Pathways to Failure
There are many obstacles that cryptocurrency has on its way to fulfilling our imagination, and it may take time and pain for it to get there, if it achieves its potential...
Some of us are extremely excited about the heady heights of cryptocurrency as both a creator of personal wealth, but also as a mainstay of our future lifestyle and culture. This potential is undeniably there, but at this moment it is just potential. There are many obstacles that cryptocurrency has on its way to fulfilling our imagination, and it may take time and pain for it to get there, if it achieves its potential. If it achieves it at all…I present to you, the sources of that pain.
Enemies
Ray Dalio is the Founder, Co-Chairman and Co-Chief Investment Officer of Bridgewater Associates, the largest hedge fund in the world - and he is one of the latest in a long line of doubters of the long-term legitimacy of cryptocurrencies.Specifically, he does not believe that crypto will be used as currency, to make everyday commercial transactions.
As a student of history and its impacts on financial markets, Dalio cites the US ban of the private ownership of gold in the 1930s as evidence that governments wish to maintain the monopoly of the supply and demand of money. I guess that’s a bit moot - of course governments want to control money supply, but it is always good to have formal evidence backing it up, right?
But the question is whether they can maintain a monopoly.. Take India for example - India is currently issuing a cryptocurrency ban, barring all activity associated with the buying, selling and possession of any and all crypto - yes that’s right, even dogecoin. Don’t fret though -, this ban can only be enforced as far as the surveillance for cryptocurrencies exists..there are a number of loopholes which will keep Indian crypto markets alive. The fact that cryptocurrency is a global innovation means that it would take global action to effectively diminish the legitimacy of this asset class.
In this scenario, there would be significant incentive for countries to not take such heavy-handed action, making this country an attractive proposition to be the hub of cryptocurrency activity. This would invite capital investment into the country, creating the opportunity for the government to institute tax systems relating to cryptocurrency, opening up a vast amount of political opportunity for the government.
The growing threat of a ban is also a great advertisement for the utility of cryptocurrencies. Remember, cryptocurrency exists because central governance systems can manipulate the value of currency. They are what we call a ‘hedge’ against centralised finance, which means, they are a protection against the government mismanaging our financial system… just like an insurance policy. So the question is, can our governments coexist with the adoption of cryptocurrencies as generally accepted currency?
Latest development in this area
Social Attack
In an era where people so liberally give away the access to their personal data in exchange of services, is it realistic to expect that people are willing to trade what they have for what is very much a mystery to them?
One might point to the fact that there has been some fierce backlash against companies like Facebook because they divulge personal data. The backlash has arisen because most people do not realise what data they’ve given up to Facebook - and, we are in danger of accepting these practices as the new normal.
In Nazi Germany, the USSR and Castro-led Cuba, children were subjected to the exposure of very selective information. This ‘education’ would stoke a fire of patriotism and affinity for the system their freedom was taken by. But why would they be aware of what their life could be if they had never known a new level of freedom? I'm positive they accepted their circumstance as freedom.
Younger generations form perceived truths based on the information and incentive structures that are available to them. Agreeing to Terms & Conditions to the app of the day, and allowing access to media, contacts and all the rest of it... they get rewarded with a completely tailored experience designed to penetrate the inner workings of their mind to keep them on the platform for as long as possible. How can one be aware that they have been marginalised in this instance?
Our culture is heavily infused with this kind of behaviour, and for younger people it will appear as the way it has always been. It's a tough sell to tell people that they aren't as free as they could be because the money in their pocket is being manipulated by a higher power, especially when the effects feel so intangible. The ability to make that sale will be what makes or breaks the currency pathway for cryptocurrencies.
Tech bugs
As with most technology, cryptocurrencies are not immune to the subtle errors of the architects of the technology. The release of Bitcoin Cash is one of the more prominent examples of bugs existing within the domain of the cryptocurrency. The effects of this are twofold. First, this can allow for major impropriety, disadvantaging other currency holders. The second, which is more serious, is the PR effects...
When I had my first work experience with a stock broker, one of the first things I was told was to never invest in an airline, because, and I quote, "If a plane falls out of the sky, you're screwed."
Hidden in that eloquent adage is the importance of brand integrity and trust. The story of Malaysia Airlines is a perfect example of this. The disappearance of a plane, and the accidental shooting down of another, within 12 months of each incident spelled the beginning of the end for the airline as they went into administration in 2015.
As long as this risk is prevalent, there is a risk that the integrity and trust of a cryptocurrency can be undermined, and so too its potential.
Price volatility
The price volatility of cryptocurrency does two things with regards to people outside the cryptocurrency market. One, it repels investors that like stability and want to limit their downside, which for the right reasons can be a wise decision. Two, it attracts people who are chasing returns rather than making rational investment decisions.
Beyond the kind of people it can attract, the price volatility fails the stable store of value test for a genuine currency and could undermine the potential of crypto before it really gets going.
Innovation Lottery
While cryptocurrencies vary in design and objectives, if the aim is to invest in the leading currency of the future, then at most you have a 0.025% chance of picking the right currency. Many will say Bitcoin is leading the way, but it is a vastly inferior currency compared to its next serious competitor Ethereum in terms of transaction fees and transaction speed. And then there are more improvements on Ethereum that almost nobody has heard of.
A prominent CEO in the technology industry by the name of Jeffrey Booth sums up this problem when describing the rate of innovation. He asked a room full of people that if it was possible to fold a piece of paper more than 7 times, how many folds would it take to get to the sun. Amused by the wide ranging guesses with digits greater than the fingers on our hands he silenced everybody to give the answer.
“50 folds.”
This is the power of exponential growth, and the advancement of our technology grows with a similar nature. So even if you trust investors to constantly, and objectively find the best cryptocurrency, the chances are that a new and improved version of your asset will appear.
I will temper this by saying that investing in a cryptocurrency that continues to innovate is a great way to hedge against 'innovation risk'. So something like Ethereum where there have been various iterations of that project would be superior to some cryptocurrencies when conducting this particular risk assessment.
Regardless, it's important to understand that people tend to think in boxes, and those who believe they are beyond it are most susceptible to stagnation in this area, so make sure you invest in the people behind the cryptocurrency rather than the cryptocurrency by itself.
Key Takeaway
Many investors get caught up in the hype of their 'world-changing' investments and will choose to ignore the obstacles on the way to success. Don't be one them. Constantly scrutinize your logic and decisions constructively to see if you're on to a winner. This article is a good way to start, but its dangerous to paint cryptocurrencies as a monolith, so find the pathways to failure with a specific cryptocurrency you're interested in.
Coming Soon...
What I like about Ethereum
A Rising Tide Lifts All Boats
Thanks for the piece Oscar. My biggest takeaway from this piece was that a global ban is not a very likely scenario for cryptocurrencies, and also that, 0.025% chance of choosing / Bitcoin being - 'the winning cryptocurrency'.
Be great at the end in the takeaways if you can consolidate down those headlines to 5x bullet points.
1. Enemies
2. Social Attack
3. Tech Bugs
4. Price Volatility
5. Innovation Lottery.
Also curious, can we easily invest in a broad range of cryptocurrencies to hedge our bets on the right future currency of use?