Crypto Crumble
News recently came out of South Korea where it was announced that a bill was being proposed to ban cryptocurrency exchanges in the country. This was significant news because 5% of all Bitcoin trades against the Won, and with a $238,723,236,857 USD market cap that's $11,936,161,842.85 worth of Bitcoin trading that could go out of circulation. Bitcoin isn't the only crypto with a sizable presence in the country, with 10% of all Ethereum trading against the Won($120,261,553,833 USD), coming out to a total of $12,026,155,383.3 worth of Ethereum that could potentially go out of trading circulation. Markets responded to the fear quite noticeably with a dip in most coins, but this volatility isn't new to the crypto space at all.
It seems like any sort of news can send jitters throughout the entire crypto market, most notably with Bitcoin. Regulation is the largest fear factor at play in these infant markets. Being completely unregulated for the most part, Bitcoin and other cryptos fragile prices seem to be unable to withstand any sort of rumors that circulate about what the future may hold. While South Korea is indeed drafting a bill to halt the trading of cryptocurrencies, we have to remember they are merely drafting a bill that would still need the overwhelming support of the majority of 297 to pass. If passed this would be the first democratic nation to ban the trading of decentralized currencies, which would set the precedent for other nations to follow. China to no one's surprise has already banned the trading of cryptocurrencies as well as Initial Coin Offerings, better known as ICO's.
So is regulation such a bad thing for this infant market? I think some sort of regulation is needed to keep amateur investors from getting hurt. Having unregulated markets is a dual-edged sword; on one end you have the freedom of not adhering to any sort of regulation, and on the other end you're subject to price manipulation by large-scale investors. An unregulated market will always attract market manipulators like a magnet. Market manipulation would take place in every single market today if it weren't for regulatory agencies such as the SEC. Here's a quick example of how easily someone could potentially manipulate Bitcoin.
I have a Bitcoin that I sell to X for $13,000 / X then sells that same Bitcoin back to me for $13,100 / I then sell that Bitcoin back to X for $13,200 and the cycle continues.
To be fair, it is much harder to manipulate the Bitcoin market because the trading volume is astronomically higher than most other cryptocurrencies, but it is important to know that 40% of the Bitcoin market is owned by only 1000 people. I don't know how evenly distributed that is, but that is a significant chunk of the overall market in the hands of a small group of people. Just to put that into perspective that is $95,489,294,742.8 divided among 1000 people. However, economic inequality isn't an unfamiliar concept which leads me to my next point.
Some people think Bitcoin is going to be the new global currency that will replace FIAT currencies that we are accustomed to. I highly doubt this will happen for many reasons. The idea behind this is that central banks monetary policy is flawed and the economic system we have created does not make sense. Bitcoin is capped at 21 million coins so there can be no more coins created, but the money supply is seemingly infinite for most central banks around the world. The coins are minted at an algorithmically determined rate based on how many people are mining them, and the current amount of Bitcoins in circulation. While this finite amount of Bitcoins is an advantage over the monetary system we've created, it can also be a vital flaw.
Economic inequality is something that has been becoming increasingly problematic for all of society. The richest people in the world have become richer not by cheating the system, but by simply taking advantage of the system that has been created. You could make the case that the same problem can occur for Bitcoin. If you own a large chunk of the market in which there is a finite amount of Bitcoins, then you have a significant financial advantage over everyone else, especially if the price continues to climb higher. With a cap of 21 million Bitcoin, a global population of well over 7.5 billion people, 16,800,000 Bitcoin already mined, and relatively low adoption of the cryptocurrency at a global scale, it seems highly unlikely Bitcoin will replace any FIAT currency around the world.
So where does Bitcoin fit in then? Bitcoin, like any other asset, is nothing but a trust game and a liquidity preference. Many people compare it to being "digital gold", that's kind of an odd statement because the preference for gold is usually that it is tangible. I think Bitcoin is overhyped and has an obviously limited utility. However, Bitcoin does offer great things that excite me for future technologies. The Blockchain or distributed ledger technology is here to say without a doubt. I'm not going to waste time explaining what the Blockchain is, but if you would like to learn more go ahead and check out this Coinbase article on it. It is a fascinating technology with seemingly endless use cases that has the ripe potential to disrupt most sectors of the economy. Peer to peer networks are surely the way of the future, trusted third parties will slowly phase out of our everyday lives as this technology matures.
Overall, Bitcoin is overhyped, yet it does have a use case. I doubt it will go to zero as the extrmely bearish people on the subject would like to think, instead I believe it will just be another way to pay for goods and services. The price of Bitcoin is what gets people excited rather than the underlying technology which is an issue in my opinion. People are more excited to make a quick buck then truly understand something that is going to revolutionize society. Most retail investors in Bitcoin don't understand the ecosystem, but rather see it going up X percent daily and have FOMO so they go and buy buy buy. I'm all for free markets so I have no issue with uneducated investors, but when this asset matures and people realize there is limited utility within the tokens ability, I believe we could see major price fluctuations as money moves out of Bitcoin and into other tokens and assets with more utility and better liquidity.
It seems like any sort of news can send jitters throughout the entire crypto market, most notably with Bitcoin. Regulation is the largest fear factor at play in these infant markets. Being completely unregulated for the most part, Bitcoin and other cryptos fragile prices seem to be unable to withstand any sort of rumors that circulate about what the future may hold. While South Korea is indeed drafting a bill to halt the trading of cryptocurrencies, we have to remember they are merely drafting a bill that would still need the overwhelming support of the majority of 297 to pass. If passed this would be the first democratic nation to ban the trading of decentralized currencies, which would set the precedent for other nations to follow. China to no one's surprise has already banned the trading of cryptocurrencies as well as Initial Coin Offerings, better known as ICO's.
So is regulation such a bad thing for this infant market? I think some sort of regulation is needed to keep amateur investors from getting hurt. Having unregulated markets is a dual-edged sword; on one end you have the freedom of not adhering to any sort of regulation, and on the other end you're subject to price manipulation by large-scale investors. An unregulated market will always attract market manipulators like a magnet. Market manipulation would take place in every single market today if it weren't for regulatory agencies such as the SEC. Here's a quick example of how easily someone could potentially manipulate Bitcoin.
I have a Bitcoin that I sell to X for $13,000 / X then sells that same Bitcoin back to me for $13,100 / I then sell that Bitcoin back to X for $13,200 and the cycle continues.
To be fair, it is much harder to manipulate the Bitcoin market because the trading volume is astronomically higher than most other cryptocurrencies, but it is important to know that 40% of the Bitcoin market is owned by only 1000 people. I don't know how evenly distributed that is, but that is a significant chunk of the overall market in the hands of a small group of people. Just to put that into perspective that is $95,489,294,742.8 divided among 1000 people. However, economic inequality isn't an unfamiliar concept which leads me to my next point.
Some people think Bitcoin is going to be the new global currency that will replace FIAT currencies that we are accustomed to. I highly doubt this will happen for many reasons. The idea behind this is that central banks monetary policy is flawed and the economic system we have created does not make sense. Bitcoin is capped at 21 million coins so there can be no more coins created, but the money supply is seemingly infinite for most central banks around the world. The coins are minted at an algorithmically determined rate based on how many people are mining them, and the current amount of Bitcoins in circulation. While this finite amount of Bitcoins is an advantage over the monetary system we've created, it can also be a vital flaw.
Economic inequality is something that has been becoming increasingly problematic for all of society. The richest people in the world have become richer not by cheating the system, but by simply taking advantage of the system that has been created. You could make the case that the same problem can occur for Bitcoin. If you own a large chunk of the market in which there is a finite amount of Bitcoins, then you have a significant financial advantage over everyone else, especially if the price continues to climb higher. With a cap of 21 million Bitcoin, a global population of well over 7.5 billion people, 16,800,000 Bitcoin already mined, and relatively low adoption of the cryptocurrency at a global scale, it seems highly unlikely Bitcoin will replace any FIAT currency around the world.
So where does Bitcoin fit in then? Bitcoin, like any other asset, is nothing but a trust game and a liquidity preference. Many people compare it to being "digital gold", that's kind of an odd statement because the preference for gold is usually that it is tangible. I think Bitcoin is overhyped and has an obviously limited utility. However, Bitcoin does offer great things that excite me for future technologies. The Blockchain or distributed ledger technology is here to say without a doubt. I'm not going to waste time explaining what the Blockchain is, but if you would like to learn more go ahead and check out this Coinbase article on it. It is a fascinating technology with seemingly endless use cases that has the ripe potential to disrupt most sectors of the economy. Peer to peer networks are surely the way of the future, trusted third parties will slowly phase out of our everyday lives as this technology matures.
Overall, Bitcoin is overhyped, yet it does have a use case. I doubt it will go to zero as the extrmely bearish people on the subject would like to think, instead I believe it will just be another way to pay for goods and services. The price of Bitcoin is what gets people excited rather than the underlying technology which is an issue in my opinion. People are more excited to make a quick buck then truly understand something that is going to revolutionize society. Most retail investors in Bitcoin don't understand the ecosystem, but rather see it going up X percent daily and have FOMO so they go and buy buy buy. I'm all for free markets so I have no issue with uneducated investors, but when this asset matures and people realize there is limited utility within the tokens ability, I believe we could see major price fluctuations as money moves out of Bitcoin and into other tokens and assets with more utility and better liquidity.
Sources
- https://www.bloomberg.com/news/articles/2017-12-08/the-bitcoin-whales-1-000-people-who-own-40-percent-of-the-market
- https://www.coindesk.com/chinas-ico-ban-understandable-reasonable-probably-temporary/
- https://www.cnbc.com/2018/01/10/south-korea-official-reportedly-readying-bill-to-ban-all-cryptocurrency-trading.html
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