Reflections on the air: a bitcoin investor skeptical look

I have been following bitcoin and invested in it since 2012. I admit, until recently I didn’t pay much attention to alternatives, because the early cryptocurrencies were not much better than bitcoin. At best, they were copies with minor modifications, and at worst - pre-nominated fraudulent currencies, which existed only for the purpose of enriching the developers and a couple of advertisers.

Several dozen of these currencies have been enough for me.

True, now because of the problem of scaling Bitcoin is experiencing a crisis, and alternative currencies are winning back its market share . Although many people consider me lucky to learn bitcoin early, I obviously missed the altcoins. It’s time for me to look at this market again and check whether bitcoin has a reliable replacement and whether it makes sense to diversify my cryptocurrency investments.
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So I plunged into this topic with my head, began to read materials and communicate with people in order to understand where all this excitement came from.

Of course, I do not claim that overnight I became an expert in these currencies. Maybe in some ways I am mistaken, but I will still share my impressions with you.

Take off like bitcoin

For a start, a general comment. As many of my interlocutors have admitted, they are investing in Altcoins and ICO, because they have missed the opportunity with Bitcoin and now they see a second chance in new currencies. They are mistaken.

When bitcoin appeared, no one was even sure of the viability of cryptocurrency. Few believed that this idea would be recognized, would become understandable to millions of people and win their trust, not to mention the billions of dollars in capitalization. Although I had bitcoins, at first I doubted. Only these doubts have already been included in the price.

It is precisely because of this vagueness of the key principles that pizza once cost 10,000 BTC .

Now, after eight years of smooth operation of the protocol, when the bitcoin market has reached its current level of recognition, distribution, and cost, doubts, for the most part, have disappeared. So far, little time has passed, but the blockchain cryptographic technology has already proven itself, and many see it as a huge potential.

Nowadays, if a new coin is not confirmed, then this cannot be said about the principles on which it is based.

This transition from the initial ridicule to the growing trust and understanding of the blockchain technology has contributed to the early exponential rise in Bitcoin, but it will never happen again. Time cannot be reversed, but technology cannot be reinvented.

Moreover, bitcoin did not run through ICO, like most of the current Altcoins. He entered the market at almost zero cost. For 4–5 years, Bitcoin strengthened positions and confidence before flying up by thousands of percent and only then reaching the level of capitalization of modern ICOs.

Thus, today, the new currency simply does not have the growth potential that bitcoin had in the early stages, and in our day it will not even be possible to enter the market with such a low initial rate. With such a motivation in the ICO is better not to invest.

This, of course, does not mean that there can be no significant increase in value, so let's consider this possibility.

Evaluation of cryptocurrency

In general, the cryptocurrency market this year has experienced explosive growth and recently surpassed $ 100 billion.

I will be the first to admit: I have no idea if this is a lot or a little for modern blockchain implementations. You can convincingly justify the cost of cryptocurrency as at the level of a small fraction of their current capitalization, and in several trillions of dollars.
I will not even try to give a concrete estimate in fiat money. Your guess is as good as mine. However, I think it makes sense to compare the types of blockchains at a cost among themselves.

To do this, you first need to understand what functions of cryptographic tokens make them valuable.

Here are the functions I consider in no particular order:

• Calculated currency for making and receiving payments. Let's call this the “PayPal” function.
• A safe store of value: the "e-gold" function.
• Derivative value: an indirect advantage due to additional functionality, perhaps outside the blockchain - for example, the execution of contracts or data storage.

By weight

Speculative value is not a value, but only expectations of a future value. With this in mind, let's consider the most popular altcoin to date, Ethereum .

Despite the fact that its capitalization is inferior only to Bitcoin, Ethereum did not really succeed as a calculated currency - if not take ICO into consideration yet. I will calculate them as part of the derivative value.

Compared to the hundreds of thousands of online stores that accept bitcoin, Ethereum is almost not used for online purchases: there is no payment infrastructure, I haven’t found any payment providers like BitPay, and Ethereum is not used for transfers or other payment transactions. almost not found.

I am also not quite convinced that Ethereum is suitable for such purposes. Although bitcoin is characterized by an urgent scaling problem, which alienates it from the ideal for (micro) transactions, it is not so difficult to cope with it from a technological point of view - this problem is mostly political.

Let someone argue, but with Ethereum, with its much more complex chain, the problem of scaling is more serious than that of bitcoin, and it has yet to be solved, at least theoretically. Some ideas of solutions already exist (“sharding” and others), but they have not yet been implemented and may not work at all.

So, in the current format, Ethereum cannot become a worthy alternative to bitcoin in the calculations, and it is not yet clear whether this will be possible at all.

With the ether as a means of saving problems even more.

Due to the complex mechanism and the execution of the code inside the blockchain, many opportunities for bugs and attack vectors open up. This has already led to at least five hard forks and one split .

The basic principles are still in development, not only from the point of view of implementation, but also conceptually. For example, it is still not clear what rates of inflation can be expected or even how to build a network protection (according to the principle of “proof-of-work” or “proof-of-stake”).

It seems that everything is in motion and in the process of development. In addition, it is difficult to trust the blockchain, which, as it turned out, is changeable and in which “unfair” operations can be canceled. All this adds ambiguity. For a store of value, there is nothing more important than trust and predictability, and Ethereum currently provides neither one nor the other.

Even if these important shortcomings are finally eliminated, I still doubt that the Ethereum concept is generally suitable for saving. I do not see much point in mixing the role of the means of accumulation with such broad functionality in one complex and constantly changing blockchain.

I do not criticize the project itself in this way because I do not think that it was created for such purposes, and the developers, as far as I know, do not claim this.

Lord of functionality

On the other hand, it should already be clear that the Ethereum ridge is its derivative value, and, perhaps, only its present value is based on it. Specialization in smart contracts implies powerful functionality within the blockchain, which would be difficult or even impossible for bitcoin or other systems.

ICO is the most common use of smart contracts, and Ethereum must be given its due: thanks to this method, developers have managed to attract millions of dollars in funding. It is even fair to say that it was Ethereum technology that caused the recent boom in the altcoin market. This is a fairly significant achievement indeed.

ICOs fuel the demand for broadcast for two reasons: first, most ICOs are evaluated on the air, so if investors want to participate in them, they will first have to buy the broadcast. It can be said that in this special case, the broadcast still acts as a calculated currency.

Secondly, the processing of smart contracts and own tokens in the blockchain is paid for with gas, that is, in essence, with ether. This creates some demand for broadcasts, even when projects built on Ethereum use their own tokens and allow them to be financed only with fiat money, such as the often mentioned RWE project for installing charging stations for electric vehicles .

To begin with, let's deal with gas. At the time of this writing, the average gas turnover per day is about 12 billion units, and the average rate is at the level of 0.000000022 units of ether. This means, on average, 260 units of ether per day (i.e. approximately $ 100,000).

For comparison, the turnover of Bitcoin in commissions for operations, on which its cost is certainly not based, is kept at about 400 units per day (about $ 1 million). If you think that using gas justifies Ethereum's capitalization, then Bitcoin should cost 10 times more, just on the basis of its least important indicator.

There remains only one rational basis for the cost of Ethereum: ICO financing. Sure, it's a huge market. It is difficult to imagine how he grew up almost overnight. ICO is already catching up with Kickstarter in terms of funds raised!

Only this, however, does not quite justify the current value of Ethereum, given that its capitalization is many times higher than the cost of all ICOs that have ever been financed by it.

Moreover, the broadcast is unlikely to linger long on the hands of companies that used it for ICO - the proceeds will go to finance their activities (the hour is not right, to the development of new cryptocurrency competitors). They will have to spend the lion's share of the proceeds from ICO to pay for services, labor, rent, advertising and other expenses, for the vast majority of which the broadcast is not suitable. Therefore, they will have to sell their broadcast again.

Ahead of danger?

All this has a legal aspect: the ether opens up new horizons.

The platform provided to them for its own tokens and smart contracts blurs the boundaries between virtual currencies and valuable currencies. On the one hand, it is fascinating and progressive. However, some of their own tokens issued on the Ethereum blockchain hardly represent anything more than unregistered securities outside the legal field of almost any country.

Here I have a sense of deja vu: many years ago I said the same thing about bitcoin exchanges like GLBSE, which were then in vogue.

Such exchanges allowed to issue and sell unregistered securities, denominated in bitcoins (shares of companies, loans, miner bonds and not only), which differ little from some modern tokens based on Ethereum. There were no less noise around the IPO of virtual companies than around IPO cryptocurrency these days.

I can not but draw attention to another similarity: almost all the assets that were traded on these exchanges were hopelessly overvalued - even those that were not just another scam or pyramid. They were bought in anticipation of rising prices . If the rate went up to heights unthinkable for the real value of an asset, including miner bonds, then simple arithmetic would still convincingly prove the complete lack of benefit.

The authorities eventually shut down all these exchanges, and some of the creators of the "securities" had serious problems with the law. I don’t know what fate awaits ICO on the Ethereum platform and how it will affect the broadcast itself, but you shouldn’t close your eyes to all this.

Especially when ICO seems to be the main driving force behind the cost of ether.

Let's sum up

In short, Ethereum as a blockchain, without a doubt, is much more interesting than Bitcoin. Compare them - this is how to put in one row the operating system and paper ledger. However, this does not say anything about the benefits of investment.

What is the value of the ether?

It still has not gained widespread acceptance as a calculated currency (and it seems that for the time being it is not suitable for this); it is too unstable to use for safe savings; its value is also indirect and almost entirely based on ICOs of dubious legality, which are held for the time being. I am afraid that many people do not sufficiently understand the essence of the ether as currency, and at least in comparison with Bitcoin its cost is too high, and the risk is much more serious.

Translation of P4man article at Coindesk.com

Warning: this article should not be taken as investment advice - this was not the intention of the author. Please explore the question yourself before investing in any cryptocurrency.