With over 14,100 cryptocurrencies floating around in cyberspace according to data from Coinmarketcap, the chances that any one of these coins or tokens will generate outsized returns should be small. Nevertheless, with the intensity of the market, seemingly everything is jumping higher. Recently, a major beneficiary is VeChain (CCC:VET-USD), a smart contract-focused initiative.
But is VET a passing fad or the real deal?
If you believe in the former proposition, I’m sure you’re not alone. As I said, there are now over 14,000 cryptos available. Just a few weeks ago, I was marveling at how the crypto complex breached the 13,000 threshold. Adding another thousand-plus opportunities for retail investors in a short time frame, these digital asset debuts put the dot-com bubble to shame.
A significant catalyst for the implosion of said bubble wasn’t just soaring (and unsustainable) valuations for internet and technology firms. Rather, the number of initial public offerings simply exceeded what the market could bear. And while the skyrocketing of Bitcoin (CCC:BTC-USD) betrays my cautionary stance, the explosion of new offerings in the crypto space is worth soberly considering.
Please note that this isn’t an exclusive jab at VeChain. I’m very much concerned about the possibility of a brewing bubble in Bitcoin and virtually every other coin and token.
To be fair, crypto proponents will argue that we’re entering a new phase in the blockchain ecosystem, that of expanded utility for the underlying technology. For VeChain specifically, its whitepaper reveals an ambitious undertaking, seeking to enable businesses and organizations to leverage “blockchain technology to create value and solve real world economic problems.”
As with other advanced networks, VeChain utilizes a consensus model that dictates orderly functionality as well as governance. Theoretically, such consensus-driven mechanisms make the network one of the most reliable and stable.
VeChain Can’t Escape the Silo Effect
Now, it’s important to realize that I’m not just throwing out buzzwords like consensus to fill airtime. One of the advantages of the VeChain system is that its technological underpinnings help prevent consequences of conflict, such as hard forks. On a technical basis, VET is a heavyweight.
My concern, though, is that VeChain has the same economic vulnerabilities of any other cryptocurrency, from Bitcoin down to the garbage assets that are not worth the bandwidth to host their website. Essentially, VET – like any decentralized digital asset – has a silo problem.
VeChain is one of the most advanced blockchain networks I’ve ever seen. But its consensus model requires, obviously, consensus. To achieve consensus, people must be involved in the network. But these same people – assuming that they’re rational economic actors – require compensation for their time, efforts and bandwidth.
As with all other blockchains, the reward for network contribution/participation is the underlying token or cryptocurrency. But that asset only has economic value because other people believe it does, as in the greater fool theory.
That’s why VeChain and every other popular crypto is like a sanctioned judo match. Both you and your opponent are wearing your judo gi or uniform. Therefore, it’s much easier to grab your opponent and perform various throws and techniques (as he can do to you).
That’s what makes judo interesting. The participants agree to the same rules and expectations.
Now imagine performing judo with neither party wearing their gi. Worse yet, your opponent decides to lather himself in baby oil. Now you simply don’t have effective leverage, making such a match ridiculous and unwatchable.
What’s the point of mentioning the above example? Blockchain-related initiatives are only sustainable if everyone agrees to follow the same rules. But that’s a long shot.
Dependency Is the Nagging Issue
While consensus sounds great in theory, it’s difficult to put into practice. Don’t believe me? Just look at what happened with something as simple as a facemask mandate to combat the spread of the coronavirus.
But decentralized distributed actors across the globe are somehow going to achieve long-term consensus over a blockchain ecosystem that may or may not succeed? It could happen but I have my doubts.
More importantly, the value of VeChain coins are dependent on fiat currencies. Let’s be honest: we only care about the price of VET relative to what each unit will fetch in terms of dollars and cents. Very few people think about what VET can purchase intrinsically on its own.
To be sure, more businesses are accepting cryptos as payment for goods and services. Still, the integration of such initiatives is miniscule to fiat-currency-based transactions. Therefore, the impressive tech behind VeChain seems like a moot point unless its ecosystem can replace traditional economic infrastructures.
That’s probably not going to happen at all since big government will never relinquish its authority. Of course, you can still make money off VET. It’s just that when folks start to wise up, the correction could be ugly.
On the date of publication, Josh Enomoto held a LONG position in BTC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.