The cryptocurrency (or cryptoasset) ecosystem is a complicated topic, and when that I’ve written about only briefly, but it is an important topic. This article is partially an update of a Seeking Alpha article that I wrote back in June of 2017, however I won’t necessarily be covering the same cryptoassets that I mentioned in the original.
I tend to use the term “cryptoasset” a lot when discussing blockchain technology and so called cryptocurrencies. There’s a reason that I use this term. Most cryptoassets are not currencies. They are generally not used as a medium of exchange. They’re used as speculative vehicles. A currency is essentially just something that is accepted as barter, for a large number of different goods and services.
Patrick Singson suggested that Ripple will overtake Bitcoin in value, and he argues that it’s because utility matters. I do agree that utility matters, but I disagree with his following suggestion: “cryptos with actual use cases, and real world adoption such as Ripple will overtake the HODLers very quickly.”
HODLing is unfortunately the primary use of $BTC, at least right now, but at the same time, $BTC has a real world use and thus utility. $BTC is the king of the exchange world, in many ways even more so than the $USD. While exchanges allow some trading in other cryptoassets, such as $ETH, there are far more BTC priced currency pairs. So in many ways, $BTC is the reserve currency of the crpyotworld. As long as people need to use Bitcoin to exchange between other cryptoassets, Bitcoin will survive, as a technology.
But how could BTC be all that if it is denominated in USD, you might ask? The answer to this question goes back to how I described currencies in the first place. exchanging money for something else is just barter. That most currencies are so universally accepted doesn’t change that. Because it’s all just barter, we can think of the currency priced in any of the items used to barter with it. A gallon of gas is $2.50 a gallon? Okay, so a $USD is worth 0.4 gallons of gas, or 0.00028BTC.
Then and Now
Even with the collapse in price, $BTC is still up over its value when I wrote the first article on the ecosystem. When I published the article on June 7, 2017, the price of 1BTC was $2,800 as opposed to over $3,600 right now.
Repeating Singson’s point: utility matters. And that’s what’s keeping Ethereum afloat, aside from another currency in which many other currencies are traded. Ethereum is what generated the altcoin boom. With ERC20 token contracts, it was super easy to create new cryptoassets. And so many altcoins in use are still ERC20 tokens that Ethereum will be around as long as someone’s using ERC20 tokens.
Then and Now
I didn’t include Ethereum in the original article. I’m not sure why. Perhaps it’s because I had done a full article on Ethereum prior to that one. Ethereum has dropped since I wrote the article however, which isn’t surprising considering the massive slowdown of the ICO craze. In fact, as FlatOutCrypto mentioned in their article last year, entities are actually working on returning assets to their investors.
Here’s a new currency that I just came across a little bit ago. I probably wouldn’t have noticed it at all, if not for the integration of a wallet into the Keybase application. The goal of the network seems to be fast payments that can be made directly and the construction of a low cost financial service system. Stellar isn’t entirely decentralized. There are some nodes that require trusting. They’re called anchors, and are responsible for all non-native currency transactions.
Anchors are simply entities that people trust to hold their deposits and issue credits into the Stellar network for those deposits. They act as a bridge between different currencies and the Stellar network. All money transactions in the Stellar network (except the native digital currency of lumens) occur in the form of credit issued by anchors. — Explainer
I didn’t mention Dogecoin in my original article on the cryptocurrency ecosystem, because it seemed foolish, but I kind of wish that I had included it. I like Dogecoin, because it doesn’t suffer from the inherently deflationary aspect of most other cryptoassets available. After all, there’s no fixed supply. This feature keeps $DOGE cheap, but unlike with other cryptoassets, $DOGE is actually used for every day transactions, including tips. In fact, in terms of the percentage of its market cap, $DOGE is actually traded more than $BTC. For a currency that started as a meme, that’s pretty damn good.
Bitcoin, and other proof of work systems have been criticized for their massive energy consumption. And it’s true. Cryptoassets require a lot of energy to produce and transfer. But what tends to be left out of the equation is the fact that blockchains do more than just act as ledgers. They are, or at least easily can be, a complete alternative to the banking industry.
A wallet is a replacement for a bank account. Smart contracts can easily allow for an alternative to traditional bank lending. So all the resources that go into the activities of banks, and really the entire traditional financial system, including the energy cost of the ACH system, need to be included in the comparison.
The One Coin?
Something I find interesting is the idea that eventually a single cryptoasset will win out and become the cryptocurrency of the world. I honestly don’t understand why. Different cryptoassets serve different functions. As I mentioned, BTC is primarily the reserve currency of the crypto world. Ethereum et al. are the frameworks on which DAPPs are built. Just like there are numerous assets and asset classes, there will likely always be numerous cryptoassets and cryptoasset classes. And many of them will be used as currencies.
Moreover, cryptoassets don’t need to entirely replace other forms of currency. In fact, I would love to see silver and gold return to currency status, sitting alongside cryptocurrencies. As for the USD, eventually it will need to die, and quite frankly, it’s already at risk of dying, simply because of what the United States is doing with global trade, and how sick and tired the world is of dealing with the petrodollar. But the rise of cryptocurrencies does not necessarily mean the immediate death of the USD. And so the world could have time to adapt, and in fact, it could have more time than if the dollar was killed by a new reserve currency issued by other governments.
I don’t want to really give advice here, so these are just my thoughts on the matter. Because different coins will continue to survive to fill different needs, I continue to reiterate my initial idea that a proper long term investment in cryptoassets should include a good degree of diversification. The goal is to try to find a nice mix of options that serve different needs, as well as perhaps a few types of assets in each subcategory. That being said, I don’t think that BTC or ETH are going away anytime soon.