Bitcoin Basics – Part 2
In the first instalment of this series I discussed Bitcoin in terms of decentralisation, scarcity and resistance to censorship.
This post will look at what gives a cryptocurrency value. Currently there are over 2,000 cryptocurrencies in existence, with more being created every day. At the time of writing, cryptos collectively are a $430 billion AUD market of ideas and new technology. But what gives each of these coins and tokens value?
Most offer very little value
The blunt truth is the majority of new cryptocurrencies being created offer no value. I believe they’re basically vehicles for the creators to get rich quick by essentially printing their own money. Some coins are outright scams, whereas others are poorly constructed ideas which the creators have no intention or ability to complete. Just like the dot com companies of the late 1990s, many coins offer very little value and are merely riding the coattails of the new and flashy crypto ecosystem. Buzz words like blockchain and decentralised are commonly used to confuse unsophisticated investors into buying into their token sale.
Therefore, it can be said that the only value the vast majority of these cryptos offer is as a speculative vehicle. However, amongst the minefield of seemingly endless cryptos to choose from are a handful of coins and tokens which may offer value.
Utility and usefulness
So how do you determine the value of a cryptocurrency? Simply put, a coins value is determined by its utility and usefulness in the marketplace. In other words, what problem does the coin seek to solve?
Most crypto tokens are offering to solve a problem that simply doesn’t exist. For example, there are coins that claim to decentralise and tokenise shares in boating syndicates. Others claim to back real estate assets which can be traded using their tokens. The recently launched KodakOne (KODAKCoin) token offers a marketplace for photographers to sell their content using their tokens.
With all of these coins competing for market share, a simple question must be asked: “Why does the project need to be decentralised, tokenised and put on a blockchain?”
Decentralisation isn’t for everyone
Decentralisation is highly inefficient and expensive. A centralised ridesharing platform like Uber, for example, is far more efficient and user friendly than a decentralised rideshare like Arcade City (ARC). So why decentralise? The only reason decentralisation makes sense is to circumvent laws or to avoid censorship.
Boat sharing syndicates and real estate funds are completely legal entities in most developed countries, so why do they need to be decentralised, tokenised and put on a blockchain? Why invest in an unregulated crypto token which supposedly represents a physical property when there are legitimate, regulated companies that already operate within the legal framework of a country?
Furthermore, cryptocurrencies are bearer assets. Why would anyone want to hold a digital bearer representation of a physical asset (such as a yacht or a house), if it could be easily stolen or lost forever?
In the case of KodakOne, numerous companies such as Shutterstock, iStock and Pond5 already offer a marketplace for photographers to sell their content, so why is a Kodak token necessary to trade photos? I don’t believe that it serves a useful purpose, aside from allowing a dying company to create and issue its own currency.
On the other hand, a decentralised ridesharing platform like Arcade City does provide utility in some jurisdictions. Ridesharing is illegal throughout countries like France, Brazil and even in some parts of the US such as Austin, Texas. Hence, a decentralised ridesharing platform is very useful in areas where censorship is present and local laws need to be circumvented.
Bitcoin has value
Bitcoin (BTC) is another example of a cryptocurrency which offers tremendous value. Bitcoin fills a very specific function of providing decentralised, censorship resistant value transfer. Bitcoin first gained popularity because of its usefulness in circumventing money laundering laws. It was initially used as an online currency to pay for illicit items and activities such as online gambling. Soon after, it was used to bypass payment blockades to media organisations such as Wikileaks.
Today, the sheer size and liquidity of the Bitcoin market allows for billions of dollars to be moved globally without censorship. Perhaps in the future, Bitcoin will be used by entire countries who have been blacklisted from the international monetary system.
Other decent cryptos
Other cryptocurrencies such as Litecoin (LTC), Monero (XMR) and Ethereum (ETH) may also offer usefulness and utility. Litecoin is able to process transactions faster and much more cheaply than Bitcoin, Monero allows the user to send transactions in a much more anonymous way, and Ethereum currently provides a platform for new tokens to launch and operate.
With new cryptocurrencies and tokens being created daily, investors must be prudent in determining which new coins offer value, and which are merely speculative instruments. A good way to start the coin filtering process is to ask the simple question “What usefulness and utility does this new coin offer?”
