Fear and Loathing in Crypto-Vegas: How the Thud of FUD Nipped Fundamentals in the Bud
January 2018 was a month of fear and loathing in crypto-Vegas. According to CoinMarketCap, the total market cap among the 1,510 digital assets the website tracks fell from highs around $820 billion USD to lows of around $320 billion. That has risen slightly over the past 48 hours.
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According to a recent reddit post, the 55 percent drop in the bitcoin price during the January (and leaking into February) 2018 correction was the fourth most severe the currency has endured in its brief history. It is topped only by the (first) post-Mt. Gox hack in November 2011 of 94 percent, the 2014 lull that saw it drop 87 percent, and the 79 percent plunge in April 2013 when Mt. Gox finally closed its doors.
Bears Wallow in FUD like a Pig in the Mud
Mainstream media’s addiction to sensationalism is well-established. The media is in the business of selling audiences to advertisers (as opposed to news to audiences). Emotive verbs like plunge, crash, and plummet are more headline-worthy than correction, dip, and ease. “Most cryptocurrencies will crash to zero, Goldman Sachs says” reads one CNBC headline. “Bitcoin price will crash to zero, Nouriel Roubini says” reads another.
Roubini, known widely as Dr. Doom for his often dire economic predictions, asserted that the “mother of all bubbles… is finally crashing” during an interview on Bloomberg television.
And if a Wall Street mainstay that paid over $5 billion in a settlement with the Justice Department for engaging in “serious misconduct” leading up to the financial crisis of 2008, and an economist renowned for attention-grabbing pessimism, aren’t to be believed, then there’s always Warren Buffett to lend credibility to the narrative that Bitcoin is a bubble and the bubble will pop.
The Zuckerberg Effect
At the end of January, Facebook announced it was banning initial coin offering ads, citing ICOs being “frequently associated with misleading or deceptive promotional practices”.
This decision aligns appropriately with Zuckerberg’s rather unimaginative 2018 personal goal of “fixing Facebook”, as ICO fraud is an all-too-common phenomenon. However, part of fixing Facebook should include encouraging people to stop using it so much, with the company’s strategy of creating dopamine hits for users by adding like and share functions now subject to criticism by a number of former employees.
The giant social networking site boasts 2.2 billion active users (defined as users who activate the site over the past thirty days). Its reach and influence in society cannot be underestimated.
Less cryptocurrency-related advertising means less cryptocurrency interest. The only cryptocurrency information Facebook aficionados were getting was that Facebook would no longer allow ads about them. Bitcoin is cryptocurrency to many people, so distinguishing bitcoin from an altcoin from an ICO is a tall order. Effectively, Facebook’s message to its audience of 2.2 billion was “Bitcoin is bad, we’re going to stop talking about it”.
Alphabet for the Internet
Just as Facebook is the mechanism-of-choice for 2.2 billion people to stay in touch with friends and broadcast photos of the meal they’re about to gorge on, Google is the agency through which forty thousand queries per second guide people to the corner of the world wide web they are seeking to entangle themselves in. That’s a little over three-quarters of all searches worldwide.
Google search trends for the term “buy bitcoin” illustrate that search term spiking about five days before bitcoin’s price hit all-time highs in December. It has fallen sharply since. At the time of writing, it appears to have plateaued over the past few days.
This trifecta of mainstream media outlets, Google, and Facebook form a triangulated web that encompasses the sole, or at least the first, sources of information to which the general public have access.
When one arm of the triangle is screaming about bubbles popping, another reflecting growing public disinterest (with causation difficult to determine either way), and another reducing exposure to cryptocurrency-related events other than announcing they will stop promoting them, is it any wonder the cryptocurrency market has corrected so severely?
The Overlooked Role of Fundamentals
To cryptocurrency skeptics, the long-term legitimacy of digital coins is questionable because they are yet to prove viable in their ultimate and most salient use case: the ability to be used to buy and sell goods and services (the obvious intention of anything calling itself a currency).
Yet, 2018 has ushered in some significant technological achievements that demonstrate cryptocurrencies, while still to face the demands of widespread adoption, are better positioned than ever before to function as mediums of exchange.
The Lightning Network
The Lightning Network is a second layer payment protocol operating on top of the blockchain. It can theoretically process up to billions of transactions per second across the network, by transacting and settling off-chain.
Transactions were tested in December, and it is not yet in widespread use. But it promises to resolve Bitcoin’s scalability problem, which was hampering the currency late last year. As you can see from the screenshot below, the Lightning Network is an active reality.
Segregated Witness, or SegWit, is a change in the transaction format already incorporated into Litecoin, DigiByte, and Vertcoin, and is increasingly being adopted for Bitcoin.
Developers’ intention in implementing SegWit was twofold. They claimed to help solve the “malleability problem”, which enabled a transaction ID to be altered after sending (however it is debatable whether it was necessary to implement SegWit for this purpose).
SegWit also helps solve the transaction block size limitation issue plaguing Bitcoin and slowing down transaction speeds. Segregating the witness data from the original component of the transaction data means the former can potentially be counted as a quarter of its actual size. Realizing these benefits requires updates and changes to most third-party bitcoin handling services such as exchanges and wallets, however.
SegWit was activated in August 2017. A growing number of wallets and exchanges are adopting SegWit compatibility.
SegWit allows the lightning network to benefit from increased security and prevents it having to cope with malleated transactions. Together, the growing adoption of these two improvements on Bitcoin’s roadmap will hopefully combine to make Bitcoin faster and cheaper to send and receive than ever before.
The screenshot below shows the adoption rate of SegWit:
Clearing Out the Mempool
The Mempool is the Memory Pool where Bitcoin transactions sit after being verified by all the nodes available, but before they are picked up by a miner for inclusion into the next block. It is, in other words, a pool of performed but as-yet-unconfirmed transactions.
The chart below shows the size of the mempool over time. It clearly spiked in December, meaning the number of transactions awaiting confirmation accumulated faster than miners could add them to the blockchain, slowing down transaction speeds. The mempool is currently not far off six-month lows.
Fundamental Improvements and Why You Should Fear Fiats
Due to these improvements in Bitcoin’s features, it is becoming cheaper, leaner, and faster to use. Its technological capacity to replace fiat currency is growing.
Even “altcoins” are improving their basic infrastructure. Litecoin is busy rolling out LitePay and startups such as Graft are developing infrastructure to bridge what remains a gap, real and perceived, between cryptocurrency and the real world.
A 2013 study found that using cash costs Americans $200 billion a year. Accepting credit cards is costly for merchants, with small retailers affected the most. The trajectory of the technological maturation of cryptocurrency promises to wipe these hidden taxes from economies worldwide, and early 2018 will likely prove to have been an historic turning point in the march toward the broader adoption of these advancements among crypto-assets.
At a market cap around $320 billion, cryptocurrencies have barely scratched the surface of their potential value if they approach widespread adoption. According to the World Bank, global GDP for 2016 was almost $76 trillion. U.S. consumer spending in 2017 was $12 trillion. The current market cap of all 1510 cryptocurrencies tracked by CoinMarketCap represents less than three percent of annual consumer spending in the U.S. alone.
There is an infinite supply of fiat currencies. State banks simply print them. There will only ever be 21 million bitcoins. And if those 21 million coins are to fuel even a fraction of global consumption, demand and supply rules suggest they will inevitably rise in price.
Critics argue that cryptocurrencies have no intrinsic value as they are not backed by assets (with the exception of Venezuela’s absurd Petro).
However, President Nixon cut the umbilical cord connecting the dollar to gold in 1971. The U.S. dollar is also backed by nothing and has no “intrinsic value” itself. It is worth little more than trust in its future value, which is defined entirely by its convertibility into goods and services.
Currencies were created because they were a more convenient means of exchange than goats and potatoes. Cryptocurrencies were designed in the same spirit. They are a more convenient means of exchange than fiat currencies.
Technology, Tulips, and Television
The gains made by cryptocurrencies in January and over the preceding six months in terms of their capacity and potential to replace or at least complement cash, credit cards, and fiat currency have been substantial.
If utility is a precursor to adoption, January 2018 proves one thing: FUD trumped fundamentals so easily it is as much an indictment on human intellect as on the fact that the mainstream media continue to get away with trotting out ‘experts’ that compare Bitcoin to tulips with a straight face — without having to suggest a ‘use case’ for tulips beyond… decorating Dutch gardens.
What do you think? Is the mainstream media to blame for the January correction? Do you think the improvements in cryptocurrency technology will eventually generate more widespread use?
Image via Pixabay