Let’s start with a quote to get some perspective on how small of a market cryptocurrencies are. During the recent G20 meeting, Governor Mark Carney of the Bank of England, stated:
Even at their recent peak, [cryptoassets’] combined global market value was less than 1% of global GDP. In comparison, just prior to the global financial crisis, the notional value of credit default swaps was 100% of global GDP.
Stating that we are still very early in the cryptocurrency space is not a bold statement. When compared to traditional markets, Bitcoin and all other blockchain projects have yet to even appear on the radar of most individuals of power and wealth. A technology and marketplace still so young is quite vulnerable. The volatility resulting from even the slightest shift in perception moves value. Even a lukewarm news story can cause the market to plummet farther than any traditional market could stomach.
We currently have a leading cryptocurrency that maintains security and decentralization to a degree that was nearly inconceivable just years ago. The definition of immutability now has a new, and possibly only, example in the dictionary. The scale of infrastructure that has been built and currently under development is constructed with an open-sourced team that couldn’t possibly be stronger. The community has steered the project through rough waters and it continues to float after nine years, even after a truly countless number of attacks.
The flagship of cryptocurrencies is Bitcoin. Again, these are not bold statements. In the eyes of the mass public, blockchain is Bitcoin. They begin to glaze over once you digress into other projects. Being able to have a conversation outside of an online community about blockchain is surprising in and of itself. The rapid growth of blockchain based applications surpasses the speed of the internet’s rise to adoption. Bitcoin’s recognition and public awareness cannot be overstated or undervalued. The amount of money and time it takes for a technology to reach the current level of adoption is greatly overlooked.
The value of currencies, and cryptocurrencies, is fueled by the network effect. Cryptocurrencies are only to the current point in valuation because of Bitcoin’s widespread user base and history of operation. This is where online echo chambers begin to degrade the conversations though.
Echo chambers lead to blockchain being treated as a zero sum game. It will do more harm than good for the health of the space. I understand how fun it can be to root for your favorite sports team. When the end goal is widespread adoption of this revolutionary and liberating technology, playing games is counterintuitive.
There is money to be made and I will not pretend that it doesn’t have its place. Capitalism will always have an effect. Valuations are the driving factor of adoption at the moment. There has been a recent spotlight on cryptocurrencies and talent is flocking to the space.
As a trader, I also can’t ignore the fact that I have benefited from this mentality. With new and emotionally driven investors gravitating towards the space and hiding in their echo chambers, the opportunity for profits have been huge. The impatient truly does benefit the patient, although there is a balance to be made here.
With adoption levels and a profit motive linked, trading a market as limited as cryptocurrencies can have its issues. Just like the early heyday of penny stocks, liquidity problems are magnified. In financial markets, liquidity is the ease with which an asset or security can be bought or sold without a real effect on price. In every trade, for your asset to have value there needs to a counterparty on the other end willing to pay.
The bull run late last year was partly due to traders and market makers wanting Bitcoin to grow and then actually using it as a means for liquidity in the marketplace. All of the cryptocurrency altcoins have their value tied directly for this same reason. There is a dire need for liquidity in this small space. In short, the reason these altcoins had the valuation and capital poured into them was a direct result from the success of Bitcoin as a means of value and the liquidity of that value.
Bitcoin’s importance cannot be overstated in bringing blockchain acceptance to the forefront. Personally, I am far from a Bitcoin Maximalist. Competition is the driving force of innovation and cryptocurrencies are no exception. I do not believe we need to be content with the current rate of development at any point; there should always be a push for something better. High fees and slow transaction times exist on the network. At peak congestion, it is nearly unusable as a currency. With the userbase Bitcoin currently has, growing pains are to be expected. Now, the point of writing this article is an attempt to shake those that believe Bitcoin needs to die in order for their latest revolutionary technology to take its rightful place as the leader in the space. This is not a zero sum game. Just because Bitcoin is the current front runner, that inherently does not give another project less value. An alternative project, for the most part, has value because of the reputation and userbase Bitcoin brings to the space.
Bitcoin will slowly lose market dominance as additional pairings become available on exchanges. This will naturally cause a shift in the marketplace. Money is continually flowing into the space through different means other than Bitcoin. It is a healthy change that has been slowly moving forward. Speeding up the transition is not worth the reputation bashing that occurs against the first and most stable currency in the space. Bitcoin does one thing exceptionally well – it holds value. In my opinion, that deserves respect.