Recent history has shown us what Bitcoin is not. In times of high volume, Bitcoin is continually burdened by a fundamental inability to scale with high fees and slow transaction times. This constrains Bitcoin to one use-case and one narrative that has been adopted by even the smartest commentators in the space. Peter Thiel, the billionaire Paypal co-founder and investor, routinely relates Bitcoin’s utility to that of gold. In this video interview Thiel describes a few similarities that are true of both assets:
It’s this weird currency that’s not backed by any government — the same thing is true of gold. It’s not clear what the intrinsic value of Bitcoin is — the same thing is true of gold.
This is a naive and impossible comparison in the context of such a historically important asset. Gold has been around since at least 700 B.C. and is ingrained into society as a trusted monetary tool. As such, gold trends are not nearly as volatile as Bitcoin, which has seen more than 1000% swings in a single year.
Who invests in gold these days? Only the most conservative old-timers who think it is a safe bet. There is a reason the commercials between your History Channel special invariably feature a gold pitch centered on buying some gold coin or trinket. They know their target audience. But even the commercials get to the point — gold is a hedge against market crashes. In many ways, Bitcoin is a hedge against the conventional stock market and currency markets as well; that is where the gold comparison ends.
Theil and Bitcoin proponents fail to acknowledge these two important distinctions: unlike Bitcoin 1) gold has an ingrained historical and social value, 2) gold has a significantly more conservative historical volatility. Both of these facts make gold a conservative hedge against market crashes and currency devaluation. Conceptually, the comparison to gold is palpable for new-comers, but overstates the importance of a relatively young and fragile asset like Bitcoin.
If the only utility of Bitcoin is a hedge against the conventional market, Bitcoin should be worried. This “digital gold” narrative is driven by design-flaws and an antiquated system (now touted as a feature). It struggles to keep up with blockchains that do more interesting things than create scarcity. Bitcoin can only ride on the coattails of its brand name for so long and with no progress planned for the future, it is easy to see why the last few months have been bloody.
Post Crash Recovery
Tax season, a lack of news, Bitcoin’s lack of fundamentals, and a later than expected timeline for Proof-of-Stake are all contributing factors to the $1000 drop in the past 3 months. In my view, it has been a necessary correction from a obviously over-valued Bitcoin. Unfortunately, the cryptomarket is highly correlated with Bitcoin, so Bitcoin price declines equal Ether declines. The crypto market is now in a much more healthy starting point.
I won’t belabor this or pontificate. Here is my current view of things:
- Ethereum will release Proof-of-Stake in the next 6–12 months (20 transactions per second to 1000’s of transactions per second)
- Proof-of-Stake will drive up price because people will naturally hold Ether for staking
- Dapps will emerge utilizing the available throughput (transactions per second) and giving a user experience equivalent to what people are used to on centralized servers (e.g. Facebook App performance). This will drive Ether price up as transaction volume increases dramatically.
- People will only then start to understand the power of the new decentralized internet
- EOS, NEO, and other “ethereum killers” will lose considerable market share to Ethereum and cease to have any relevance.
- Bitcoin will lose as it fails to adapt to the changing crypto ecosystem
In summary, my view is that Ether is quite cheap at the moment, but a lot could happen in the short term to make this crash even more painful. $380 seems to be the bottom, but Bitcoin is still overvalued at $6700 for the lack of substance it provides in terms of utility.
Nothing has changed in terms of Ethereum’s future and potential. So I suggest we take the advice of Elon and the Tesla Spaceman (even as it unintentionally travels towards the Kuiper belt): “Don’t Panic!”
Also this reddit post by u/reterical summarizes why I’m bullish beautifully.