Prime Trust

Bitcoin Is Falling, But Is It A Crash?

Bitcoin hit $3,400 on Sunday. The global crypto exchanges have seen their trading volume decrease by anywhere from 50% to 90% since January. The market is crashing. The sky is falling.

Or is it?

In March last year a Bitcoin (“BTC”) was $950. So $3,400 today looks pretty good in comparison. And although trading volume is down on the exchanges, their reported overall custody is way, way up as people are holding rather than trading. Check this out for a historical view https://coinmarketcap.com/currencies/bitcoin/

When will this settle down? What’s the right price for a Bitcoin? Heck if I know. As I’ve said, there is no real utility value in BTC and so, from the perspective of sound financial fundamentals, BTC has zero value. It’s worth what people are willing to pay for it, and not for other uses.

Imagine a situation where a financial instrument sees demand fall to almost zero. That happened in 2008, when the market dried up for mortgage-backed securities. These became known as “toxic debt” on a bank’s balance sheet because there were no buyers of the bonds. So the price hit $0.00. Banks went into a panic and the economy fell into a great recession as banks were forced to “mark to market”, incurring massive paper (not actual) losses that wiped out their balance sheets and forced the government to step in. But you know what? Most of the homeowners in the country kept paying their mortgages (which backed the bonds), others paid part of their mortgages, and some defaulted but their loans were backed by real estate. Even though the buyers of the bonds evaporated, the underlying fundamentals and utility were still there. Savvy investors with cash on hand bought these from banks for pennies on the dollar, and as the economy recovered the investors turned millions into many billions of profits. The government ultimately did away with the idiotic “mark to market” rule and bank balance sheets recovered nicely. Likewise, if tomorrow, for whatever reason, investors didn’t want to buy gold anymore, it wouldn’t mean that the industrial, medical, culinary and fashion demands for gold would dry up. Regardless of market price, there is still utility. Not so with Bitcoin.

Well, how does this affect us? Isn’t it bad for the industry?

The answer is complicated, but not bad. On one hand, many of the exchanges, OTC desks and institutional investors are seeing their volumes and values decline. Investors are incurring losses. This may have them hesitate to invest or expand and thus slow the pace of innovation in this market. On the other hand, in my opinion, the future of the market is not dependent upon BTC, ETH, or any other form of speculative, utility-less product.

So where does this take us? Where are we in the timeline of this market lifecycle?

To me, this is analogous to the internet in 1995 – 1999. We’ve seen ridiculous business models raise billions in “ICO’s” that are nothing more than vaporware at best, and Ponzi schemes at worst. We’ve seen venture dollars chasing terrible ideas. And regulators and legislators scrambling to do something, anything as they struggle to get their arms around this new disruptive technology. All this time the media pundits have been either irrationally exuberant or irrationally head-in-the-sand negative.

When the dot-com bubble burst, the market lost hundreds of billions of dollars in then-current value. The baseless businesses got washed out. Unfortunately, even the good businesses got crushed as investors and the markets weren’t able to cope with the turmoil. Remember when you could buy Apple for $4.24/share on March 10, 2000? Or Amazon for a song?

Yet from this sprang online shopping. Digitally delivered music and entertainment. Online banking. Merchant processing. Social media. Smart phones. And countless other internet-driven applications that have literally transformed economies, society and culture.

So today we are seeing, and will continue to see, the failure of thousands of tokens issued in scores of ICO’s that were foundationless, with zero utility. And that’s healthy for the future of this industry. Unfortunately, we are also seeing the values of blockchains and businesses that do have sound business models and utility get hammered in the process. Those will recover…and thrive.

In the future, we will see blockchain-based exchanges transform capital markets as tokenized assets and securities become available and traded frictionlessly. We’ll see lending transformed into fractionalized ownership of…well…everything. eCommerce and payment mechanisms will be seismically changed by stablecoins and new methods of transaction settlements. Personal data such as medical records will easily aggregate and become portable and securely shareable, enabling preventative and diagnostic medical techniques that even a few years ago would have been considered science fiction. Coupons, payrolls, bill payments, and other financial services will look very different than they do today.

Blockchain, like the internet before it, will transform economies, society and culture.

Whatever happens in the market with Bitcoin doesn’t matter. Those of us who are lucky enough to be here at this point in time are creating something extraordinary.