Cryptocurrencies – Questioning The Value Proposition, by Stephen Englander

When the tech bubble popped in 2000, many companies went to zero, but many had value and are still with us today. Their values were lower than the euphoric values assigned to them at the height of the tech bubble, but they were or became profitable going concerns. A similar weeding out process will probably hit cryptocurrencies. From Stephen Englander at Rafiki Capital Management via zerohedge.com:

Bitcoin is deciding whether this is the moment to crash and burn.

My conjecture is that cryptocurrency holders are trying to decide whether to abandon Bitcoin because its limitations mean it will be superseded by better products or bet that it can thrive despite them.

The dilemma is that once you stop pricing Bitcoin and its derivatives as new assets that will head to the moon, the pricing model is more conventional and much less breathtaking.

We discuss these issues below.

Below we go through some of the questions on why Bitcoin and cryptocurrencies have certain characteristics, and whether these characteristics are needed or even desirable.

  1. Is Bitcoin Netscape?
  2. How limited is the supply of cryptocurrencies?
  3. If Bitcoin crashes what happens to other alt-currencies?
  4. What asset market lacunae do cryptocurrencies fill?
  5. Why mine?
  6. Why distribute the ledger?
  7. Do cryptocurrency transactions need coins or tokens?
  8. Can you make cryptocurrencies KYC and AML compliant?​

1) Is Bitcoin Netscape?

Bitcoin emerged in the shadow of the financial crisis, when the reputations of the financial and economic policy community was at a post-1930s low. It is designed for a world in which there is no confidence in major fiat currencies. Bitcoin gives you pseudonymity (albeit imperfect), the distributed ledger means that transaction records are unlikely to disappear, the mining can take place anywhere and there are built-in incentives for miners to keep mining.

The question is whether there is a problem that the original Bitcoin solves in developed economies. Some Bitcoin characteristics superficially suit a ‘Mad Max/Hunger Games’ world, but add little now. My suspicion is that even in the Mad Max world, the value of Bitcoin will be de minimis since hard assets will be the currency, not an abstract string of code.

 

To continue reading: Cryptocurrencies – Questioning The Value Proposition

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