Half a trillion dollar valuation

"Congratulations, if you invested in bitcoin back in 2010 you would have (insert high dollar amount) today!!" 2017 is officially the year of the Bitcoin thanks to the media. Now that everyone and their daughters are now talking about Bitcoin's stratospheric market valuation I'd like to take this opportunity to talk about something else. Is the current market capitalization in the cryptocurrency market really well deserved?

Bitcoin is due for a healthy correction or it might end in a lot of tears.

The short answer is, NO. The current valuation of Bitcoin and altcoins alike are at an all-time high despite a lot of uncertainties. The face of Ethereum Vitalik Buterin, on his recent Twitter feed, asked a series of thought-provoking questions hinting most cryptocurrencies haven't really done much besides the ability to crowdfund extraordinarily effectively. The main problems cryptocurrencies alike are trying to solve is to decentralize banking and make it accessible to everybody. The reality is we still have over one billion unbanked individuals, so in terms of progress, we haven't really gone that far to deserve the half a trillion dollar market valuation. The crypto market is still in its infancy and innovation stage and there is simply a whole lot of speculation.

Hype for the wrong reasons

Positive news coverage is great to increase exposure but the flipside associated with exposure is more speculative HYPE. There are two types of money in any market: "smart money and dumb money". HYPE would be the latter of the two. Thanks to the media's spotlight on Bitcoin's unprecedented gains, a lot of new dumb money now floods the crypto market. Most of these individuals have a "fundamentals don't matter as long as it can make me rich" mentality and place bets on coins with little to no understanding of the underlying technology. Often the mass majority also have little to no trading experience prior, making the crypto market especially volatile and quite unlike other traditional indices with more predictable trends. Greed, lack of awareness and gullibility are all priced into the current Bitcoin condition. Any amount of negative news, regardless of how credible the source may have severe unfavorable effects.

Misguided accusations

As Bitcoin gained notoriety, it also came with a lot of distrust and hate because though well known, the significance of the blockchain technology is still very difficult for the everyday person to understand. Most lack the imagination to see the implication that the Bitcoin technology represents.

Today a well-intentioned buddy of mine shared with me an article written by David M Webb in which he branded Bitcoin a Ponzi scheme. If you don't know him, David M Webb is a pretty well known financial figure in Hong Kong and is frequently called upon by the media to comment on all matters relating to corporate and economic governance. Though I strongly dislike the title of the article, I figured I'd read it anyways to gain a new perspective. A big financial figure David M Webb should have something to say that I may not have considered before. If you wish to read the article, I'll have a link to it down below.

To my surprise, Mr. Webb made a few valid point in support of his hypothesis that Bitcoin is a Ponzi Scheme. Firstly, he pointed out Bitcoin is currently in a bubble, which I agree with. Next, he mentioned that as long as the world has governments with the power to tax and spend, an "end of fiat currency" scenario is very unlikely which I also agree with.

Opinion: In time, banks may become obsolete with the move from fiat to crypto. However, the future cryptocurrency will still be government-backed crypto and cannot truly be decentralized lest we are living in a dystopia.

Everything else in his hypothesis I thoroughly disagree with. Mr. Webb's opening argument against Bitcoin as a viable currency is because "it's value will fluctuate based on the willingness of others to take it off your hands and nothing else". My counter-argument is that fiat behaves exactly the same way! If you need evidence just look at the forex exchange and note how the value is constantly fluctuating based on supply and demand. All things monetary is invented by man and thus the value of any medium (including gold and precious metal) only has as much value as people have an interest in it. The only difference is that government-backed fiat is more stable because they can artificially manipulate the price by adjusting the interest rates. The decreasing flow of new Bitcoins and the 21 million cap will actually help ward off inflationary pressures.

If Bitcoin becomes the chosen cryptocurrency of the future, it will behave more like fiat. As it gains mass adoption, the asset will have less drastic price action. Naturally, any FUD associated with the asset will naturally disintegrate to further strengthen the currency's stability. Similar to how blue-chip stock generally has smaller price movements compared to that of small-cap stocks. The issue Mr. Webb mentioned is a current one and doesn't pertain to a future where cryptocurrency replaces fiat, nor does it prove Bitcoin is a Ponzi scheme by any measure.

Mr. Webb lost more credibility when he attempted to talk about the technicalities of Bitcoin mining. It was clear his knowledge on the subject was more selective than objective. He mentioned and I quote that " it is perhaps only a matter of time before the consensus, out of rational self-interest, decides to abandon the software-imposed cap of 21 million Bitcoins and increase the reward for "mining" it, once the majority of operators have cashed out." What he failed to mention in his argument was that this potential problem was already mentioned in the Bitcoin whitepaper under section 6 titled incentive. In this section, the whitepaper clearly states that miners get paid for not only mining new coins but also verifying transactions on the network. Therefore, in the scenario that all newly minted coins are mined (which will happen around 2140) the incentive can also be funded with transaction fees.

We are all entitled to our own opinions and perspectives. However, I sincerely hope Mr. David M Webb will stop spreading FUD on cryptocurrency based solely on his personal opinion. There is enough FUD as it currently is.

Final thoughts

This goes to say the complexity of bitcoin that even experts like David M Webb don't fully grasp, so don't feel bad if your dad or mom doesn't get it right away either. Adoption will take time. Bitcoin is more than just a digital intangible asset, but rather it is the first to successfully implement an innovative and feasible alternative to traditional banking solutions. Moreover, the blockchain technology is not just limited to banking but could have countless other useful applications in a number of different industries.

**This article represents my personal opinion. I am not a financial advisor nor do I give out financial advice.

David M Webb's article: https://webb-site.com/articles/bitcoinponzi.asp