A month ago, my article Seven Lies Bitcoin Fans Tell Themselves (And Anyone Else Who Will Listen) clearly struck a nerve, as almost half a million people read it.
Each of those readers will take heart in the fact that there are plenty more such lies to go around – especially if we include all of the alternative cryptocurrency coinage springing forth like tulips in the snow, what aficionados refer to as altcoins.
Here, then, is the sequel.
Cybercurrency: tulips in the snow
Alan LevineLie #1: The ‘Black and White’ Fallacy
In the previous article, I pointed out that Bitcoin wasn’t sufficiently similar to other things to draw comparisons. A common response: I fell into my own trap by making comparisons between, say, the Bitcoin bubble and other speculative bubbles or between Bitcoin and ‘real’ money.
Such responses are examples of the black and white fallacy: assuming that for a given argument, only the two most extreme positions are under consideration. Such extremist thinking pervades the cryptocurrency world.
A common argument that succumbs to this fallacy: there are problems with putting governments in charge of the money supply, so we need a money supply independent of any government. Perhaps working within the system to improve how government operates would be more efficacious, hmm?
Lie #2: Bitcoin’s Market Cap is Relevant
The formula for market capitalization is simple, but deceiving: multiply the number of Bitcoin (or any altcoin) in existence by the market value of such a coin, and voila! A number that represents…what, exactly?
As I write this, Bitcoin’s market cap is over a quarter of a trillion dollars. That doesn’t mean, however, that there’s a bucket with that much cash in it under a rainbow somewhere, ready to be divvied up amongst all the lucky leprechaun-seekers holding Bitcoin.
In reality, when the bubble is about to pop and everyone seeks to cash in, the total amount to be divvied up can never be more than the amount people invested in Bitcoin over time – and that number is far, far smaller than its current market cap.
Lie #3: Decentralized Transaction Processing is a Good Idea
As with any blockchain-based technology, every cryptocurrency’s transaction infrastructure depends upon a number of decentralized transaction processors.
In the case of Bitcoin, we call these processors ‘miners,’ because of the Bitcoin infrastructure rewards such miners with new Bitcoin.
For cryptocurrencies that follow this model (and not all of them do), there are a number of problems. Mining becomes increasingly expensive and consumes massive quantities of electricity – but those aren’t even the biggest problems.
The ticking time bomb behind Bitcoin and all similar currencies: if the market value of the reward for mining drops below the cost of mining, then miners will stop mining. Which means that nobody will process transactions. Which means the entire Bitcoin infrastructure grinds to a halt. For good.
For altcoins that don’t reward transaction processors with new coins, there’s even less reason to continue to participate once the hype dies down.
The solution? Centralize transaction processing, like
Lie #4: ‘HODL’ is a Rational Strategy
Some cryptocurrency speculators are all too happy to sell on the upswings and buy on the downswings, a surefire way to make money – as long as you can time your transactions properly, of course.
But other speculators are HODLers – HODL standing for ‘hold on for dear life.’ The HODL strategy assumes that the value of Bitcoin or altcoin in question will multiply many times in the future, and thus a HODLer won’t sell no matter how volatile the price.
In reality, the sheer quantity of HODLers are simply propping up the speculative value of the cryptocurrency, giving the more active traders a better chance of getting out with some profit.
Remember, the only people who make money in a speculative bubble are the ones that get out in time. Everyone else is a loser. Which is essentially what HODLers are.
Lie #5: Cryptocurrencies Can Be a Viable Medium of Exchange and also Artificially Scarce
Bitcoin’s most important innovation is perhaps its artificial scarcity. There is a maximum number of possible Bitcoin, creating more is increasingly difficult, and the blockchain infrastructure prevents double-spending any of it.
Such artificial scarcity is essential to Bitcoin’s speculative value, but operates at cross purposes with any effort to make it a viable medium of exchange. After all, who would want to buy – or sell – a cup of coffee with Bitcoin if one day that cup cost $5, the next $50, and the day after that $10?
In fact, if I were to invent a cryptocurrency that could serve as a viable medium of exchange, it would make far more sense to base the value of one of my coins on, say, an average of the top ten fiat currencies (aka ‘real money’).
Such a cryptocurrency wouldn’t have artificial scarcity, however, and thus wouldn’t be particularly useful as a speculative vehicle. And where’s the fun in that?
Lie #6: Innovation in Altcoins Will Fix the Issues with Bitcoin
There are hundreds of altcoins out there, with more appearing out of nowhere every day. Now that even die-hard Bitcoin aficionados are realizing that Bitcoin itself has a number of technical issues, they are rapidly jumping ship to various altcoins that purport to solve the problems with Bitcoin.
The problem with this argument is that by far the primary motivation for this shift are Bitcoin’s shortcomings as a medium for criminal enterprise. It’s not anonymous enough for child p*rnographers and too volatile for money launderers, in particular.
So where is the innovation focusing? On altcoins that better meet the needs of such criminals – not on priorities that align with bona fide, legal business drivers. From the perspective of legal commerce, today’s innovation is creating more issues, not fewer.
Lie #7: Coins from ICOs will Have Value
Perhaps the craziest corner of an already insane cryptocurrency circus is the world of initial coin offerings (ICOs). Vaguely similar to initial public offerings (IPOs), ICOs are a way for startups to raise money from investors.
That, however, is where the similarities end. In essence, to implement an ICO, a startup creates a large number of some brand-new kind of altcoin out of thin air and sells many of them to speculators.
There are a number of variations on the specifics, including how many of the altcoins the founders retain and what can be done with extra ones left over after the ICO.
The startup then supposedly uses the real money they get from selling the fake Monopoly money they just printed up to get a blockchain-related business off the ground (unless they’re complete scammers, of course, which many are).
Then something magical happens, and everyone who bought the altcoins at the ICO sells them for a profit. Just what magical occurrence imbues such worthless bits of, well, bits, depends upon the business model of the startup – but one thing the investors don’t get is an ownership stake in the company.
At least you can play Monopoly with real Monopoly money. However, with ICO-generated coinage, there is rarely even a speculative market, because there are simply too many ICOs with too many new altcoins.
Want to put a hotel on Park Place? You’re out of luck. All that new altcoin isn’t worth the paper it’s printed on – if there were paper, which there isn’t.
Welcome to the world of cryptocurrency.
Intellyx publishes the Agile Digital Transformation Roadmap poster, advises companies on their digital transformation initiatives, and helps vendors communicate their agility stories. As of the time of writing, none of the organizations mentioned in this article are Intellyx customers. Image credit: Alan Levine.
