But a Boost for Crypto Assets
Good. Getting over bitcoin allows us to see where the real value of crypto assets 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.
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Ether and Other Crypto Assets 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. 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.
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As we expected, since publishing Crypto TREND we have received many questions from readers. In this edition we will answer the most common one.
What kind of changes are coming that could be game changers in the cryptocurrency sector?
One of the biggest changes that will impact the cryptocurrency world is an alternative method of block validation called Proof of Stake (PoS). We will try to keep this explanation fairly high level, but it is important to have a conceptual understanding of what the difference is and why it is a significant factor.
Remember that the underlying technology with digital currencies is called blockchain and most of the current digital currencies use a validation protocol called Proof of Work (PoW).
With traditional methods of payment, you need to trust a third party, such as Visa, Interact, or a bank, or a cheque clearing house to settle your transaction. These trusted entities are "centralized", meaning they keep their own private ledger which stores the transaction's history and balance of each account. They will show the transactions to you, and you must agree that it is correct, or launch a dispute. Only the parties to the transaction ever see it.
With Bitcoin and most other digital currencies, the ledgers are "decentralized", meaning everyone on the network gets a copy, so no one has to trust a third party, such as a bank, because anyone can directly verify the information. This verification process is called "distributed consensus."
PoW requires that "work" be done in order to validate a new transaction for entry on the blockchain. With cryptocurrencies, that validation is done by "miners", who must solve complex algorithmic problems. As the algorithmic problems become more complex, these "miners" need more expensive and more powerful computers to solve the problems ahead of everyone else. "Mining" computers are often specialized, typically using ASIC chips (Application Specific Integrated Circuits), which are more adept and faster at solving these difficult puzzles.
Here is the process:
Transactions are bundled together in a 'block'.
The miners verify that the transactions within each block are legitimate by solving the hashing algorithm puzzle, known as the "proof of work problem".
The first miner to solve the block's "proof of work problem" is rewarded with a small amount of cryptocurrency.
Once verified, the transactions are stored in the public blockchain across the entire network.
As the number of transactions and miners increase, the difficulty of solving the hashing problems also increases.
Although PoW helped get blockchain and decentralized, trustless digital currencies off the ground, it has some real shortcomings, especially with the amount of electricity these miners are consuming trying to solve the "proof of work problems" as fast as possible. According to Digiconomist's Bitcoin Energy Consumption Index, Bitcoin miners are using more energy than 159 countries, including Ireland. As the price of each Bitcoin rises, more and more miners try to solve the problems, consuming even more energy.
All of that power consumption just to validate the transactions has motivated many in the digital currency space to seek out alternative method of validating the blocks, and the leading candidate is a method called "Proof of Stake" (PoS).
PoS is still an algorithm, and the purpose is the same as in the proof of work, but the process to reach the goal is quite different. With PoS, there are no miners, but instead we have "validators." PoS relies on trust and the knowledge that all the people who are validating transactions have skin in the game.
This way, instead of utilizing energy to answer PoW puzzles, a PoS validator is limited to validating a percentage of transactions that is reflective of his or her ownership stake. For instance, a validator who owns 3% of the Ether available can theoretically validate only 3% of the blocks.
In PoW, the chances of you solving the proof of work problem depends on how much computing power you have. With PoS, it depends on how much cryptocurrency you have at "stake". The higher the stake you have, the higher the chances that you solve the block. Instead of winning crypto coins, the winning validator receives transaction fees.
Validators enter their stake by 'locking up' a portion of their fund tokens. Should they try to do something malicious against the network, like creating an 'invalid block', their stake or security deposit will be forfeited. If they do their job and do not violate the network, but do not win the right to validate the block, they will get their stake or deposit back.
If you understand the basic difference between PoW and PoS, that is all you need to know. Only those who plan to be miners or validators need to understand all the ins and outs of these two validation methods. Most of the general public who wish to possess cryptocurrencies will simply buy them through an exchange, and not participate in the actual mining or validating of block transactions.
Most in the crypto sector believe that in order for digital currencies to survive long-term, digital tokens must switch over to a PoS model. At the time of writing this post, Ethereum is the second largest digital currency behind Bitcoin and their development team has been working on their PoS algorithm called "Casper" over the last few years. It is expected that we will see Casper implemented in 2018, putting Ethereum ahead of all the other large cryptocurrencies.
As we have seen previously in this sector, major events such as a successful implementation of Casper could send Ethereum's prices much higher. We'll be keeping you updated in future issues of Crypto TREND.
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