A dollar is a dollar because the Federal Reserve says it is. A Bitcoin (CURRENCY:BTC) is a Bitcoin because the market says it is. (Or so says Bitcoin.) There is a strict theoretical limit to the number of Bitcoins that can be “mined,” and mining by discovery of encryption keys is meant to be expensive.
That last sentence is not strictly true, as we learned this week.
It’s true that there are only 21 million encryption keys to the Bitcoin puzzle. But the cost of “mining” declines as computing power increases. All the keys will be found sooner than expected.
But that does not limit the money supply, because there’s more to cryptocurrency than Bitcoin. A lot more. Bitcoin now represents less than half the cryptocurrency market, even as its value approaches $2,500, 150% more than where it was in January.
Ripple, designed for handling international trade, has increased in value exponentially this year, rising 41% just in the 24 hours while this article was being written. There are also huge value increases this year for coins like Dash, LiteCoin, and Dogecoin. Each coin is “limited” in number, but each is a separate puzzle to solve or “mine,” and thus the real supply of cryptocurrency is unlimited.
The price of a specific cryptocurrency is based in part on its platform, in part on the uses to which it is being put, but mostly on the imagination of traders. Fear drives prices up, complacency drives prices down, and the moves are often quite sudden.
Bitcoin, and its competitors, are thus not currencies. There is no one in charge of them. They are commodities of the imagination, and right now a lot of people are imagining a dystopic future. This should concern every trader, no matter the market they’re in, because fear can’t be isolated.
In the past, gold price volatility was closely correlated with recessions. Bitcoin is the new gold.
Considered yourself warned.
In Other News
Everyone still wants to rule fintech. If they can’t be the hub of the technology, citizens demand it be regulated in their government’s interest.
But can it be? Fintech is decentralized. It routes around regulation like Internet traffic routing around censors. Fintech is turning small business loans into credit lines, payments into algorithms, and turning banks into dinosaurs.
It’s also transforming the very concept of a financial start-up. Cointelegraph, which recently profiled what it considers the seven hottest fintech startups, included IPFS, the InterPlanetary File System, which is less about money than about replacing the Web’s http protocol with something more resilient, harder to erase. Instead of Web numbering it uses encryption keys, separate keys for each version of a page.
What does this have to do with finance? Plenty. It means nothing gets erased, that there is always an audit trail on transactions, and that platforms for lending, collaborating, or organizing ad hoc corporations can’t be lied to.
And Finally …
The biggest news in fintech this year remains the rise of Ethereum at the expense of Bitcoin.
Ethereum is more than a currency. It’s more of a smart contract, built with blockchain, with its coins as a stand-in for value. It is more liquid than Bitcoin, in that there are more Ethereum coins out there — over 92 million. The value of its market is now over $21 billion, against Bitcoin’s $40 billion. The Ethereum company itself now has a market cap of $4 billion, which should eventually make its 23-year old Russian-born co-founder, Vitalik Buterin, a billionaire from his base in Singapore. (He also holds Canadian citizenship, having emigrated there at the age of 6.)
Oh, he’s also a college dropout, from the University of Waterloo. Mark Zuckerberg, watch your back.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.