In spite of the crypto-bubble peaking in late 2017, a large proportion of the cryptocurrency market is still made up of overvalued coins which have no sustainable or useful purpose. Once investors finally wake up to the worthlessness of the tokens they hold, the whole cryptocurrency market will slump, with Bitcoin (BTC-USD) also a casualty due to the strong correlation between the price of Bitcoin and the other coins in the market.
Bitcoin And The Rest
To start, I would like to point out that there is a very strong link between the performance of Bitcoin and the other cryptocurrencies presently available.
Bitcoin Close Price data by YCharts
Increased confidence in cryptocurrencies undoubtedly leads to increased confidence in Bitcoin and vice versa. Bitcoin makes up 39.8% of the cryptocurrency market. Its price is so strongly related to the prices of other cryptocurrencies because many of the people who buy Bitcoin are the same “early adopters” who get involved in new ICOs (Initial Coin Offerings) and who are enthusiastic about the future of cryptocurrencies in general.
Once these people become disenfranchised with other coins due to the weaknesses I will outline, the overvaluation of Bitcoin in the context of its own problems will become even more obvious to these people. It will become more and more difficult for these (principally speculative) investors to hold onto Bitcoin while the rest of the cryptocurrency market is shrinking around them. This will in my view lead to a significant drop in the price of the world’s largest cryptocurrency.
To illustrate my point that many of these “altcoins” are worthless, here are a selection of some of my favourite overvalued coins:
Name Market Cap Purpose Dogecoin $349,541,504* A coin to promote a breed of dog that was popularized in an online meme. (Yes, seriously.) Ontology $1,014,052,444* “Ontology is a diverse, integrated, distributed trust network and the infrastructure for building a trust ecosystem” (Isn’t that what a blockchain is?) Binancecoin $1,867,391,913* A coin to pay fees on cryptocurrency exchanges. Litecoin $5,596,648,927* Functionally identical to Bitcoin with a faster transaction processing speed. Bitcoin Gold $552,846,272* Functionally identical to Bitcoin with a faster transaction processing speed. Bitcoin Cash $15,334,058,168* Functionally identical to Bitcoin with a faster transaction processing speed.
*all market capitalization data obtained from coinmarketcap.com.
But What About Blockchain?
One of the overwhelmingly common selling points of these coins is that they are somehow uniquely suited to make use of blockchain technology.
Let’s take a look at one example of what a coin has to offer:
“We responsibly provide blockchain services that enable growth and economic progress.” – NEM Foundation
This is a big claim by one of the comparatively successful cryptocurrencies. But it hardly reflects how the coin is actually being used. In fact, there’s only been one widely reported use of any software derived from the coin being used a major institution (Japan’s SBI Sushimin). Despite its lack of use, the coin has a market capitalization of $1,790,370,000!
Other than the fact that these coins’ claims are largely nonsensical hype, the problem with the argument that they use blockchain technology in a special way is that most of these coins are open source. There is therefore very little incentive for banks and institutions to adopt these blockchain networks if they can cheaply develop their own more secure versions using existing code.
Where does Bitcoin itself fit into this equation? The coin itself undoubtedly has its own weaknesses, though this is not the focus of this article.
in January of this year, fees reached a ridiculous peak of $54 per transaction. Fees have fallen significantly since then, but I think this helpfully demonstrates the lack of resilience and capacity of the network, and is just one weakness that investors should start to take more seriously once the crypto-market as a whole starts to struggle.
Even stubborn Bitcoin bulls are likely to wake up to the problems associated with the “pure” Bitcoin network once the market for cryptocurrencies as a whole starts to grasp to their lack of utility (in many cases).
Threats To My Thesis
It’s possible that speculators are still nowhere near recognising the persistent overvaluation of the “lesser” cryptocurrencies. If this is the case, I will concede that investing now in some of the more superficially innovative coins may lead to some significant short term gains.
In addition, some cryptocurrencies such as Ethereum really do have useful and innovative applications. It is possible that as a result of their success, the whole of the rest of the market for cryptocurrencies will be pulled up.
The strengths of the stronger cryptocurrencies may extend the period over which investors are blind to the weaknesses of the weaker cryptocurrencies.