Bursting the bitcoin bubble

The Future Lies in the Blockchain

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Cryptocurrency is an absolute mind boggler.

Bitcoin first caught my eye about 2 weeks ago, so I was definitely late to the party, as it has been on the markets since 2010 (at the ripe price of $0.04).

It has been on a tear. Right now at time of writing (12/5/17 3:20 pm CT) the coin is at $11,810 according to the GDAX exchange. Its increased 2% in the last day, which is actually small compared to its past movements.

To give you an idea of the volatility of this asset/currency, it was at $11,621 a mere 15 minutes ago, and at time of publishing, it is at $14,050 (12/6/2017 8:37 pm CT). It is one of the more complicated things out on the market right now, and extremely prone to large price movements.

Despite this, the asset has grown into a market cap that surpassed Goldman Sachs and Morgan Stanley, two of the biggest banks, back in early October. The coin currently has a market cap of $199,407,776,020, according to Coinmarketcap.com. That’s $199 BILLION.

Below is a ranking of the top 26 stocks in terms of market capitalization. As you can see, Bitcoin’s market cap puts right at #26 in terms of WORLDWIDE stocks market cap.

That’s wild.

Data from dogofthedow.com

Symbol Company Cap Rank Market Cap
AAPL Apple 1 873.1
GOOGL Alphabet 2 715.8
MSFT Microsoft 3 640.7
AMZN Amazon.com 4 531.0
FB Facebook 5 522.9
BABA Alibaba Group 6 470.2
BRK-A Berkshire Hathaway 7 461.8
JNJ Johnson & Johnson 8 374.2
JPM JPMorgan Chase 9 355.6
XOM Exxon Mobil 10 353.2
BAC Bank of America 11 288.0
WFC Wells Fargo 12 276.7
WMT Wal-Mart Stores 13 260.8
RDS-A Royal Dutch Shell 14 258.8
V Visa 15 251.5
BUD Anheuser-Busch InBev SA/NV 16 237.4
PG Procter & Gamble 17 220.2
CVX Chevron 18 219.6
TSM Taiwan Semiconductor Manufacturing 19 219.5
INTC Intel 20 213.8
ORCL Oracle 21 212.4
PFE Pfizer 22 208.5
UNH UnitedHealth Group 23 207.9
T AT&T 24 206.6
CHL China Mobile 25 206.6
HSBC HSBC Holdings 26 197.7

For an asset/currency that not a lot of people truly understand, that valuation is incredible.

Worldcoinindex

As you can see in the graph above from World Coin Index, Bitcoin has had exponential growth in the past month, increasing from about $7,000 on November 6th to the current price of about $11,700. That’s a 67% increase in the span of a month.

[In fact, if you bought it back on October 9th at $4,769, you would have made $10,000, with the current price right around $14,500 In the course of two months.  $10,000. From just holding your money in a coin.]

So if you bought one Bitcoin, at $6,000 and cashed out at $11,700, that’s a $5,700 profit over the course of one month.

But what if you bought it at the price of $0.08 cents in July 2010, when BTC began to take off? In fact, on May 22 2010, way early in the game when Bitcoin was worth nothing, Laszlo Hanyecz used 10,000 BTC to buy 2 pizzas.

Today, that would buy a 25,000 square foot mansion, a Van Gogh painting, the annual expenditure of Palau, or a four-lane interstate highway.

$100,000,000 goes a long way for sure.

Below is a Bitcoin price chart. It shows the absolutely exponential growth that has occurred over the past few years. If you look really closely, you can see how little it was worth back in 2010 era – and compare that to how much it is worth now.

coindesk-bpi-chart

Image via CoinDesk.com

But what gives Bitcoin its value? What gives any cryptocurrency its value?

For most coins, it’s the store of value and trust that people have in the coin. They are putting their money in it, and because of that, it has a “semblance” of value. Supply and demand is essentially keeping it afloat.

The thing a lot of people like about Bitcoin, and what I personally think is interesting, is that it is completely decentralized. The government (currently) has little to no say in what Bitcoin does.

Right now, the government treats it as “property” and the capital gains and losses have to be recorded for taxation purposes. Of course, only 800-900 people reported gains between 2013-2015 according to ZeroHedge.com, because the government cannot trace the transactions. (Clever.) So the government requested the account information of users on Coinbase.com that have traded at least $20k of Bitcoin in a given year. Coinbase is opposing that petition in court.

So I don’t know what the government has a store (and I doubt they really know either). Individual states have set forth proposals for the blockchain ledger regulations and for smart contracts (which are basically instantaneously executable agreements written in code) but not overarching regulations across the nation.

The reason for this is that Bitcoin has taken almost everyone by surprise. The growth has just been insane. The exponentiation, the overvaluation, and the bubble that has been created was a bit of a shock.

Image via Bitcoin Brasil

The whole concept behind Bitcoin is unique – the science behind cryptocurrency is general is absolutely fascinating. To break it down to the very basics, to create a Bitcoin, you have to mine a Bitcoin.

  1. Bitcoin is composed of blocks on the blockchain
  2. The proposed new block that holds the Bitcoin is broken into two components
    • Nonce: random data
    • Header of most recent block
  3. They combine, which produces a hash number
    • If the HASH < Target Value (which is determined by mining difficulty)
      • When more miners join the network, mining difficulty increases
  4. Then the Proof of Work is solved and a Bitcoin is produced!!
  5. The miner that mines is rewarded a set block reward (currently: 12.5 BTC)
  6. The Bitcoins are then able to be used in transactions
    • Assigned a wallet that has access to multiple bitcoin addresses
    • You then have a private key (PIN) to control your BTC
  7. When you buy things you sign using your private key
    • This transaction must be verified by the miners
      • They record it in the blockchain (general ledger)
    • This ensures that no bitcoin is spent twice or hijacked
  8. And then you have successfully utilized your Bitcoin!

But not a lot of people actually use them for transactions. It’s more so a store of value, especially now as the price continues its upward trajectory (12/5/2017 6:04 pm CT $11,759) 

There are other cryptos that work similarly to Bitcoin, but offer different advantages and behave in different ways.

Litecoin is the most “comparable” to Bitcoin in the cryptos that I am going to discuss. It was actually a hard fork back in 2011, and is headed by Charlie Lee, who used to be a software engineer at Google before moving onto Coinbase (which has actually hasmore users than Charles Schwab). Charlie then moved completely into growing and fostering Litecoin as a cryptocurrency.

Litecoin has been called the “silver to Bitcoin’s gold“. It is interesting because the platform plans to function more as a payment system rather than a store of value, as I mentioned previously that Bitcoin does.

Litecoin also uses a different proof of work algorithm (how the transactions are verified) with Bitcoin utilizing SHA-256 and LTC utilizing Scrpyt.

Litecoin is designed to be more efficient, and produce more coins at a faster rate. Litecoin produces 1 coins per every 2.5 minutes whereas Bitcoin only produces 1 coin every 12.9 minutes.  LTC also has a much larger coin limit than Bitcoin does, with 84 million coin production cap vs BTC’s 21 million coin cap.

The coin is also able to utilize the marketing trail of Bitcoin, as a little brother would the popularity of his older brother. It can basically ride off the success of Bitcoin without enduring the same amount of respective volatility.

Litecoin also has much lower transaction fees that Bitcoin does (BTC does have a 36.4x greater market cap which explains potentially explains some of the difference)

The fees have remained extremely stable overtime as well, a contrast to the volatile nature of Bitcoin’s transaction fees:

graph

Graph via Seeking Alpha

But the most interesting thing that I find about the relationship between Bitcoin and Litecoin is the comparison to Gold and Silver.

When we look at the historical Gold-Silver ratio of the actual commodities, we can see that the ratio between the two is on average somewhere between 55 and 60 for the past 20 years, and is currently at 75.31.

gold

Graph via Street Wise Reports

Right now, the ratio between Bitcoin and Litecoin is 144. Bitcoin sits at $14,399 right now (12/6/17 7:22 pm CT- absolute insanity). 

Based on historical averages between gold and silver commodities, Bitcoin and Litecoin should mirror that relationship and movement.

Right now Bitcoin is on an absolute tear (some speculate due to the number of hard forks; I think its become a glamour investment). Reversion to the mean has to occur eventually, so LTC has some growing to do. Based on Gold-Silver, LTC should be sitting at right about $191.98 dollars ($14,400 / 75) which would be a $91 increase from the current price.

The thing is LTC was $4.58 on January 1st of this year. It’s at $104.10 (12/6/17 7:44 pm CT) That’s a 2172.9% price increase. ([104.1 / 4.58] – 1). BTC began the year at $1,019.20 and is currently at $14,300 for simplicity’s sake. That’s only a 1,303% price increase.

So although BTC is bigger, grander, and more mainstream, LTC has surpassed it by almost 1,000% in terms of growth. That’s quite substantial.

And obviously, there is still room for growth in LTC. The coin is only at $104. If it matches (and continues doubling) BTC’s growth, then the returns will be absolutely wild.

There over 1,000 (1,372 to be exact) investable virtual currencies, according to the Motley Fool. Ethereum is one of the biggest ones, right behind Bitcoin in terms of market cap. It is more of a software platform, that is based on economic activity through it’s currency.

Funnily enough, ethereum is being haunted by Crypto Kitties. Right now, these CryptoKitties are taking up 13% of the network traffic, but have moved almost $4.5macross the exchange. People spend about $23 a cat on average. The most expensive one was sold for $108,100.

The cats are essentially a “unique digital Pokemon card” according to the BBC.

crypto kitty

Image via BBC.com

So basically, these coin exchanges can do a lot.

Iota, which doesn’t rely on the blockchain but uses an alternative ledger called Tangle is another upcoming coin. They are currently backed by Microsoft and Fujitsu, amongst other companies. They claim to be the “first marketplace powered by the Internet of Things“.

Ripple is another interesting coin. It does more international transactions, focusing on providing instant transfer and reliability. One unique thing about them is that they don’t involve mining in their consensus measures, which is one of the reasons that their transfer speed is almost so much quicker than other cryptos.

And that’s only 5 of the 1,327 currencies out there.

But basically, the world of cryptocurrency is insane.

But I think we have a movement on our hands, in essence. This is the first mainstream opportunity that people have had to escape the centralized financial system (that offers measly interest rates in terms of banking and distrust and uncertainty in terms of investment).

It has been an opportunity for people to embrace the idea of decentralization and let the “Too Big To Fails” out of their lives for once.

Crypto is anonymous. It’s transparent. And as the value of the dollar strengthens and fluctuates and inflation runs rampant (despite what the Fed says; read about that in this post) people are looking for other opportunities.

I thought this little tidbit from a Grandma was the epitome of the whole idea of cryptocurrency.

IMG_20171130_145847

Image via the WSJ

“I didn’t have this much fun with T-Rowe Price.”

Cryptocurrency has become a store of value, a payment system, a place for digital cats, and has the potential to grow exponentially larger than that.

I don’t know where Bitcoin, Litecoin, Iota, or Ripple, or any of the other thousand cryptocurrencies are going to end up. But I think it’s fascinating. I think it’s exciting.

And I think it is so much more than a currency or an asset – I think it’s a movement. It’s a sign to the Big Banks, to the Fed, to the government in general: You can try your best, but you can’t touch us.

I plan to write more about cryptocurrency and the impact that it has on the economy in the future. The subject is a first step in a lot of different directions. No one knows if cryptocurrency itself will be successful, but I am positive the platform it stands on and the technology it utilizes is the beginning of the future.

uses of blockchain

Image via Cognizant.com

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