Now that the market cap of bitcoin is moving to $500 billion, I believe crypto is here to stay. Few things can slow it down. The number one threat I see is regulation.
Regulations
Regulations could make it hard to own or use crypto. By simply forbidding the use for instance. However:
- It's not possible for a single government to control or regulate cryptocurrency due to its decentralized nature. Also, as crypto gains momentum it becomes harder to regulate or even forbid the use of it for a government.
- Nations working together are usually not very effictive in coordinating regulations. Just look at OPEC, NATO, Global warming etc. So that will probably not happen.
- If just one country legalizes mining operations, anyone using the internet can keep using crypto for payments. So even if lots of countries obstruct crypto, it won't stop it.
- Now that Wall Street is on the verge of investing in crypto, big companies will have a lot to loose if crypto's market value suffer from tight regulations once they've have loaded up. They’ll lobby against such regulations then.
- Banks have a weak hand arguing against crypto. The monetary system they’re representing is not a good alternative in my opinion.
But will bitcoin be the main cryptocurrency? Here are some thoughts about challenges bitcoin has:
Bitcoin Technology
- Bitcoin has been around since 2009 and it is battle hardened. The underlying protocol has never been compromised (except by a small bug in 2010). It is however clear that Bitcoin suffers from lack of scalability and the proof of work algorithm consumes ever growing amounts of energy. Especially now that bitcoin value increases so fast, more people want to mine. The networks 6-7 tx/s is nowhere near enough to let it serve as a peer 2 peer cash system like it was intended. Thousands of transactions per second are necessary. Radical improvements are needed, a little bit of tweaking won’t suffice. This is also why a fork like bitcoin cash doesn’t make a lot of sense. That project forked bitcoin and increased the block size from 1 to 8 MB, not much more. This is not a sustainable approach to scaling.
- Bitcoin underwent a technological improvement a couple of months back (Segwit), making it suitable for something called the lightning network. This is being as tested as we speak with promising results. This cannot be used effectively with Bitcoin Cash by the way, they choose not to implement Segwit. Lightning network makes it possible to settle transactions with parties that deal with each other on a regular basis with very low or even no fees, instantly. Sounds good, most companies or people transact with a limited number of parties on a regular basis.
Bitcoin Community
- Bitcoin has the best brand name of all crypto's, it is however a big concern that the core group of developers is just 20-30 people. They can only do so much, while a lot of work needs to be done.
- Bitcoin miners are becoming centralized parties. The 5 biggest mining pools control over 50% of the network and can determine if they support new bitcoin protocol improvements. They're not incentivized to do any improvements that reduce their source of income, even if this would benefit regular users. I think this is one of the reasons Bitcoin Cash is successful at the moment, despite having a long term vision on scalability. It is good for the miners on the short term, they just check which coin is most profitable to mine.
- There's clearly a lack of leadership or a governing body like most other open source projects have, and most other blockchain implementations. This is the reason I think these forks occur, it takes a long time before an improvement is agreed upon and dissatisfied users decide to split of.
- Just a handful of people control a lot of the bitcoins available. I think this could be an issue for mainstream adoption. There are simply not enough coins available to let it serve as a regular payment system, especially if few people sit on so many of them.
State of bitcoin
Bitcoin has some serious issues to solve before it can go mainstream. I don’t see how the issues around centralization of mining, availability of bitcoin and the lack of leadership are going to be solved. Therefore I expect that bitcoin will probably be more like gold, then a payment system over time and (an)other coin(s) will step up.
Contenders
There are a number of newer crypto’s that have better properties than bitcoin has. Let’s try to classify them a bit.
Platforms based on bitcoin software
The altcoins based on the bitcoin source code are all not very suitable to be the new payments system of the future. They all use proof of work, which is basically consuming too much energy. These coins involves Bitcoin Cash, Bitcoin Gold, Litecoin and Dash. It must be said however Dash and Litecoin developers have demonstrated that they are able to make new features available fairly quickly, especially Dash. So I could be proven wrong here.
Distributed computing coins
The most popular blockchain for running all kinds of applications is Ethereum. It is quite successful, but far too slow (15 tx/s at the moment). It’s also not primarily aimed at becoming a payment system . That’s probably not an advantage, focus helps. Also, a number of projects like NEO, Nemero and EOS seem to be offering better technological approaches for forming a general purpose blockchain platform. Off course, they lack the track record and the growing number of running applications on top of the network that Ethereum has. A special mention here for EOS, it uses a proof of stake protocol which allows it to process 100.000 tx/s. In theory…
Other competing platforms
In the top 20 coins by market cap we find Monero. It is not based on bitcoin source code but it’s main design focus seems to be ensuring privacy. Probably not a killer feature for most people. Also we find Iota, which has a very promising technology that uses a system where every transaction automatically validates other transactions and a blockchain is not needed. It is however very beta, there’s no consensus algorithm at the moment for instance. Ripple is governed quite tightly, it’s coin however is optional if you use their blockchain. Making it a less interesting asset to invest in. Then Cardano was introduced not too long ago by one of the Ethereum founders (Charles Hoskinson) and it seems to be using the latest and greatest insights in how we should build a robust durable blockchain. Looks very good.
In conclusion
Anything could happen I would say. Every coin has it owns pro’s and con’s. There's a lot more to say about the different types of blockchain I touched upon, but my goal was to find arguments to invest in coins. Please correct or supplement me in the comments below.
Now what's my advice: I believe it’s wise to diversify. The coins I mentioned in this post are my favorite ones, including bitcoin. I try to rebalance from time to time, and make sure I keep around 50% in fiat. That means constant rebalancing.
It’s going to be exciting in 2018, that's for sure. What if Amazon launches their own coin, or Alibaba? Or what if they decide to integrate Litecoin into their platform? What if big money finds a way to short bitcoin to make money? I’m not a professional advisor or investor, so make your own decisions.
I wish you good luck!