Cryptocurrencies and the failure of Bitcoin

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By Neville Chester

At last count, just under 2000 cryptocurrencies are in existence. The persistent hype, and aggressive marketing by the various proponents of these instruments has only served to increase the supply to market of ever more “ICOs” (Initial Coin Offerings). This is the process whereby people sacrifice hard earned real currencies in exchange for a digital token. Not since Jack gave away his cow for a handful of magical beans have we seen such a trade taken place that is patently not in the buyer’s best interests!

After the mania and rampant appreciation in price in 2017, Bitcoin’s price has collapsed 60% off its December 2017 peak, along with a collapse in general interest in Bitcoin (Google searches were down over 75%). This fall has made the average investor, who was being strong armed into investing into cryptocurrencies by aggressive marketing campaigns, a little more sceptical about the investment case, as they should be.

Bitcoin enthusiasts will offer many reasons why Bitcoin will appreciate in value. It’s the only real currency not backed by a central bank, it will become the world’s number one means of transacting and the cost of producing Bitcoin is rising etc. These, however, all ignore the number one driver for increasing the price of Bitcoin (or any other cryptocurrency for that matter), which is the need for more buyers than sellers. The purveyors of cryptocurrencies are always so keen for more people to join the pool, so that the value of the existing holders’ stakes will increase. This is the ONLY reason why the price of a cryptocurrency will appreciate.

The argument that the supply of cryptocurrencies is finite is patently false. This argument is proved wrong both as the number of cryptocurrencies continues to balloon (as a refresher there are just 180 fiat currencies in issue by various countries in the world today) and due to the fact that individual cryptocurrencies have continued to expand via hard forks and by the fact that the entire system is premised on rewarding ‘miners’ with new coins.

Secondly, Bitcoin has proven itself to be a very poor form of transaction mechanism in today’s online world. Verification is slow in comparison to any competing payment system and the number of transactions processed per second is way below that of Visa or MasterCard; the rough number is around five transactions a second for Bitcoin vs 24 000 a second for Visa.

Finally, the point around the cost of producing Bitcoins rising is moot if no one wants to use them anymore. And if you really want to get worried about the actual cost of producing Bitcoins, do some research into the environmental impact that ‘mining’ Bitcoins is having.

The blockchain technology used will undoubtedly have a profound impact on the future of many financial services, but this should not be confused with the speculative investment fad into the various coin products being offered.

*Neville is a senior member of the investment team with 21 years investment experience. He joined Coronation in 2000 and manages Coronation’s Aggressive Equity Strategy.