The price of bitcoin has fallen more than $100, or 10%, since Wednesday, leading a sharp drop in the value of cryptocurrencies like ether and ripple as well. The reasons given so far by analysts to explain the collapse are the recent rejection by the SEC of yet another proposal to create a bitcoin ETF, and a news report stating that Goldman Sachs is shelving a plan to launch a cryptocurrency trading desk.
That these are the reasons offered for a more than 10% decline in an asset like bitcoin may be more frightening to investors than the decline itself, because they indicate that we still haven’t reached a place where the value of bitcoin is based on something other than estimates of speculative interest down the road. Let’s say, for instance, that the SEC does eventually approve a bitcoin ETF, and this helps convince Goldman to start trading digital currency or institutional money to invest in it. These events would simply signal the entrance of more speculative money in the market, and not what bitcoin desperately needs: actual commercial actors using it to buy and sell goods and services.
Looking at this metric over the past year should be even more alarming for cryptocurrency bulls than looking at their prices. According to a recent analysis by Chainanalysis Inc., the 17 largest processors of crypto-based transactions accepted just $69 million worth of cryptocurrencies in June, down from $270 million the previous year. The reasons for this muted and falling use of cryptocurrencies are obvious. For a person of even above average intelligence, but limited understanding of computer science, it is difficult to understand just what bitcoin is. It’s also difficult for this person to learn how to buy and store it safely while being much less convenient for buying stuff than a credit card. Meanwhile, banks and payment companies are offering ever more ways to easily buy and sell goods, or to transfer money between parties.
There are folks around the world for whom the current monetary and payment system is not convenient. Mitch Steves, an analyst at RBC, points out that there is $8 trillion worth of gold reserves across the world in addition to $21 trillion in wealth stored in offshore wealth. Steves argues that because bitcoin cannot be seized by governments, and is more cheaply traded and stored than physical gold, it will become an attractive alternative to these types of investments. If bitcoin can come to replace just a third of this $29 trillion horde, it justifies his call that the cryptocurrency sector will ultimately be worth $10 trillion.
Steves argument that the wealthy investors around the world—who are storing their wealth offshore to hide it from the taxman or corrupt government officials—will soon turn to cryptocurrencies is pure speculation. Steves writes that cryptocurrencies are “a new digital store of value that cannot be seized” by governments, making it a clearly superior alternative to traditional offshore investments. But it’s not actually true that bitcoin can’t be seized by the government—U.S. authorities were able to take control of Silk Road pioneer Ross Ulbricht’s bitcoin fortune in 2013. There is evidence that some people in countries with mismanaged currencies are buying more bitcoin, but the argument that bitcoin will supersede today’s system of quasi-legal offshore investing is as yet unfounded. Meanwhile, the comparison of bitcoin to gold is also offbase, given that much of the $8 trillion in gold stores is owned by the very governments Steves says crypto will help offshore investors thwart. The idea that the U.S. government will ever shift the $300 billion worth of gold in its coffers into cryptocurrencies is risible.
There are plenty of folks who are excited about the business-to-business applications of the blockchain, like smart contracts, file storage, or supply-chain management. If you fall into this camp, ether, rather than bitcoin, is the cryptocurrency for you. Ether boosters argue the value of the currency will rise as more developers build applications using the ethereum platform. But even if ether becomes as widely used for future applications as protocols like HTTP are for today’s internet, it’s still not guaranteed that the ether currency will become proportionately valuable. And as it becomes increasingly clear that popular adoption cryptocurrencies will not happen for many generations, if at all, investors should be wondering whether cryptocurrencies themselves are the right focal point for their interest in the blockchain more broadly.
The market capitalizations of Google, Facebook and Amazon have made investors salivate over the next company or invention that will be able to tame the power of networks to create companies worth hundreds of billions of dollars. These stories helped fuel the press coverage of crypto, as the potential network effects of a newer, better currency are obvious. But for the vast majority of us, cryptocurrencies are far less appealing than traditional ways of spending and accepting money. The fundamental difference between Facebook and bitcoin is that people actually use Facebook, and the company went out an obtained those users before it ever attempted to justify itself as an investment.