Baffled by Bitcoin? How Cryptocurrency Works
2017 was the year cryptocurrencies and blockchain technology went mainstream… or at least tried to.
Market action (both volume and price) said that investors trying to buy bitcoin was like a pig trying to fit through a keyhole.
There was bound to be some pain in a sector going super-nova.
Towards year-end, bitcoin had its inevitable pullback.
As the sector went red-hot, then white-hot, exchanges went down and clients couldn’t access their accounts for days.
“Hard forks” and the rise of other crypto-currencies like Ethereum and Dash only added to the drama.
In the middle of this momentous year, I started this investment newsletter.
The first article of the New Currency Frontier newsletter appeared on June 11, 2017 or roughly one thousand years ago in crypto-land.
Bitcoin was $3018 USD, Ethereum was $338.
No surprise then, that with those ridiculous valuations my second story was on the cryptocurrency bubble where I noted:
“The bubble must burst, the market must crash, we are overdue for a correction….
Pick your favorite catchphrase. In any case, “it” being the pullback should happen any moment. It should have happened last week.”
Okay I was just kidding about that.
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We were just getting started.
While there is no doubt I will be wrong again on some things in the coming year, it’s still fun to pull out the crystal ball and tell investors what to expect in 2018.
My Top Ten Predictions for 2018:
- The price of Bitcoin will go up. Old white guys living in Western countries with decent financial institutions (and used to having coffee poured for them at the local bank by the branch managers) will continue to not understand Bitcoin.
- Meanwhile, non-white, non-rich people living in Venezuala, Zimbabwe, Moldova and a host of other countries with banking systems run by cronies of corrupt governments will desperately try to get their hands on any bitcoin they can.
Because it’s easier to store Bitcoin on a USB than to bury gold coins in your backyard. Especially if you don’t have a backyard.
- News articles in mainstream financial publications about Bitcoin will be written for those old white guys described in the previous paragraph.
US college students will make up drinking games based on keywords in articles written by Forbes magazine (drink a shot of beer if they write “tulip”; drink a shot of vodka if they write “bubble”).
- Jamie Dimon, the CEO of JP Morgan, will continue to hate Bitcoin with the heat of a thousand suns. JP Morgan research teams will continue to publish articles like “The Value of Bitcoin is Zero?”
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Dimon will step down as head of JP Morgan after Goldman Sachs cryptocurrency division records record profits in second quarter 2018.
- At least a dozen Bitcoin mining companies will go public this year on the junior markets. Their valuations will soar as total mining revenue from Bitcoin will hit $50 million USD a day or $18 billion USD a year in 2018.
By comparison, revenue from all the silver mined in the world is $15 billion. Valuation of top 10 public silver companies is $19 billion. The valuation of the top ten Bitcoin miners should be …pick your own ridiculous number?
Then the valuations of public Bitcoin mining companies will crash as investors realize all those Antminer S9 mining rigs on order won’t get installed and operational until March at the earliest.
So that’s dead money for two or three months right there.
Then they will soar again in the spring as new mining rigs from China plug in and literally start to make money from nothing.
- The Bitcoin governance model will continue to be a hot mess, as most of the Bitcoin Core developers are millionaires with no sense of urgency in fixing the insanely low rate of four transactions per second.
It also doesn’t help that the large Bitcoin miners have a vested interested in keeping Bitcoin Cash (30 transactions a second) alive as a competitor.
- Bitcoin market cap ($225 billion at present) will surpass the GDP of Singapore ($500 billion).
And there will be articles written about how this ridiculous valuation is profoundly destabilizing the entire financial system.Some investor will lose 1 billion dollars worth of Bitcoin on Bitmex in a single day, the largest futures exchange/casino in the world.
- Ethereum will solve the bandwidth/bottleneck problem by May as “sharding” reduces congestion by a factor of 100.
The proof-of-stake implementation will be shelved as people realizes it concentrates power to a select elite.
Applications built on the Ethereum blockchain will roll into beta and terrify large sectors of the financial sector like Uber terrorizes the taxi industry.
- In fourth quarter 2018, The Singularity will occur. The worldwide crypto-exchange system will finally be functional and efficient (no 10% surcharges!) and able to accept deposits from retail investors in a timely fashion (like two days instead of two weeks).
Bitcoin will soar to $80,000.
We live in interesting times. For so many of in the financial industry, you face a choice of drinking the crypto-Kool-Aid or closing your eyes and hoping it’s all a bad dream.
As for myself, was it worth dropping everything I was doing before to work full-time on this newsletter?
I guess I will know the answer by the end of 2018.