Bitcoin has entered a small recovery period over the last week. On Monday, IMF head Christine Lagarde wrote a blog post which stated that crypto-assets “could have a significant impact on how we save, invest and pay our bills” and advised policymakers to “keep an open mind and work toward an even-handed regulatory framework that minimizes risks while allowing the creative process to bear fruit.” Even before those remarks, Bitcoin’s value had increased by nearly 20 percent over the last week, and currently sits at a little over $8,000 at the time of writing.
But while Bitcoin’s enthusiasts may be celebrating, it should be pointed out that Lagarde talked about the benefits of crypto-assets as a whole as opposed to just Bitcoin. There are more than 1,600 cryto-assets out on the market, and there is little doubt that at least some of them will perform well on a speculative level. Even if cryptocurrencies become accepted, there is no guarantee that Bitcoin will remain the dominant currency and plenty of reasons to believe it will not. Under no circumstances should any sane investor consider touching Bitcoin.
The Problem of Being First
If there are more than 1,600 crypto-assets out there, what makes Bitcoin the most popular? Is there any reason beyond being one of the oldest digital currencies?
Not really. Bitcoin became popular because it was the first cryptocurrency to get some appeal. People heard about it and started putting their money in it, which caused other people to hear about it and put their money in it, and so on. Last year, Bitcoin broke into the mainstream, with taxi drivers and NFL players asking questions about cryptocurrencies.
However, being first at this point can become a problem. Bitcoin has crashed in the past, but it has always been able to find new investors who heard about Bitcoin for the first time. But there are now far fewer of these investors because Bitcoin is now mainstream.
Furthermore, investors who learned about cryptocurrencies through Bitcoin now have learned about other cryptocurrencies. They will start speculating in those cryptocurrencies hoping to strike it rich just as the first people who speculated in Bitcoin did.
Better Cryptocurrencies
Newer cryptocurrencies offer speculators more opportunity, and this is further bolstered by the fact that those currencies offer certain technological advantages compared to Bitcoin.
For an example, look at two of Bitcoin’s biggest rivals in Ethereum and Ripple. Ethereum is a cryptocurrency and a system of smart contracts backed up by blockchain, the underlying technology behind all cryptocurrencies. The main purpose of smart contracts is to facilitate payments using Ethereum’s currency called ether. But as Deloitte points out, blockchain-based smart contracts could help businesses by reducing the need for an intermediary and providing a low-cost way for both sides of a contract to ensure they fulfilled their terms.
Ripple is a cryptocurrency like Bitcoin, but it promises faster transactions. It has also signed up over 100 financial institutions as of last October according to CNBC, which also promises greater stability and security. Both of these cryptocurrencies could eventually surpass Bitcoin in value, and one of Ethereum’s co-founders predicted that Ethereum may surpass Bitcoin in 2018.
The Deflation Problem
In addition to the technological advantages which cryptocurrencies provides, other cryptocurrencies are in a much better position to deal with deflation, a problem which has plagued Bitcoin from the beginning. Bitcoin and Ethereum use different models for how users earn currency, which makes the former a deflationary currency and the latter inflationary.
Bitcoin’s enthusiast will deny that this is a problem, but this touches onto an important note for those interested in this currency. Investors should not forget that there is a lot of ideological impetus behind the rise of cryptocurrencies in general and Bitcoin in particular and it’s hard to gauge Bitcoin’s economic impact without looking at the wider picture. Some people put their money in Bitcoin not as a currency or even a speculation, but as faddish virtue signaling to indicate that they are not a part of the system, dude.
The intransigence of these political types could hold other cryptocurrencies back, particularly Ripple given its ties to financial institutions which are not trusted by anti-government types. But if cryptocurrencies want respectability and acceptance, they are going to have to work with experts and financial institutions. Ethereum and Ripple are doing a better job at this than Bitcoin, and that is a reason why they have more potential.
The Future of Crypto-Assets
The idea that Bitcoin could ever be the currency of the future can be bluntly dismissed by the fact that in less than two months, Bitcoin lost over 60 percent of its value. For any real currency, that would be a national catastrophe, not an opportunity to buy low. If you are interested in cryptocurrencies, you should be looking to deal with a new currency that offers more services, instead of an older currency existing off of its legacy. Ethereum and Ripple are much better investments than Bitcoin going forward.