themselves anywhere and are perfectly positioned to exploit stranded energy assets, feed off of waste energy, co-locate and buy operating reserves from power plants, just to name a few.
As Bitcoin becomes more mainstream, there is no reason to allow bitcoin energy use and contribution to greenhouse gas emissions to be an obstacle to its advancement, because Bitcoin mining is perfectly suited to rely on renewables and waste-energy streams. The opportunity now is for a Bitcoin network to not only rely on renewables, but also utilise waste streams from oil and gas production operations and even unused baseload from utility operations to add energy efficiency to the overall energy production market.
Although investors in the business may say that Bitcoin's environmental impact means they simply are not able to invest in it, regardless of their desire to invest in a digital store of value, I would argue however that as more effort is put into making the network operate in a more energy efficient and 'green' manner this sentiment may change, especially with corporations facing an inflationary environment that will see the persistence of value being eroded from corporate cash reserves.
This is why I say we're still early. The image of a digital store of value is appealing, but the current frontrunner has its own share of issues. Are these issues insurmountable, absolutely not, in fact it is quite ironic that it is the average investor who can for the first time in history front run the institutions. Lets face it, cryptocurrency offers a unique value proposition with regards to yield which is becoming harder and harder to find in any meaningful amount in an over stretched traditional financial system that has been artificially bloated by central bank money printing and is now faced with ever increasing amounts of inflation.
In theory we could see more backlash against crypto for the massive energy usage of some cryptocurrencies, we could even see governments trying to push it into the ground, however I struggle to see that being a reality as you simply can't put the technological genie back in the bottle. In fact those countries that fight against it will be missing out on massive opportunities for their economies in the future.
A positive future ahead
I think however there is a more positive future possible. To succeed in the long term, I think we need to rethink crypto from the ground up. Our digital store of value needs to have low energy usage, remain secure in the long run and offer an underlying use case.
ETH's move to PoS in ETH2.0 would come close, and institutions are watching it with interest. It could solve Ethereum's energy issues. Other efforts are ongoing to increase its scaling and thus usability. Because of this, I expect Ethereum to do better than Bitcoin in the next few years, however the roadmap to a viable and operational blockchain still remains unclear.
With network fees being a massive hinderance to genuine mass adoption a number of worthy competitors to the Ethereum blockchain have gained a share of the market, however given it's first mover advantage in the space and it's battle tested reliability over several years of operation a lot of infrastructure has been built around the network architecture.
A unique solution
One unique solution that could accelerate the growth in the space is in my estimation quite a brilliant move. This is the development of PulseChain by the often controversial crypto entrepreneur Richard Heart.
For whatever reason many commentators in the space seem reluctant to acknowledge the brilliance of his move, however this could quite possibly alter the face of cryptocurrency completely.
What Richard and his team are preparing to launch is a hard fork of the entire system state of the Ethereum network.
Essentially this means that Ethereum's fees should be lowered by the PulseChain network sharing its load.
Ethereum users will become enriched as PulseChain will re-enable those Ethereum projects that have been priced out due to the fee situation.
Instead of the blockchain launching empty, PulseChain will contain all ERC20s. This will be achieved by the launch of PulseChain becoming the largest airdrop ever. The holders of literally thousands of Ethereum based tokens and NFTs will receive free PulseChain versions. This new gold rush will contain the value discovery of those tokens and NFTs on the new blockchain.
PulseChain promises much lower fees and thus will be able to serve more users.
It will increase the throughput of Ethereum 4x by using 3 second block times, which is a significant improvement on Ethereum's average block time of around 13 seconds.
The network will also replace proof of work miners with proof of stake validators, making it an environmentally friendly blockchain, which should appeal to the institutions
Although we are definitely still early in the evolutionary development of cryptocurrency I am extremely excited for the future, especially as we see more and more new and innovative projects being rolled out which look to not only improve the user experience but also make it possible for anyone to transact with ease and without having to worry about the expense.
In the not too distant future I envision a world where people will be using technology on their computers and mobile devices and they won't even realise that they are interacting with a blockchain.
Right now is literally like being able to invest in the future, but unlike in the 1990's where only those with money were presented with the opportunities to invest in those companies that went on to mold the shape of the internet we have today, with cryptocurrency, which is the next phase in the progression of the internet, literally anyone is able to participate, which makes it an incredibly exciting time indeed.