Why Cryptocurrency isnt a perfect bubble

By Ariel Deschapell Edited by Blake DeBiase

Within recent months weve seen Bitcoin(BTC) continue to explode in value, and due to that success various other cryptocurrencies that mimic Bitcoins open source design have sprung up. These currencies have continued to climb at astonishing rates, and 400% increases in just a few days is not uncommon. Understandably most wary individuals are quick to yell bubble! when eyeing the growth rate of this intangible and completely digital asset. Indeed Bitcoin does have many obvious characteristics of a bubble. It has come under fire by many who claim it has no real utility or substance to back up its value, and critics are fond to say there is no real way to measure that value in the first place. It is worth whatever someone says it is, making its growth fueled by nothing but complete speculation. Besides, how can a currency that isnt universally accepted everywhere have any staying power? In essence, this is all simply the modern version of the tulip mania playing out all over again, maybe even worse. Being purely digital and intangible, the critics argue, means that Bitcoin and other cryptocurrencies are the perfect bubble and can totally collapse at any second.1 All of the so called experts that espouse the above however, are lacking fundamental understanding of just what cryptocurrency is. As acknowledged by many, Bitcoin and other virtual currencies have real potential long term uses. Even Ben Bernanke remarked in a letter to the Senate that virtual currencies may hold long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system.2 This is the inherent source of all of Bitcoins value: Its future utility. The fact is cryptocurrencies, led by Bitcoin and Litecoin(LTC), have potentially huge roles to play in the future.3 Everyday more and more physical businesses are accepting cryptocurrency. Restaurants in various cities have begun accepting payment in bitcoins, as has the largest food delivery network in the Netherlands, while its parent company Takeaway.com is scheduled to start implementing the new policy in its
1

Bitcoin perfect bubble/no real way to measure value: http://www.businessinsider.com/bitcoin-bubble-2013-11

2

Ben Bernanke letter: https://www.documentcloud.org/documents/835843-virtual-currency-hearings.html

Litecoin (founder and info): http://www.businessinsider.com/introduction-to-litecoin-2013-11

Dutch, German, and Australian subsidiaries.4 Even more interestingly China is embracing cryptocurrencies, and in Shanghai one real estate developer is accepting payments in bitcoins, which equates into much less paperwork and hassle than by doing the payments traditionally through a bank.5 Baidu, which provides the largest search engine in China has also began accepting bitcoins as payment in its various services. All this indicates that while the value of cryptocurrency is undeniably volatile in the short term, its long term growth is far from tulip mania.

But all of this progress is only the beginning. Every business that begins accepting bitcoins and other cryptocurrencies increases its utility, and increases the real value ever higher. But the practical uses of the currencies expand far beyond simple enhancements to already existing businesses and infrastructure. Popular and well supported cryptocurrencies like Bitcoin and Litecoin can soon pave the way for much more dramatic changes in the world economy, and it all lies in certain advantageous it has over paper money that allow it to do what our current multitude of fiat currencies cannot. Cryptocurrency, unlike dollars, can be shoved through an Ethernet cable without expensive or time consuming middlemen or banks. Transactions can be made in minutes securely without government oversight, and payments can be made to any single persons virtual wallet on the planet, so say goodbye to wire transfers and Western Union. Similarly deposits can be made to family, friends, or another one of your own secure and encrypted wallets anywhere in the world making it a viable alternative to a traditional bank account. In addition that cold hard USD in your bank account has the unfortunate trend of inflating over time, while your secure cryptocurrency will gradually appreciate and gain value as you save it due to its limited supply. It can function as an effective store of wealth like more physical commodities such as gold and silver, and is even more versatile and easy to use in many cases than paper money. It promises to streamline the online economy, and do for finance what the internet did for publishing. On top of all this, as an added bonus cryptocurrency is impossible to counterfeit. So as you can see bitcoin is, technically speaking, more than just intangible currency. Its both a currency and a protocol backed up by an internal network which is roughly

Netherlands retailer: http://www.coindesk.com/netherlands-food-delivery-network-bitcoin/

Bitcoin in real estate/shanghai: http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20131114000039&cid=1102

256 times faster than the top 500 supercomputers in the world, and growing.6 A protocol that can replace all the middleman processors we have such as banks and credit cards yet the overall market cap of bitcoins is only right under $14 billion at the time of this article. Meanwhile twitter, an internet blog that allows you to post at most a tweet of 140 characters is worth $22.6 billion. Bitcoins success and its open source code has led to many alternative cryptocurrencies springing up. While many of these are simply poor copycats, at least a few promise to valuably compliment Bitcoin in the days to come. Chief among these alternate cryptocurrencies is Litecoin, started by a former Googler and MIT grad, Charlie Lee. Litecoin differs from Bitcoin in that it has a larger, though still limited, supply. This could make it more easily available to more individuals. Litecoin also benefits from the fact that transactions are confirmed by its network several minutes faster than Bitcoin. As a result of the greater quantity, lower price, and the slightly faster transactions, it is often referred to as the silver to Bitcoin gold. It is widely suggested that litecoins can be used for more regular small transactions, while bitcoins can be reserved for larger ones. In addition to Litecoin, Namecoin (NMC) can provide an entirely different function as well.7 Namecoin comes built in with the capacity to support a unique decentralized DNS system. In essence once the infrastructure is fully developed, anyone who owns any amount of Namecoin can secure unique .bit domains on a first come first serve basis. Because the directory is completely decentralized within the currency system, the domains it supports cannot be censored or otherwise shut down by any governments. This can have huge implications in countries such as China or Iran where internet censorship is prevalent, giving Namecoin a possibly strong and unique niche amongst the cryptocurrencies. All of this I am describing however is the "end game". What were experiencing now is cryptocurrency in its infancy, awash in speculation as many attempt to gauge its untapped and potential applications, and yes perhaps make a quick buck. Eventually the boom will stop, correct, and stabilize in value. This may be more than what Bitcoin and Litecoin are worth today, or less, who knows? It all depends on the political and economic situation in the future and how well the infrastructure for cryptocurrency is developed, as well as how highly adopted it becomes. The speculation and volatile price levels will probably continue for at least a couple
6

Bitcoin computing power: http://www.forbes.com/sites/reuvencohen/2013/11/28/global-bitcoin-computingpower-now-256-times-faster-than-top-500-supercomputers-combined/ Bitcoin perfect bubble/no real way to measure value:
7

Namecoin: http://namecoin.info/

years, and the eventual correction may indeed be harsh. But were not talking about a total implosion of cryptocurrency, this is not tulip mania. Cryptocurrency has real utility and value, most people just don't see the big picture yet.