Other cryptocurrencies will continue to catch up with bitcoin this year, but this is by no means a bad thing for this nascent industry, says Galen Stops.
“Whether it works out or not, the Bitcoin story definitely has further to go. And regardless of its success or failure, it seems increasingly likely that virtual currency, in one form or another, is here to stay” – “Does Bitcoin Have a Future?” (Profit & Loss, December 2013).
A lot has changed in the intervening years since Profit & Loss published the above statement in conclusion to its first ever feature length article on bitcoin.
The market capitalisation of bitcoin went from $13 billion when this original article was written up to a high of $326 billion in December 2017 and back down to $148 billion by February 12, 2018.
During the same period of time, the price of one bitcoin has gone from $946 up to a high of $19,343, again in December, and then back down to $8,809 at the time of writing, according to CoinDesk.
Bitcoin has proven to be remarkably resilient, having survived early setbacks in the form of the Silk Road money laundering scandal, the collapse of what was the biggest cryptocurrency exchange at the time in Mt Gox, some high profile hacks and regulatory crackdowns by certain national authorities (China alone must have banned bitcoin trading about a half a dozen times at this point, Profit & Loss reported on the first one back in 2013).
More recently, it survived a very public trashing by JP Morgan CEO, Jamie Dimon, who initially declared bitcoin to be “a fraud” in September 2017, only to subsequently walk back his comments months later.
Perhaps most significantly of all, as the more eagle eyed reader will no doubt have already noticed, the Profit & Loss style guide has been updated since that first article to clarify that bitcoin does not require a capital “B”.
But having come so far, survived so much and for all the concern about regulators shutting it down, it is somewhat ironic that the most existential threat to bitcoin in 2018 could be……well, bitcoin.
Well for starters, the hard fork last year that created bitcoin cash (BCH) in addition to bitcoin (BTC) was a symptom of a larger and more ideological divide within the bitcoin community that could yet rear its head again.
To give a very simplified version of the politics involved, the debate centred around the desire by some to make each block on the bitcoin blockchain bigger in order to enable the cryptocurrency to scale up by processing more transactions at once, versus others who argued that this change would reduce miner’s profits and make the network more vulnerable to hackers.
As the cryptocurrency continues to evolve and be held by a more diverse set of individuals and firms with different expectations and desires about bitcoin there is a distinct possibility for more hard forks in the future.
Another potential challenge for bitcoin is that is has helped pave the way for other cryptocurrencies to achieve more mainstream popularity and recognition. Having enjoyed a distinct first mover advantage in the cryptocurrency space, there is the potential for it to be, if not eclipsed, then at least partially caught up, by other cryptocurrencies now enjoying a late mover advantage.
Currently, bitcoin’s market capitalisation is roughly double that of the next biggest cryptocurrency, ethereum, according to CoinMarketCap, a website that tracks cryptocurrency market capitalisations. But despite the fact that it still dominates the space, bitcoin has been making up an ever-smaller percentage of the overall cryptocurrency market over the past year.
In March 2017, bitcoin is estimated to have accounted for 85% of the overall cryptocurrency market capitalisation. Today, that figure is down to roughly 35%.
The primacy effect is what leads us to wonder how bitcoin could be displaced and what’s interesting is that in 2017, we saw the dominance of bitcoin lessened over the course of the year as other non-bitcoin assets increased in price, along with bitcoin,” observes Daniel Hodd, general partner at Digital Asset Investment Company.
But he adds: “This isn’t an example of MySpace versus Facebook, it’s more a case of MySpace versus Kickstarter – both have social features and both use the Internet, but they fundamentally do different things. Likewise, bitcoin and ethereum are good at two very different things and I think we’ll see that as we go forward.”
But part of the issue here is: what things do people want from a cryptocurrency?
For example, advocates of ethereum will argue that it has more value because, in addition to having a native cryptocurrency, it is also a ledger technology that companies can use to build new programs (shortly after Jamie Dimon’s intial comments on bitcoin, a JP Morgan representative at Sibos last year revealed that the bank is building blockchain products off the ethereum network).
Proponents of Ripple’s cryptocurrency, XRP, will bring up charts and graphs showing how many more transactions it can process at a faster speed than bitcoin and other cryptocurrencies in the market. The list goes on, each cryptocurrency claims to have its own niche and advantage over the rest of the pack.
What does this mean for bitcoin in 2018? A large enough industry has begun to build up around bitcoin that it will probably end the year as the largest cryptocurrency out there, but as an overall percentage of the cryptocurrency market, it will continue to decline. This is not necessarily a bad thing for cryptocurrencies in general.