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The Cryptocurrency Explosion

I do not know that much about cryptocurrency yet but I will take a stab at discussing it as even some “official” sources seem wrapped up in one hysteria or another.  The people who write for zerohedge, for example, live and breathe investing but always seem to write about how the world is ending.  I guess perpetual clickbait is a good business model for them.

Even tech-savvy people are calling cryptocurrency a “bubble” but I don’t think that’s the right way to think of it.  There’s a clear demand and niche for the value it provides.  These currencies are just now reaching a point that normal people can use them easily and a critical mass of businesses and organizations are adopting them. 

So the huge explosion of cryptocurrency over the last year is not so much a bubble as it is the Atlantic spilling past the Pillars of Hercules and filling up the basin of the Mediterranean.

The question is not when it will burst but when it finds its natural level and reaches a steady equilibrium.  How much water does the Mediterranean hold?  I’m very far from being expert in anything financial but I casually notice world bond markets hold 10s of trillions of dollars and precious metals contain well over 10 trillion dollars worth of value.  World-wide derivatives are somewhere in the hundreds of trillions.  The market cap for all cryptocurrencies combined only approached 500 billion dollars in the last day or so.  I could imagine that as a mature sector, cryptocurrency ought to hold at least a few trillion. 
That said, even as the Mediterannean sea fills up, I can anticipate there will be plenty of volatility between cryptocurrencies.  Right now, I suspect bitcoin is golden because everyone is using it.  It might be the microsoft windows of cryptocurrency, for a little while.

Unlike operating systems, cryptocurrencies don’t have as much of a moat.  There’s little to stop a business from accepting multiple crypto-currencies.  Also, bitcoin is way too slow and it already has many alternatives, even bitcoin cash, a more scalable hard fork of itself out there. Bitcoin alone is worth more than all the other cryptos combined which is pretty impressive, but that’s still a lot of market share out there it doesn’t control which has also been growing.

The real killer about bitcoin’s slow transaction speed is miners will be able to blow up fees for priority customers to get to the front of the line until bitcoin becomes the San Francisco, Manhattan, or Arlington of cryptocurrencies.  As wait time and fees mount, the pressure rises to spread ballast to other crypto-currencies, especially those that have been specifically engineered for better scalability.

So the real question regarding bitcoin is how strong the network effect is before it starts to settle into equlibrium with other cryptocurrencies.

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