The “Experts” Are Getting Crypto All Wrong

The crypto-token ether sure seems like a currency. But ether isn’t a currency. Because most people who trade it don’t really understand or care about its true purpose, the price of ether has bubbled and frothed like bitcoin in recent weeks.

Back on January 1, I made the following prediction:

Bitcoin suffers a big correction after swinging wildly in the last 10 days of December. … Sometime in the next three months we will see a sell-off as latecomers panic and sell. Long-term investors will remain in bitcoin and it will creep back up, but will not revisit its December highs.

I nailed it.

Bitcoin peaked about a month ago, on December 17, at a high of nearly $20,000. As I write, the cryptocurrency is under $11,000 … a loss of about 45%. That’s more than $150 billion in lost market cap.

The crypto-token ether sure seems like a currency. But ether isn’t a currency. Because most people who trade it don’t really understand or care about its true purpose, the price of ether has bubbled and frothed like bitcoin in recent weeks.

(Source: CoinMarketCap.com)

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Cue much hand-wringing and gnashing of teeth in the crypto-commentariat. It’s neck-and-neck, but I think the “I-told-you-so” crowd has the edge over the “excuse-makers.”

Here’s the thing: Unless you just lost your shirt on bitcoin, this doesn’t matter at all. And chances are, the “experts” you may see in the press aren’t telling you why.

In fact, bitcoin’s crash is wonderful … because it means we can all just stop thinking about cryptocurrencies altogether.

The Death of Bitcoin…

In a year or so, people won’t be talking about bitcoin in the line at the grocery store or on the bus, as they are now. Here’s why.

Bitcoin is the product of justified frustration. Its designer explicitly said the cryptocurrency was a reaction to government abuse of fiat currencies like the dollar or euro. It was supposed to provide an independent, peer-to-peer payment system based on a virtual currency that couldn’t be debased, since there was a finite number of them.

That dream has long since been jettisoned in favor of raw speculation. Ironically, most people care about bitcoin because it seems like an easy way to get more fiat currency! They don’t own it because they want to buy pizzas or gas with it.

Besides being a terrible way to transact electronically — it’s agonizingly slow — bitcoin’s success as a speculative play has made it useless as a currency. Why would anyone spend it if it’s appreciating so fast? Who would accept one when it’s depreciating rapidly?

Bitcoin is also a major source of pollution. It takes 351 kilowatt-hours of electricity just to process one transaction — which also releases 172 kilograms of carbon dioxide into the atmosphere. That’s enough to power one U.S. household for a year. The energy consumed by all bitcoin mining to date could power almost 4 million U.S. households for a year.

Paradoxically, bitcoin’s success as an old-fashioned speculative play — not its envisaged libertarian uses — has attracted government crackdown.

China, South Korea, Germany, Switzerland and France have implemented, or are considering, bans or limitations on bitcoin trading. Several intergovernmental organizations have called for concerted action to rein in the obvious bubble. The U.S. Securities and Exchange Commission, which once seemed likely to approve bitcoin-based financial derivatives, now seems hesitant.

And according to Investing.com: “The European Union is implementing stricter rules to prevent money laundering and terrorism financing on virtual currency platforms. It’s also looking into limits on cryptocurrency trading.”

We may see a functional, widely accepted cryptocurrency someday, but it won’t be bitcoin.

…But a Boost for Cryptoassets

Good. Getting over bitcoin allows us to see where the real value of cryptoassets lies. Here’s how.

To use the New York subway system, you need tokens. You can’t use them to buy anything else … although you could sell them to someone who wanted to use the subway more than you.

In fact, if subway tokens were in limited supply, a lively market for them might spring up. They might even trade for a lot more than they originally cost. It all depends on how much people want to use the subway.

That, in a nutshell, is the scenario for the most promising “cryptocurrencies” other than bitcoin. They’re not money, they’re tokens — “crypto-tokens,” if you will. They aren’t used as general currency. They are only good within the platform for which they were designed.

If those platforms deliver valuable services, people will want those crypto-tokens, and that will determine their price. In other words, crypto-tokens will have value to the extent that people value the things you can get for them from their associated platform.

That will make them real assets, with intrinsic value — because they can be used to obtain something that people value. That means you can reliably expect a stream of revenue or services from owning such crypto-tokens. Critically, you can measure that stream of future returns against the price of the crypto-token, just as we do when we calculate the price/earnings ratio (P/E) of a stock.

Bitcoin, by contrast, has no intrinsic value. It only has a price — the price set by supply and demand. It can’t produce future streams of revenue, and you can’t measure anything like a P/E ratio for it.

One day it will be worthless because it doesn’t get you anything real.

(For more of my thoughts on the differences between cryptocurrencies and crypto-tokens, click on the video below.)

Ether and Other Cryptoassets Are the Future

The crypto-token ether sure seems like a currency. It’s traded on cryptocurrency exchanges under the code ETH. Its symbol is the Greek uppercase Xi character (Ξ). It’s mined in a similar (but less energy-intensive) process to bitcoin.

But ether isn’t a currency. Its designers describe it as “a fuel for operating the distributed application platform Ethereum. It is a form of payment made by the clients of the platform to the machines executing the requested operations.”

Ether tokens get you access to one of the world’s most sophisticated distributed computational networks. It’s so promising that big companies are falling all over each other to develop practical, real-world uses for it.

Because most people who trade it don’t really understand or care about its true purpose, the price of ether has bubbled and frothed like bitcoin in recent weeks.

But eventually, ether will revert to a stable price based on the demand for the computational services it can “buy” for people. That price will represent real value that can be priced into the future. There’ll be a futures market for it, and exchange-traded funds (ETFs), because everyone will have a way to assess its underlying value over time. Just as we do with stocks.

What will that value be? I have no idea. But I know it will be a lot more than bitcoin.

My advice: Get rid of your bitcoin, and buy ether at the next dip.

Kind regards,

I'm going to stick my neck out and make a few calls for Wall Street 2018 based on evidence, logic … and history. And we have all year to see how I do…

Ted Bauman

Editor, The Bauman Letter

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  • Joshua Booth

    So you joined the experts?

  • Walter Fyler

    Please your argument for the cost of mining bitcoin is a stretch at best. Cutting down a single tree or mining for metal is many times more destructive than a few computers running for a few hours. Please don’t make such wild hyperboles in the future it actually lessens your credibility.

  • Tom Donino

    He also gives no argument for the computing value and or the re-purposing of the heat produced, as we do re-use the heat for various other processes.

  • Tom Donino

    351 kWh to power one house for a year? Do you live in a 200 sq ft house?
    “In 2016, the average annual electricity consumption for a U.S. residential utility customer was 10,766 kilowatthours (kWh)”…from the national energy council

  • Eddie Beverage

    This is a lazy call because no matter what happens to bitcoin you’ll win on the ethereum long. Of course ETH will rise again, but so will bitcoin. BTC is the reserve currency for the crypto world, and just like the worthless fiat U.S. dollar, it will continue to benefit from its reserve status. Until it doesn’t. Just like the buck.

  • Marcos R Espinosa

    I agree with Eddie Beverage, this article is a lazy call for the reason he mentions. More and more merchants are accepting Bitcoin and when Amazon starts accepting it the pendulum will swing the other way again. Articles like this are making me loose my interest in Money and Markets newsletter.

  • Ernest Lawes

    According to eia. gov

    In 2016, the average annual electricity consumption for a U.S. residential utility customer was10,766 kilowatthours (kWh), an average of 897 kWh per month. Louisiana had the highest annual electricity consumption at 14,881 kWh per residential customer and Hawaii had the lowest at 6,061 kWh per residential customer.Nov 7, 2017

  • Did you know there is an entire black market for NY subway tokens. People will pay cash for them. There are “token taxis” where you pay them in subway tokens for short rides…

    never underestimate the value of things going on with the common man.

  • I annotate Bauman’s article in this link to MoneyDelusions.
    https://moneydelusions.com/wp/2018/01/23/the-pot-calls-the-kettle-black-again/

    He clearly has no idea what money is … and I prove it.

  • Anyone who has a bitcoin is a fool to use it in trade. It is deflating way too fast. The only ones who can use it in trade to advantage are speculators and elicit object traders.

    Real money never deflates or inflates. See http://www.MoneyDelusions.com/wp.

  • I live off the grid in about 700 sf of space. I use 1kWh per day.

  • Block chain ledgers are important to the transparency of any “proper” Medium of Exchange (MOE) process. But they don’t require cryptography at all.Thus, they don’t require mining at all. All you have to do is hash each transaction (including in it the hash from the previous transaction). In that way, any change to a transaction must change very transaction thereafter … and a proper process won’t allow such changes.

  • Proving he is clueless about what money is … as you are as well.

    See https://moneydelusions.com/wp/2018/01/23/the-pot-calls-the-kettle-black-again/

  • The biggest problem any Medium of Exchange (MOE) process faces is counterfeiting. With our USA government process (and virtually all central banking processes) open counterfeiting is a government privilege. It is the sole reason for inflation.

    See https://moneydelusions.com/wp/2018/01/23/the-pot-calls-the-kettle-black-again/

  • David Laing

    The value went up because people in Brics countrys were trying to escape devalution of their currencies. This raised demand hence price. Then it became speculative.
    It was not its intended path

  • Dannie Mason

    Hello my name is Dannie Mason and I need to buy some bitcoin and marijuana stock

  • Gregg Morgan

    Probably padded the numbers a bit from here,,,

    http://www.businessinsider.com/electricity-required-for-single-bitcoin-trade-could-power-a-house-for-a-month-2017-10..

    However, the cost of the bitcoin power consumption is an aspect of the code. The cost of better security than we all trusted to Equifax or Target or Home Depot.

  • Gregg Morgan

    Gemini.com has been the cheapest place I have found to exchange U.S. funds for Bitcoin or Ethereum. On average it takes about a week of ACH transfer time from standard banking until you’ll have full access to transfer your private keys to a wallet of your choice.

    What is important is controlling the private keys to your personal amount of value.

    Please do your own research and do not trust any one form of storage. I chose Blockchain.info for one of my online wallets, a Trezor.io offline wallet, and Opendime.com which are also offline storage “memory sticks”. I also have a set of keys stamped into a Cryptosteel.com case.

    Not your keys , not your money. – Andreas Antonopoulos –

    You may now send any amount of your Bitcoin to an exchange that offers: Cannabis (CANN) found on the Bittrex Exchange, Pot coin (POT) found on Poloniex Exchange, Kush coin (KUSH) found on Cryptopia Exchange. But no matter which exchange you send them to, they will have control of your money.
    Create a Potwallet.com wallet if you are investing in Potcoin for example or a Kushcoin.info wallet for Kush.
    In my experience, I have learned to replace the bitcoins that I spent on speculation with more US currency as soon as I see a buying opportunity.

  • Gregg Morgan

    https://99bitcoins.com/bitcoinobituaries/
    I’m sending his article here with the rest of them.. lol

  • Marcos R Espinosa

    I agree with you, real money shouldn’t deflate or inflate. That is why there is actually no currency that qualifies. Bitcoin or any crypto-currency at the moment don’t qualify either. However, I believe that if there is a global economic collapse one of the crypto-currencies could be adopted as a global currency and then it would not have the inflation and deflation cancer of our economic system. For now is just speculation.

  • ME: I agree with you, real money shouldn’t deflate or inflate.

    TM: Not “shouldn’t” … but “can’t”. The proper process won’t let it.

    ME: That is why there is actually no currency that qualifies.

    TM: You’re sloppy with the word currency. Currency is just one form of money. Coin and ledger entries are others. “All” currencies are money. They are “all” just in improper processes. Our Fed shoots for a 2% leak and delivers a 4% leak. With the tiniest tweak, that process could easily guarantee 0% leakage … i.e. 0% inflation.

    ME: Bitcoin or any crypto-currency at the moment don’t qualify either.

    TM: And never will. Real money is created (and destroyed) by traders … and only by traders. Show me any other instance except counterfeiting. Miners used to create stuff like gold and silver and traded it like it was money … it was not. It was a completed trade. The promise and the delivery happened simultaneously … on the spot. Money “creation” trades happen over time and space. Money “use” trades happen like simple barter of stuff … because it is “guaranteed” to trade for stuff anywhere and any time in the future. The “proper” process guarantees it. Bitcoin isn’t even stuff… it’s pure waste.

    ME: However, I believe that if there is a global economic collapse one of the crypto-currencies could be adopted as a global currency and then it would not have the inflation and deflation cancer of our economic system.

    TM: Oh really? And who is going to spend it with the ridiculous deflation it is guaranteed to exhibit (at least until it predictably crashes to zero in an instant). We have a model … Weimar Germany. They just cleaned the slate and started up a new bogus money system … in less than one year.

    ME: For now is just speculation.

    TM: No. For now it is just “stupidity”. Here’s your sign.

  • Marcos R Espinosa

    You miss the point of Bitcoin. completely. A lot of people said the same thing about the internet and now here you are using it. The future is digital.

  • The “point” of Bitcoin is missed by Bitcoin. It thinks a proper attribute of money is “scarcity”. It get’s that stupid view from the goldbugs … who also are clueless about money. With “real” money, you don’t want scarcity … you want free supply and perpetual perfect supply/demand balance of the money itself. But one point of Bitcoin is correct … no one controls it … and “real” money gets that same point.

    We can have “real” money with or without digitizing things. One attribute (and a critically important one) is that traders who “create” money (i.e. make time and space spanning delivery promises) must do it “transparently” and without anonymity. And their performance on their promise must be transparent. The internet lets us all be the parties who see it isn’t abused. Without the internet, we are stuck with scrutinizing the process in other ways … which we are capable of doing if necessary.

    Bitcoin’s requirement of “connection” to the internet is the stupidest restriction on it of all.

    “Digital” is the best solution to many communication and counterfeit resisting mechanisms … but it’s not the only one … and this ridiculous mining isn’t required at all. We could effect a satisfactory chain of transactions with the flawed MD5.

    You sir are clueless about what money is and who creates it and how it “must” work (i.e. defaults immediately mitigated by interest collections of like amount).

  • Marcos R Espinosa

    Well, I have no problem admitting that I am clueless if that makes you feel better. I guess in the end time will tell whether Bitcoin or any other digital currency will be adopted as a universal form of payment for goods and services which is what I though money was.

  • ME: Well, I have no problem admitting that I am clueless if that makes you
    feel better.
    TM: Makes me feel terrible. I wish I could be in a different space from you.
    ME: I guess in the end time will tell whether Bitcoin or any
    other digital currency will be adopted as a universal form of payment
    for goods and services which is what I though money was.
    TM: That’s like saying “I guess time will tell if throwing ourselves live onto the funeral pyre will bring us everlasting life”. It doesn’t take time. It just takes common sense. I wonder why they call it common sense … there seems to be so little of it going around.

    If you know what “real” money is and why it is (even though it has never existed … follow the money), you know you can’t do better than that as a trader (albeit money changers and the governments they create are doing just fine, thank you very much). And you know, when it comes to trading, Bitcoin and that concept is beyond ridiculous and worthless! It, like religion, exhibits the near total and universal stupidity of the human species.

  • Marcos R Espinosa

    Well, we are lucky to have such an illuminated guide in you.

  • Someone like you “must” rely on luck. You don’t even have the intellect to grasp the obvious! We definitely need more spaces. Iterative secession is the answer. You clueless intellectuals can then have your own space …. all to yourselves to try to make your nonsense work. And we who are less “enlightened” by force fed propaganda and indoctrination can have more satisfying economic lives basking in reality.

  • Marcos R Espinosa

    I already admitted that I am clueless. Why you keep poking at my lack of intellect, does it make you feel better about yourself? LOL

  • ME: I already admitted that I am clueless. Why you keep poking at my lack
    of intellect, does it make you feel better about yourself? LOL

    TM: The clueless shouldn’t be assertive. Before I called you clueless you wrote:

    Marcos R Espinosa Todd B. Marshall • a day ago You miss the point of Bitcoin. completely.