The world is going cashless, so why wouldn’t digital currencies soar?

Q&A with Jonathan Cho continued

It’s important to distinguish digital currencies in their current form from digital currencies as an overall phenomenon. The overall phenomenon is going to trend up, but the current incarnation is unlikely to.

The first cellphones were large, clunky, and could only do a fraction of what cellphones can do today. Bitcoin, Ethereum, and more or less all other digital currencies have serious problems with regard to scalability, energy consumption, and inflation (endless alternative digital currency creation and forking), and none of these issues have yet been resolved.

Fundamentally, cryptocurrencies have hit a wall. Unless these problems are solved in a sustainable way, it’s more likely this first generation of digital currencies will become precursors to future ones, created with the lessons learned from the problems plaguing the ones that exist today.

Apart from these problems, however, digital currencies have another serious problem that’s less often discussed, in that they’re backed by nothing other than the confidence of the people who hold them, no different really than fiat currencies backed by confidence in governments.

Crypto supporters often point to existing networks of holders, built out over time (years in Bitcoin, and often just months in others) as the main reason their favored cryptos can sustain themselves.

But the problem is two-fold: one, any network is flimsy and replaceable if another can be created based on the same technology, particularly one predicated on an evolving technology. MySpace’s network once dominated, before Facebook’s superseded it.

And two, the existing networks of crypto holders are problematic because they’re mostly just that: holders. The majority of people who own digital currencies don’t actually use them for their intended purpose, regular transactions, but instead as speculative assets. These aren’t dedicated networks of actual users, but networks of people who care less about the technology (and often understand it even less) than they do about making easy money off it. Their loyalties to those networks are flimsy at best.

The more immediate reason digital currencies should continue to decline, however, is that prices have likely already peaked for this market cycle.

Regardless of asset class, all markets cycle from bull to bear markets, in regular time intervals, reflecting less the conditions or technology of the period than historically consistent patterns of human market behavior.

These swerve from early adopter buying, to public hysteria, to mass liquidations, and the cycle is unlikely to renew until we see liquidations result in the kinds of price declines commensurate with a bull market that multiplied prices by the thousands or more.


TRENDPOST

The size of bear markets always correlates directly with the size of the bull markets that precede them, and this should be no exception.

Comments are closed.

Skip to content