Why we might be missing the significance of cryptocurrencies
As originally featured on stuff.co.nz on 9 Feb 2022
Most cryptocurrencies tanked in January, with Bitcoin dipping as low as around $52,000, down sharply from an all-time high of around $91,000 in November last year.
Ethereum, the second-largest cryptocurrency by market capitalisation (approx. $478 billion, compared to bitcoin’s market cap of approximately $1.08 trillion, at time of writing) was down to about $3600 after a high of $6600, also in November.
And, as comes with every wild fluctuation in price (up or down), we’ve seen the usual flood of articles from the mainstream press warning us of fools’ gold and using crypto’s wild fluctuations in price as evidence of the emperor having no clothes.
Yet, no matter how many times the world is warned by our press that cryptocurrencies are just a massive Ponzi scheme, that same world keeps investing in them. Yes, there are severe troughs, but the value of cryptocurrencies continues to trend upwards overall and the peaks continue to get higher with each cycle.
Despite the entire crypto market shedding almost a third of its value in less than three months, it’s still worth almost $2.7 trillion as at time of writing. The market is way too volatile for anyone to know for sure what its total value will be in six months or a year’s time, but it’s clear that it’s likely to grow over the long term, despite the frequent and vocal naysayers in the media.
So what gives? If crypto is in fact some kind of Ponzi scheme on a global scale then when will it finally implode, as all Ponzi schemes must eventually do?
The problem is the mainstream press just doesn’t get it.
If you look at cryptocurrencies simply as commodities then of course they’re going to look like fools’ gold. How could one possibly argue that a digital token, a cryptographic collection of ones and zeros that has no intrinsic value whatsoever, could be worth tens of thousands of dollars?
You couldn’t and time after time pundits try to point out what they see as obvious – the emperor is naked! Can’t anyone else see this?!?
What they fail to see is that, although there is no shortage of speculators hoping to make a quick buck, the value of crypto speaks more to its potential value as a technology than simply how much people are willing to pay for tokens today.
Yes, it is a gold rush of sorts, but it’s much more similar to the dotcom boom than it is to a ponzi scheme. Just as it was obvious that the internet would change the entire world back in 2000, it’s obvious that crypto will transform commerce... it’s just that no one’s entirely sure how yet.
Yes, with the irrational exuberance of the dotcom bubble came the mother of all corrections, but that didn’t make the eventual impact of the internet on all of our lives any less significant.
It also didn’t make investors wrong about investing in the sector at a macro level, although a lot of investing at the micro level was questionable to say the least.
It’s notoriously difficult for anyone to predict where technology will take us in as little as five or ten years.
There are too many embarrassing predictions from tech luminaries such as Bill Gates, Steve Jobs, Thomas Watson (founder of IBM), Larry Page and others to list here and lord knows how bad pundits (including yours truly) can be at tech predictions.
But sometimes new technologies emerge that are so self-evident that, although no one knows exactly how they will manifest themselves, we do know that they will change everything.
No one predicted the impact that smartphones would have on our lives back in 2000, but it was clear to just about everyone in tech that the confluence of internet protocols, web technologies and constantly improving telecommunications links (collectively ‘the internet’) was going to be life-changing.
It was clear that movies and music would be streamed and it’s obvious that, someday soon, all cars will be electric and self-driving.
It may be inconceivable now that Kiwi’s would ever relinquish the right to drive, but I think it’s obvious that we’ll have no choice but to hand over the control of our vehicles to robots (and to make self-driving illegal) in our lifetimes. We’ll no longer be willing to tolerate humans killing and maiming each other on the roads once machines have rendered such practices obsolete.
It may seem like these technologies emerge overnight, but it usually takes 20 years or more for them to mature to the point where they become truly life-changing.
Bitcoin, the mother of all cryptocurrencies, was first unleashed upon an unsuspecting world in 2009 and, as of today, most of us have heard of cryptocurrencies, but have never owned or used them ourselves.
But we all will soon enough.
Will it be bitcoin that revolutionises our lives? Personally I don’t think so. Bitcoin is like the Model T - it was ubiquitous for a while, but innovation caught up and overtook it and Ford is now a bit player in the global automotive market.
Bitcoin has fundamental, structural problems with both the technology and with the community that develops and manages it. The bitcoin network requires enormous amounts of energy to function, it has crippling scalability issues (limiting the speed and number of transactions that can be performed on the network) and the developer community seems to be constantly at war with itself.
Worst of all, bitcoin does not natively support smart contracts (essentially programmes or workflows that can be built into the blockchain) and I believe it’s smart contracts that will have the most profound impact on our lives.
The press is so fixated on crypto’s wild gyrations in value, and on bitcoin’s inherent weaknesses, that it typically ignores the vital technological breakthroughs that are happening in the sector.
These technologies allow newer, more advanced blockchains to offer practically limitless scalability and performance at a tiny fraction of the energy required by bitcoin.
For example, Ethereum uses a ridiculously inefficient proof of work algorithm (similar to the one used by bitcoin) to secure and validate transactions.
It’s estimated that it takes more than 150,000 times more energy to process an Ethereum transaction than it takes Visa to process a card transaction on its network.
Ethereum is moving to a much more efficient proof of stake approach, however, that should see a 99.95 per cent reduction in total energy consumption.
This will not only reduce the environmental impact of Ethereum, but it will also result in massive reductions in the cost of processing ethereum transactions and will help to massively increase the capacity and performance of the Ethereum blockchain.
The introduction of smart contracts, which are integrated into blockchains such as Ethereum, are already having a huge impact on commerce. I might not understand the NFT craze, but it’s already clear that the art industry will never be the same again.
For the first time in history, thanks to smart contracts, a creator can now continue to take a cut each time one of their digital works is traded, not just on the initial sale. Imagine how much creativity and innovation this simple change will unlock over the coming years now that creators have a better chance of being adequately compensated for their work during their lifetimes.
Before long we will see blockchain-based smart contracts in all aspects of our lives. Why use a bank for a mortgage when you can borrow money directly from cashed-up lenders (who you will never meet) via the blockchain? Why involve lawyers in the transaction when smart contracts will be capable of checking that all sale conditions are met, transferring payments securely and even foreclosing on the loan if the borrower defaults?
For business the impact of blockchain and cryptocurrency cannot be overstated. We just don’t know all the ways how yet.
Right now we think of blockchain primarily as a technology for facilitating crypto transactions (ie payments) and I can’t see this diminishing over time. But blockchain technology is capable of so much more than that.
What if, for example, all of our health records were stored on a blockchain so they were all in one place and always up to date? We could not only decide who could see them, but also see who has accessed them and when. Imagine how much better we would have responded to the Covid-19 pandemic if we had such a centralised register of health records.
What if we could finally get rid of these ridiculous bits of paper and plastic that we use to identify ourselves (birth certificates), prove that we’re authorised to operate a motor vehicle (driving licence) or use to travel (passport)?
As a technologist who may or may not have a history of losing his passport while overseas, the need to have physical documents to facilitate travel between countries is beyond ridiculous.
One day our travel records, visas, vaccination status, biometric data, etc. will be securely stored on a blockchain and a simple facial scan will be all it takes to stroll through immigration in any country in the world.
Are cryptocurrencies overvalued? Are they a good investment? I couldn’t honestly tell you. But while journalists continue to pour scorn on them, those cryptocurrencies, and the underlying blockchains that support them, are starting to change the world in ways we’re only just beginning to understand.
And that, to me, is the real story.
— Damian Funnell, Choice Technology Founder