by Mark Schwartz, Technology Attorney
with Eric Kivelevitz
1. What is the Long Term Significance of a Cryptocurrency Crash?
In 2013, Bitcoin crashed from a value of $1,000 to $200. Bitcoin actually had five crashes in its nine year history. Ethereum similarly crashed to only few dollars in value after its controversial hard fork to remedy its infamous DAO hack.
People who are experienced in cryptocurrency are accustomed to volatility. They have nerves of steel. People new to cryptocurrency are scared. Cryptocurrency purists believe that Bitcoin's long term curve goes to $50,000 by 2020 and Ethereum to $20,000 in the same period. Skeptics say Bitcoin will hit zero by 2020.
2. Is Bitcoin Tanking Right Now?
In the spring of 2017, Bitcoin was trading at $1,400. By autumn Bitcoin was at $4,000 and today it is above $6,000. I don’t have a crystal ball, but I think that on July 4th people will reflect on Super Bowl weekend and will regret not buying during the week after Brady played against the Eagles. Warren Buffet said it best, When people are greedy, be fearful. When people are fearful, be greedy.
3. What if Governments Ban Cryptocurrency?
Yes, China and India can always choose to ban cryptocurrency at any time. The United States and Europe can follow suit. This plays out in one of two ways.
First possibility: Cryptocurrency might in the long run prove to be a superior model to government printed fiat money. More efficient. Better medium of exchange. Better store of value. Better unit of accounting. More portable, more secure, more divisible and more fungible.
Even in spite of a government ban, cryptocurrencies might supersede government issued fiat. Remember, everything Uber did was illegal. (Also remember, coins were an improvement upon barter; fiat was an improvement upon coins; credit cards were an improvement upon fiat. But there was skepticism and resistance each time a quantum leap showed up. This is normal when a new technology improves upon a previous one. In 1997 journalists complained that “you can’t find anything on the Internet.” Instead of whining about the problem, two guys set about creating a solution. Today it’s called Google. So, technology leaps take time to perfect and are greeted with skepticism and resistance. Again, everything Uber did was illegal.) In sum, Scenario 1 would be one in which cryptocurrency prevails.
Second possibility. Cryptocurrency becomes a failed experiment similar to Prodigy, Compuserve and AOL. Or kind of like the Hindenburg and zeppelin air travel. In this scenario, blockchain technology is likely nonetheless here to stay as Web 3.0. (The Hindenburg yielded an abandonment of zeppelins but not an abandonment of air travel itself. We transitioned to fixed wing aviation and still use it today.) The myriad use cases that smart contracts allow - voting, title to land, insurance, pharmaceutical tracking, medical care, airplane engine maintenance, food supply chain tracking - portend that smart contracts and blockchain technology will surge ahead whether or not cryptocurrencies come along. (Cryptocurrencies are the first killer app of blockchain technology, while smart contracts are the second killer app. Under Scenario 2, cryptocurrency expires in 2018 but mass adoption of smart contracts obtains by 2026. And the third killer app of blockchain, called the DAC, might take root by 2030.)
4. This is a Long Play.
Blockchain is a long play. So was the Internet. The Internet we expected in 1994 and 1999 didn’t show up until 2012. There were a lot of shipwrecks in 2000 when the bubble burst, but Facebook, Amazon, Netflix, Google, Twitter and Wikipedia are standing tall.
When the wheel was invented, transportation was not revolutionized overnight. The first wheel was hundreds of pounds and too heavy to pull, it took a generation or two to realize that much of a solid “wheel” can be hollowed out, leaving only spokes. This newer design created a wheel that had all the strength and structural integrity of the first heavy, useless wheel, but was significantly lighter and useable. Wheels would still not become prevalent until roads proliferated. “All roads lead to Rome.”
A similar analysis might apply for the printing press. Books were not suddenly printed everywhere immediately after Gutenberg’s invention. It would take several years to perfect another critical element in the printing process, namely paper. The paper stock in existence when Gutenberg introduced the printing press rendered printing cumbersome and inefficient. When we later realized that we should change paper stock to better suit a printing press, printing proliferated.
So, cryptocurrency might need some additional perfecting and that is happening by the day. Private channels, sidechains, atomic swaps, DPOS and DACs are merely the first experiments in solving issues such as scalability, interoperability and governance.
5. Why would McDonald’s Crash?
This leads us to my next point. If the coins are all red, there might be one of two fundamental reasons why they are crashing in value. First, the fundamental technology underneath the coins might be proving to be nonviable and untenable. Alternatively, the technology is fine but demand in the market trades might have diminished due to market conditions. Analogy: McDonald’s stock could crash tomorrow because a food poisoning outbreak occurred in their restaurants revealing a broken process in operations. Second, McDonald’s is operating fine, but the markets underwent a fluctuation in demand.
With respect to cryptocurrency, the underlying technology has never been more sound. It works. It works better than credit cards. Bitcoin is nine years old and has never been hacked. Credit cards are hacked by the hour. Equifax was hacked as was Sony, Home Depot, Target, the FBI and the US Department of Defense. Everyone has been hacked but not Bitcoin, even though Bitcoin is a multibillion dollar honeypot for hackers. Bitcoin’s technology works, and it is being improved upon weekly. Litecoin, Dash, ZCash and ZenCash are all improvements upon an already viable Bitcoin technology. Yes, Bitcoin is in search a scaling solution, but the technology is anything but broken or untenable. And a scaling solution is imminent. So, the bloodbath in the cryptocurrency markets is not due to anything untenable about the inherent technology itself.
6. Government Intercession.
Now, let’s examine whether China banning cryptocurrency could damage the paradigm. China banned the Internet, and the Internet is doing fine. China is unlikely to ban cryptocurrency. True, they have banned ICOs and might shut down exchanges, but China has declared an espousal of blockchain technology and China has not banned cryptocurrency.
Neither has India banned cryptocurrency. The Indian government has declared that cryptocurrency is not recognized as legal tender, but they did not ban cryptocurrency.
The United States and Europe will likely not ban cryptocurrency but instead be more likely to try and regulate it. Just like they regulate almost everything. For every government that wants to ban cryptocurrency there is another government that is cryptocurrency friendly. Look at Japan, Puerto Rico and Singapore. Not to mention Ethereum Island and Lieberland.
But even if governments across the world were to attempt to destroy cryptocurrency (slavery and piracy are banned universally and governments cooperate to keep slavery and piracy off the face of the Earth), the cryptocurrency genie is already out of the bottle.
Decentralized exchanges coupled with decentralized currencies will be nearly impossible to eliminate unless the Internet itself is unplugged. Try as they might, regulators will be unable to regulate cryptocurrencies. Such is the nature of the technology architecture.