David Hargreaves says the hype around Bitcoin and other cryptocurrencies is obscuring the likely huge future impact of Blockchain technology

By David Hargreaves

I'm not sure if anybody has publicly stated this as such, but I can confirm that the total market value of the world's cryptocurrencies is now bigger than New Zealand's GDP.

Our GDP as measured in American dollars last year was US$185 billion, while the cryptocurrencies in aggregate are now 'worth' in excess of US$200 billion. Or at least they were when I started writing this. By the time I've finished, it's even odds that the market cap will either be less than US$50 billion or in excess of US$500 billion. Well, that's tongue in cheek, but yes, they are a bit volatile like that.

I can't recall where I read it, but earlier this year I did read some missive describing the stages of the cryptocurrency market and where it was in terms of the investment cycle. At that stage it was said to have moved on from the very 'in' nerds who knew a bit about the subject to some bigger corporates and investors. This was seen as the second stage in a three-stage cycle. 

The third stage of the cycle it was said, would be when 'the public' discovered cryptocurrencies and began flying into the market. We appear to be there now, which is why the subject now deserves much broader attention and yes, I would say, concern.

I was disconcerted to read the comments stream on one of the online publications spruiking cryptocurrencies last week and see that groups of younger people are now clearly seeing this as a get-rich scheme and climbing in.

These people are expressing the view that the price will go up and up. People are on there making boastful comments about how 'easy' it is to buy in the dips and sell at the peaks of the prices. Next stop US$20,000 for the Bitcoin price. Easy. You can’t lose.

We now really do have the gigantic 'Ponzi' effect taking place whereby the value of the cryptocurrencies is being pushed up and up by the inflow of new money into it. People who have been in the market for a while are benefiting from this infusion of new money and are undoubtedly making some quite stupendous profits. Classic Ponzi structure.

How much do the new people who are climbing in at these price levels really know about what they are buying? That's my question.

Ask the questions

Are people making a genuine assessment of these currencies and saying to themselves: Yes, that's an asset that will appreciate in value. Or are they buying them having seen how much they've gone up in price and assuming this will continue.

Look, I’m not an investment adviser, so, I don’t offer advice on what people should or should not invest in, but as a simple statement of common sense, I would offer this: If you don't understand what you are buying, don't.

I well remember in the 1980s when working for the Evening Post newspaper in Wellington getting a lot of calls from share ‘investors’. The lack of even basic knowledge of what they were doing or what they were investing in demonstrated by some of these people was staggering. And it was quite clear in talking to some of these people that they were in ‘boots and all’. Huge sums of money.

Kiwi investors were badly burned by the 1987 sharemarket crash. The effect was that two generations of Kiwis were scared off sharemarket investment. There possibly remains a bigger scepticism about buying shares in New Zealand than in many other places. That is a shame because if you understand what you are doing then sharemarket investment is just another very useful asset class to consider investing in.

There’s no empirical evidence of how many Kiwis have ‘gone crypto’ – that is ‘invested’ in the cryptocurrency markets. The difficulty in measuring the investment levels is of course one of the very notable features about this new ‘disruptive’ technology, the relative lack of traceability. You don’t need to go out and find a broker – just get on your computer and off you could go. Easy and therefore a bit scary too.

In terms of the number of Kiwis involved, all I could proffer on that is that the longer the crypto markets hold up and keep going up, then so more Kiwis will get in.

Bubble talk

Talk of bubbles is invariably subjective and dangerous. Firstly, even to suggest something is a ‘bubble’ gets construed by people as suggesting that it is about to ‘burst’. The fact is most investment bubbles exist for some considerable time before they burst. And it’s not inevitable that a bubble would burst. However, the bigger a bubble gets then certainly the bigger the potential mess if it does burst.

Probably the last and most obvious ‘bubble’ we had in New Zealand that burst was the finance company bubble, which spectacularly burst in the 2006-2010 period. I would argue that the impact of that was rather greater than the figure put on it as being involved of around $6 billion. The point is that the money affected was savings money. It was ‘extra’ money. Mattress money. Retirement money. Safety net money. Its removal was traumatic. The effect on New Zealand and its economy was probably disproportionate to the amount of money involved. There must still be people out there badly emotionally scarred.

So, when do we get worried that discernible numbers of kiwis – particularly if it’s younger ones with perhaps less money behind them and therefore more to lose – might be going crypto?

And how far-reaching globally might a meltdown of the cryptocurrency markets be? The one thing you can say is that the bigger the market gets, the bigger the impact if it crashes.

Knowing more means understanding less

Because I saw things crypto as being a gap in my knowledge earlier this year I made a conscious effort to understand it a bit better. For me it's proven to be one of those areas in which the more I do know the less I feel I understand. 

For what it's worth though, I would say the more I understand about Bitcoin in particular, the more I am convinced it is a quite enormous bubble that will, as sure as night follows day, burst. But to go back to the earlier point, the difficulty here though is that you can say something is a bubble now – and actually witness the bubble just happily continue on. Could Bitcoin go to US$20,000? Well, let’s answer that with another question. How many people this time last year foresaw Bitcoin going over US$7,000 this year? 

The main argument supporting ever-increasing valuations of Bitcoin appears to be the finite supply of it. Well, okay. There's a finite supply of Bitcoin. But, look what happened earlier this year. Suddenly, lo, there was a 'hard fork' (don't ask me to explain that, because I tried to understand and it's incomprehensible) and next thing you know there's 'Bitcoin Cash'. And then last week there's suggestions that proponents of Bitcoin Cash might want to lay claim to the Bitcoin name.

Supply is not everything

The point is the limited supply thing doesn't hold water. A token - for that is all Bitcoin is, even if it was the first one to utilise Blockchain technology - can very easily be made. Anybody can make their own cryptocurrency. Now, yes, the trick is that you need people at the other end of your transaction prepared to accept your token. But once you’ve done that and the person at the other end of the transaction can release value from that token (currently by exchanging it for fiat currency), well, it could be used for anything and be called anything.

How many people currently buying Bitcoin are doing so to use as currency? I should imagine any person who did buy Bitcoin at around US$1,000 earlier this year and then spent it might now be feeling green around the gills.

And surely that fact must mitigate against Bitcoin getting much broader acceptance and usage as an actual currency.

The fact that Bitcoin was the ‘first adopter’ of the Blockchain technology doesn’t guarantee it a future and longevity. It does guarantee it a place in history. But a future? Not necessarily.

I’m writing this using a Google web browser and I’m hardly even thinking about that fact. Google has become virtually synonymous with internet browsing. You ‘Google’ someone or something. But it wasn’t the first internet ‘search engine’. Not even close.

First does not mean best

I was a latecomer to Google, using things like Yahoo and Alta Vista. It was only in 2001 when I noticed that a work colleague seemed to exclusively use this ‘Google’ thing that I tried it one day. I never went back. Why? Because it was better.

That's right. First is not necessarily best, not when people use the technology that's been created and make refinements. It's inevitable the same thing will happen with Blockchain technology.

Is Bitcoin going to prove long term to be the best cryptocurrency to use? I doubt it very much, unless the reported clunkiness in transmitting it, coupled with problems such as Bitcoin transfers simply getting ‘stuck’ – possibly for weeks - are sorted out.

My best guess is that at some point there will be state, or multi-state sponsored cryptocurrencies. It could include current ones. It could be new ones. It may even be that it is found unecessary to have cryptocurrencies at all when using Blockchain.  Either way, at this later point the likes of Bitcoin will be obsolete.

The thing about the hype around the cryptocurrencies market is it obscures the huge breakthrough that is Blockchain.

I’m convinced that as a method of making records and transactions this is going to be as big a game changer as the original onset of the internet was.

The ‘dotcom bubble’ of the early 2000s helped to obscure the fact that the internet was going to be huge. It distracted attention from what was really happening.

The cryptocurrencies are now doing the same thing.

Blockchain is massive. It is being developed behind the scenes while so much attention is being diverted to the crypto market. Blockchain will be used and widely adopted. Its potential is enormous. But cryptocurrencies? The ones we've currently got? Well, as I say, I'm not an investment adviser...but be careful out there people. 

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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16 Comments

Who on here is using crypto currencies on a daily basis vs those just holding onto it in the hope it will continue to increase in value?

Im attracted to it because of blockchain....quantum computing cant crack it ,the banks dont like it and with an OBR event in the wind the government cant control it.......Vladimir Putin was against crypto till he sat down with Ethereums founder and had it explained how russia could bypass the dollar and the western system using crypto...as long as everyone involved has confidence in it............................................

OBR, indeed, ideally gold is thought of as a store of value through a major event not a gain of value from speculation. In this respect Bitcoin has some advantages over gold. It is a series of 1s and 0s cant (--edit--) it be tracked by and confiscated by a Government? not taht I am aware of, can it be exported easily? yes. Is it immune to voter / Govn economic mis-management? probably.

Is it safe? not sure yet...

can it be abused? yes. It looks like a ponzi scheme being hijacked by speculators, classic free market in action.

While there is a finite supply of Bitcoin - you can still mine Bitcoin.

https://www.bitcoinmining.com/

https://99bitcoins.com/bitcoin-mining-profitable-beginners-explanation/

except the energy cost to do so seems to negate the cost of "mining"

I believe the legacy of Bitcoin will be the acceptance of blockchain as a main stream financial instrument. Presently the world economies are run on US dollars that has severed its ties to anything tangible such as gold. I would like to see a "World Coin" based on blockchain that all five members of the permanent council need to agree to generate any new "World Coins". The initial allocation for each country would be based on per capita and there-after only added to at 5% per year. If all local currencies were promissory notes that HAD to tied to "World Coin" holdings then inflation could be controlled.

Good luck with that!
Where there are rules (promissory notes that HAD to tied to "World Coin"; all five members of the permanent council need to agree, etc) there's a mass of very clever people finding a way to exploit them...

In order to be useful in trade, a currency should be stable.
Not like Hungary after the war where prices doubled every 15 hours.
The bitcoin is just crazy. It is a ponzy now and nothing can be done to stop it crashing and crashing HARD.

Interest rates in the United States....jumped amidst Deflation and Depression.... the Federal Reserve voted to raise the Discount Rate by 200 bps, from 1.5% to 3.5%. American banks already crushed by illiquidity in the previous waves of bank runs liquidated US government paper to hold cash. The long-term US Treasury bond rate that had fallen to around 3.15% in the middle of (the year), was suddenly headed back toward 4% and higher. The BOND ROUT!!! would last about five months, with the long-term yield peaking around 4.25%

So that was 85 odd years ago, but how familiar it all looks! The disconcerting fact is that interest rates can go up even as the economy is in tatters....and Bitcoin...isn't going to help, because ( repeat after me!) "this time it's different"...

http://www.alhambrapartners.com/2017/11/14/historical-precedence-for-how...

All the crypto currencies combined are 'worth' more than nz gdp, so in comparison how much is the NZD 'worth'?
And how much is all the fiat currencies combined 'worth'?

I dont really understand why people talk about the market cap a currency. What is the market cap of gold?

What is better Wobbly Westpac or Bubbly Bitcoin?

"Bitcoin could go to $1,000,000 !" says teenage investor...

Cool! Sounds like Posieden in the late 60's. From $1 to $300 per share, then....well let's just say a lot of 'investors' used the scrip for wallpaper after it became worthless.

http://tinyurl.com/y9vpd38e

https://en.wikipedia.org/wiki/Poseidon_bubble

It sounds like the author is trying to describe the Rogers innovation adaption curve. We are still in the innovators part of the curve, we haven't yet go to the early adapters part of the curve.
http://www.valuebasedmanagement.net/methods_rogers_innovation_adoption_c...

I feel sorry for the poor man, spending the later parts of the 90s without a proper search engine, no wonder he struggles to recall information. He was the late majority (of search engine users) then, old habits die hard.

Understanding a folk is certainly incomprehensible when your job depends on you not understanding it.
Imagine a blockchain as a book. It starts blank. Every ten minutes, a new page of the book gets written in, and accounts are updated. A hard fork is like photocopying the book - cloning it - so that the original one continues to be used as it originally was, and the copied one instead has a different set of information written in its blank pages moving forward.

Look, this article is written by someone who doesnt understand the technology, doesnt understand the various use cases for it, and either does understand or refuses to acknowledge all the factors that are fueling adaption (hint its not just ignorant teenagers with dreams of becoming millionaires!)

I will leave any readers with this excerpt from a useful article I read earlier today:

"This was about a year and a half before "blockchain" became a generic reference carrying an indefinite article – a blockchain – and two years before it morphed into an uncountable noun: "blockchain" as a concept. (Imagine someone saying "I'm interested in ledger" and you'll understand why this drives some of us nuts. A blockchain is a tangible thing, not a practice, a process or a field of interest.)

But thinking about the etymology of these words is more than just an academic exercise. It helps us understand the motives and interests that fuel subtle but important changes in meaning. For example, recognizing that detaching the word "bitcoin" from "blockchain" works to neuter the former helps us see how those most threatened by cryptocurrency are trying to shape the debate.

By the same token (no pun intended), if you don't understand why "blockchain," expressed as an uncountable noun, means something different from "a blockchain" or "the [bitcoin] blockchain," you could fall into a trap. It means you probably don't understand the technology you're dealing with and that someone could take advantage of you."

https://www.coindesk.com/im-really-blockchain-blockchain-everything/

PS the market cap of gold is in the 7 trillion dollar ballpark.

So you think it is new? I was explaining the key part of the blockchain system to my father the other day. While not a technical man, he understood completely as he was a radio operator in the Navy. The only difference is that some mathematics have been applied to make the system more versatile.

How about some wise words? The "Blockchain-Based Token Sales, Initial Coin Offerings, and the Democratization of Public Capital Markets" is now #3 on the SSRN Top Downloads chart.

Well - What's the value in being the function of money and the total Market Cap of all the money in the world? Bitcoin is, a fraction of a fraction of that. It's limited to 21M in total circulation while fiat gets debased.

Your arguments are flawed -

Supply is unlimited because you can always create new coins and call them whatever you want
- The project is open and anybody free to create whateverCoin. But, the block chain on bitcoin has the most work (computational work) done on them, and is the most accepted. This is the public consensus and the market dictate that it's the accepted currency, good luck getting the market accepting your version of WhateverCoin.
- It's a bubble because its price has risen so much. "Look it's USD$7000+ a coin, must be the tulips."
Well, its value is rising in tendem with the public awareness, the amount of users, and the community behind it. Using price per coin to conclude bubbleness is flawed, trylook at the entire market cap. Is Google @ $1048 worth 6x Apple @$171.5 ?

Agree that there are a lot of scammers in the ICO space. But bitcoin will prevails because that's what the market is heading. And yes, Google was the first search engine that used pagerank as a search engine, and the rest was history.

Now, if you would like to discuss the technicality, there are a couple of problems with bitcoin:
- Scaling beyond 1MB blocks (7 transactions per second vs VISA's 100000)
- The ability to adjust to rapidly changing hashrate with sudden miner migration. (Risk of chain freeze)
- The ability to move forward because of hardforks due to the difficulty in achieving consensus to the changes to the protocol
- Upcoming and potential BlockStream / LN Monopoly over Microtransactions.

These are probably more concerning than your arguments in the article.