The Crypto Revolution

It’s Not

There are benefits — you just won’t make any money.

Bitcoin was created in 2008, amid the financial crisis, to be a replacement for currencies that were seen as being debased by global central bank money printing. 14 years later, the reality is that most people can only engage with cryptocurrency, not as a means of exchange, but as a speculative asset.

The financial revolution will certainly not be based on a process where someone buys coins or tokens and simply waits for them to increase in value. On top of that, despite the belief that there will be frictionless peer-to-peer transactions, purchasing any cryptocurrency requires a crypto exchange like Coinbase or FTX that charge high trading fees and have questionable security.

Coins and NFTs Are a Sideshow

Along with investing in crypto as a speculative asset, investors can use cryptocurrencies to buy in NFT (unique non-fungible tokens that often appear as an image or video). Much like crypto, there are two ways to look at NFTs.

One way is that it is a digital contract that enables the transfer of an asset of some kind from one party directly to another, tracking it publicly, and leaving residual economic value to all intellectual property owners per the contract. A contract could not only be a work of art, but it also could be the title to a home or other asset whose ownership can be traded among agreeing parties.

Another way to look at NFTs is that it is an investment class, much like crypto. In a typical case, it is an art investment where the unique creation can be tracked and ownership verified. Of course, along with art’s appeal, its value is in the eye of the beholder. Whether Martha Stewart’s Christmas collection or Justin Bieber’s Bored Ape NFT is a worthwhile speculative investment is beside the point.

The value proposition is that NFTs could potentially be used to make secure and traceable digital contracts. But, to be clear, these applications remain rare and legal requirements, as well as legal enforcement, make the current process challenging, if not impossible to fully replace. After all, what entity do you turn to if one party violates the contract? This is the role of government and regulatory enforcement. That flies in the face of the spirit of NFT and crypto’s mission — and it is a valuable reality check.

Crypto is Still Not a Currency

Purchased crypto is added to a digital wallet, although it does not give the everyday spending power of cash or credit cards. Sending crypto is expensive and difficult. Both parties need to have compatible wallets (Bitcoin cannot be sent from an Ethereum wallet) and the sender must enter the receiver’s wallet ID, typically more than 20 characters long. Sending crypto can take from a few minutes to hours, depending on network traffic, and there are no security measures to ensure you’ve even reached the correct person. In other words, accidentally put crypto in the wrong wallet and you are out of luck. Not really the characteristics of enticing disruption to traditional wallets.

Fees, Fees, and More (Gas) Fees

It costs money to set up a wallet and more to send crypto or exchange dollars for digital coins. Ethereum has “gas fees” that uses paid to transact and miners collect for adding the transaction to the blockchain. Fees vary by transaction type, speed, security preferences, wallets, and exchange platforms. Fees also fluctuate based on network congestion, the price of the currency, and changes to already fluid company policies.

All this makes costs both high and extremely hard to predict before any transaction. Also, smaller transactions are prohibitively expensive. For example, moving $5.00 worth of Bitcoin on the Coinbase exchange can cost an additional 20% in fees. Transferring about $5.00 worth of Ether from one wallet to another costs almost $4.50 in gas fees.

While companies are working to make this a smoother, low-cost Venmo-like experience, this is not a trivial task. These remain prohibitively expensive and probably another generation away from a technology that could make lower transaction fees plausible.

Venmo (and parent PayPal) have claimed to support crypto, but these platforms simply allow consumers to buy, sell, or trade crypto. Essentially, it is an investment platform, but it is in no way a platform for commerce.

If “the future of money is here” (as Coinbase claims), apparently, that money can’t be used to exchange for goods or services. In other words, while the future may arrive, crypto as money will not be part of it.

Not the kinds of characteristics that make digital coin transfers compelling or disruptive.

Did We Mention Security?

While crypto is a speculative asset with little to no use in the commercial world as an exchange of value, it’s still pretty easy to lose it via fraud or other deceptive practices. There are no financial systems for protection (such as “Know Your Customer” or KYC protocols) or enforcement. As mentioned, peer-to-peer transactions can be conceptually appealing until one needs enforcement or identity verification for financial transactions.

And Volatility…?

Even without fraud or hacking, crypto assets are extremely volatile. Bitcoin’s value has dropped more than 20% in a single day multiple times in the last six months. It is a speculative asset, but it is hardly a store of value or a medium of exchange that can be relied upon for predictable transactions at an agreed-upon value.

In other words, it’s no currency.

Volatility is one factor, concentration is another. Since .01% of Bitcoin holders control almost 30% of the currency it is hardly a well-distributed asset with a robust and liquid market. Cryptocurrencies increase in value as demand for them rises above available supply. Remember, price is just the intersection of demand and supply — there is nothing inherent about the price of anything. Bitcoin and other cryptocurrencies are more easily manipulated by a handful of concentrated owners limiting available supply while creating additional demand. “Fortune favoring the bold” indeed.

A Word from Big Tech and Big Brother

Facebook developed an intriguing nascent cryptocurrency, but regulatory scrutiny and government forces will simply not allow a viable currency to be managed by a private company, such as Facebook, Apple, Google, etc. Even though these companies have more than enough capability to create, manage, and distribute among their billions of users a reasonable medium of exchange.

However, federal agencies will simply not allow this to happen — whether they call it an unlicensed investment product, a platform that facilitates illegal activities, or whatever construct is essential, an independent third-party currency created and managed by an independent technology company acting as a digital central bank, while certainly viable, will simply not be allowed to happen.

The US Federal Reserve will impact the crypto market more than any other single influence, and government regulation will limit and narrow how it can actually be applied.

Regulation has its limits, and there are ways for crypto and other digital assets to be useful, but this is in the distant and unpredictable future.

Instead of an egalitarian utopia, crypto wealth more closely resembles inefficient markets. One can never underestimate the power a handful of people can have in persuading a lot of people to do something that benefits that small group of people. This is to say that current currency markets work quite well and do not need a disruptive form of cryptocurrency or other digital substitutes. But financial and currency markets certainly need enhanced efficiency.

Enter Blockchain

Blockchain makes all the difference.

While speculation, volatility, inefficiency, and limited use are characteristic of crypto, blockchain technology enables transparency and efficiency. Businesses from corporate banking to pharmaceuticals to international shipping are being transformed from old, slow, and even paper-based processes into a digital age.

Efficient distribution, faster transfers, accountability, security, and verifiability are all possible in a variety of applications for many industries globally. None of these require a digital wallet or cryptocurrency.

One example is a blockchain platform offered by Ripple. It uses its own blockchain token as a bridge between currencies that allow hundreds of corporate customers, including large money-center international banks, to reduce operational costs and eliminate manual settlement processes. Rhetoric aside, the reality is that a blockchain platform allows the speed of digitized currencies to improve legacy banking — not replace them.

Another example is within the pharmaceutical supply chain. The pharmaceutical industry is creating a digital system to track prescription medications, prevent counterfeiting, and eliminate notorious non-interoperable systems. A closed, permission-only system offers a secure shared environment for the pharmaceutical industry, enabling a narrow but potent solution for a specific application.

Super lofty ideas get attention and publicity, but they are not real. Narrow, specific applications are where true foundational value is created.

Blockchain is an evolution for businesses, it is not a disruption or a new infrastructure. It will improve user experiences, regulatory clarity, and interoperability. Crypto proved that digital transfers and settlements were possible, it is the blockchain platform that enables this efficiently and securely.

It may be boring and we’re not going to have any stadiums or arenas named after a technology platform, but real change will be driven by a blockchain. The rest is a noisy sideshow.

The crypto industry’s defining pitch is that there is a financial revolution that sounds good too good to be true — because it is. Sorry Matt Damon, but there’s a difference between fortune favoring the bold and stupidity drowning the naïve and irresponsible.

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I am an investor, entrepreneur, writer, and lecturer.

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Nicholas Mitsakos

Nicholas Mitsakos

I am an investor, entrepreneur, writer, and lecturer.

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