Cryptocurrencies: Structural Weaknesses Persist

Cryptocurrencies have been rather placid for the past month or so, with prices on a general downward trend. The usual Crypto-bulls are out talking about buying opportunities, but no one seems to be listening. Google Trends data suggests a waning interest in the asset class in general, with searches for Bitcoin and Ethereum dropping substantially.

Bitcoin Google Trends

Google Trends – Bitcoin (March 2017-March 2018)

Ethereum Google Trends.jpg

Google Trends – Ethereum (March 2017 to March 2018)

Of course – a month is a lifetime in the crypto-world, and the Crypto-bulls are seeing the emergence of “value investors” who speak of picking up coins at a discount. Despite the 70 per cent drop in the cardinal cryptocurrencies, it would be foolish to assume that the market has “bottomed out”. Bitcoin in particular, has plunged over 90 per cent in the past, and even on a slow-dump, the market may have a way to drop yet. Furthermore, many of the structural problems in terms of slow network speeds and high settlement times persist. Regulatory issues continue, with the latest blow coming from Social Media platforms having banned advertisements for ICOs.

Scalability is where Cryptocurrencies lag. While Bitcoin and Ethereum were reasonably efficient in the time when there were just a handful of computer geeks sploshing around in their utopian currency, both networks got seriously congested when the plebs piled in. Ethereum fell prey to an absurd calamity when “Cryptokitties” – an online game where users bred virtual kittens – caused the network to slow so much that a simple transfer of Ether took over 24 hours. The massive price fluctuations and slow transaction times put paid to any claims that either was a “currency”.

Still, after the brilliant rise and the crushing plunge, murmurs persist. What could be next?

It seems likely that crypto platforms such as Ethereum and EOS may rise on fundamental factors as acceptance widens. With more apps being built on these platforms and their tokens being used as “fuel”, demand should spur an increase in value. However, unlike Bitcoin supply of both these tokens is open-ended, and the Sanhedrinesque “governing councils” or watchamacallem will be pressed to increase supply to keep the platforms viable for users to the disadvantage of hoarders or speculators.

A black-swan event of course will be an open-source solution to the Scalability problem, which would be a major boost to the ecosystem. An adverse Black Swan event would be an alternative technology such as what Hashgraph claims to be, that could render Blockchain obsolete. As with all Black Swans, none of this seems imminent, as there are no plausible solutions to Scalability at this point, and all Blockchain alternatives have serious weaknesses of their own.

In all, what we have is Limbo. Speculators looking to stay exposed to the asset class will do well to hold liquid tokens such as Bitcoin, Ether, EOS, Monero, Litecoin, and Dash. Longer term Cryptoptimists should focus on Initial Coin Offerings (“ICOs”) backed by strong teams with a viable product.

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