source : https://seekingalpha.com/article/4139213-try-catch-bitcoin-knife
Summary
Bitcoin has been on a roller coaster ride the past two months.
A lot of people seem to be trying to get in at the "bottom" of the most recent "crash"
The fundamentals are as untenable as they were a couple months back. Don't try to catch a falling knife.
A couple of months back, I wrote an article about Bitcoin (OTCQX:GBTC, COIN) talking about the idea of purchasing power and why Bitcoins, the tokens in a sample reference implementation, are worthless precisely because they do not have a large institution, central bank or government backing it. I also mentioned in the article that it is important to distinguish between Bitcoin and blockchain, the underlying technology. I have gotten some comments on this topic from readers both on this platform and elsewhere and so let me start by clarifying what I mean when I say blockchain has value.
A Distributed LedgerSource: here.
Blockchain, a distributed ledger
I will try to keep this discussion general without getting into too many technical details. So forget about hash functions, digital signatures and merkle trees for a minute and think about it from a high level perspective. Frankly, if you have studied the technical details of Bitcoin or any other cryptocurrency, you should know exactly what you are buying into and this article is not targeted at you. So lets start with what I mean when I say blockchain has value.
Firstly, the concept of a distributed ledger itself is not new. We have seen implementations of a distributed ledger system dating as far back as the ancient Roman Empire. In those days, it was likely driven more by necessity than anything else because it would have been impractical to have a system with a central clearing authority given the time it took communicate information across the vast empire.
One of the fundamental issues in any P2P distributed system is to determine what incentive to provide the nodes to participate and act honestly in the system. If you think about the BitTorrent P2P file sharing protocol, the incentive here comes in the form of better download speeds by increasing your upload speeds and the number of nodes you are willing to upload to. Each block of data transferred also is checked against a hash to ensure that nodes only transfer data you are actually interested in downloading. This makes the system self sufficient as long as there are enough people interested in the file being shared. This also makes the system scale well because the more the number of people interested in a particular file, the more the number of nodes in the P2P network downloading and distributing parts of the file. In this sense, it is a clever solution that both promotes good behavior and scales well as the size of the network grows.
In some ways the concept of the Bitcoin blockchain is somewhat similar in that as the perceived value of the Bitcoin token appreciates, it incentivizes more nodes (miners) to join the network which makes the blockchain more secure thereby giving the participants more confidence in the Bitcoin tokens allowing for further appreciation of the token value. With Bitcoin, the incentive for the nodes (miners) comes in the form of tokens (Bitcoin) paid to validate transactions both in the from of transaction fees and block rewards. That is to say, as long as the nodes participating in the system are interested in acquiring more of the Bitcoin tokens, the system is self sufficient. Just like BitTorrent, this is an interesting implementation.
Note here that I'm not talking about the integrity, non-repudiation, and authentication benefits that Bitcoin proponents often tout. All that comes from public key cryptography and there is nothing unique or special there with respect to Bitcoin. The real value in the Bitcoin blockchain to me is the clever way the creators made it a self-sufficient system. So now, what is this "value?" It is just a useful approach to solve the problem of incentivizing honest nodes to participate in the network? By no means am I assigning a monetary value to the token or the technology itself. You are not tapping into any of this "value" by buying Bitcoin or any other cryptocurrency token.
Governments, central banks and institutions will continue to shut down Bitcoin
In my earlier article, I commented on how every government will eventually shutdown any instrument that allows users to circumvent the capital control measures they want to enforce across their borders.
Most if not all the news driving positive sentiment in Bitcoin these days are indications that it may be accepted into the broader financial system. However there is absolutely no reason to believe this is possible. Recently, Bitcoin prices took a tumble after news that Chinese authorities plan to shut down domestic Bitcoin exchanges. Soon afterwards, it rallied on rumors that China would reverse its decision. Well, that is not going to happen and it is not that hard to figure out why.
All countries like to monitor capital flow across their borders. Currently, Chinese banks are required to report every transaction that exceeds 1000RMB (~$147) to the authorities. Does anyone seriously believe that they will allow a form of exchange that will allow users to engage in transactions orders of magnitude higher with no ability to regulate it?
What has happened since then?
China, after shutting down central Bitcoin exchanges, far from reversing their stance have continued to crack down on platforms and mobile apps that offer exchange like services
Not only have China and South Korea have banned ICOs, China also is looking to clamp down on Bitcoin miners.
South Korean Banks are being scrutinized for services rendered to cryptocurrency customers.
Indian Banks are suspending accounts linked to Bitcoin exchanges.
I may have missed a bunch but it looks like there are almost daily headlines about cryptocurrency clamp down these days. The key takeaway here is the understanding that this is not going to change.
The other day I read a story about what the CEO of Blockchain, Peter Smith, had to say about the topic. By the way, his company is called Blockchain, but by no means do they have any sort of monopoly or intellectual rights over the ideas behind blockchain.
"I think this year will be the first year we start to see central banks start to hold digital currencies as part of their balance sheet," Peter Smith, CEO of Blockchain, told CNBC.
Smith said that central banks would likely buy bitcoin and Ethereum as part of their reserves. Central banks hold gold and foreign currency reserves to allow them to act if there are any market shocks. -Peter Smith, CEO of BlockChain
Well, he certainly has the right idea. The moment any large central bank starts to hold Bitcoin as a store of value, Bitcoin will have value. But the key point here is this: It is a central bank that is adding value to the instrument, not the other way round. Now why would any central bank try to acquire an instrument it cannot control or regulate? Remember, all the regulation being talked about right now is at the point where the virtual currencies are exchanged into local fiat currencies. This becomes useless if central banks assign an intrinsic value to the virtual currencies by holding them. They were forced to hold gold when the world started moving to fiat currencies in the 20th Century because gold happened to be the commonly agreed upon store of value till that point. They have no such compulsion now.
For those of you who want to challenge me saying Bitcoin transactions can be traced on the blockchain (and hence can be regulated), that is not my point. Yes, governments may be able to track the transactions, but that does not give them any power in enforcing capital controls. This is precisely what attracted a lot of early investors to Bitcoin. There is absolutely nothing any government or institution can do to stop me from transferring Bitcoin from my address to a different one (perhaps in a foreign land) as long as there are a majority of honest nodes in the system and I have control over my private key. Anyone who tells you otherwise does not understand this system or cryptography in general. You may consider that a benefit but it is a fundamental problem for central banks and the primary reason they will shut this down.
As I write this article, Bitcoin is hovering just above $11,000 after falling to as low as $9,000 over the past few days. It is down almost 50% from its all time highs. I see a lot of people trying to catch this so called "bottom" expecting the price to only go up in the long term - the so called "HODL" crowd. Don't be one of them. Don't try to catch this falling knife. Bitcoin, the token, may end up being worth a few dollars each as a novelty item someday. While it is a very interesting solution to a well understood problem of building distributed consensus, it most certainly is not the future of money.