De-Homogenizing Cryptocurrencies

For the past month, Bitcoin has reached a new all time high every week. On December 11, Bitcoin reached its all time high of over $17,000 per coin. Bitcoin witnessed an impressive 1600% increase in value during the past year. The cryptocurrency market increased from $18 billion in January 2017 to over $475 billion in December. Bitcoin is going through the process of monetization and the cryptocurrency market is being financialized. Cryptocurrency credit cards, automatic teller machines, exchanges, over-the-counter markets, bank accounts, insurance, derivatives, and trading algorithms are available. CBOE Bitcoin futures launched last Sunday, the CME is launching this Sunday, and NASDAQ is expected to join in early 2018. However, the prices are rising too far too fast. Every asset class has ups and downs. If cryptocurrencies are really a new asset class, they must come down at some point.

The Role of the Overall Economy

As discussed in this report, the prices in many asset classes are at their highest levels and the volatility of equities is on a record low. However, the fundamental problems that caused the 2008 crises have not been solved.

Ronald Stöferle has noted, “although financial markets seem to be all right at the moment, we consider the current situation to be an ‘uneasy calm.’” The financial system continues to be fragile, i.e. because of over-indebtedness, which is a result of the monetary policy interventions in recent years. The value of cryptocurrencies is highly dependent on the state of the global financial and monetary system.

Chart 1: Daily Price of Bitcoin and Gold from 2010 – 2017

 Sources: Incrementum AG, Quandl.com

Furthermore, the Bitcoin network relies on the Internet and on cryptographic encryption techniques that have only existed for a few decades. In addition to technological risks, Bitcoin has technological limits as well. The Bitcoin network has reached its full capacity. The network can process approximately 7 transactions per second or 350,000 per day. To ensure a transaction is confirmed quickly, the sender must pay a high transaction fee to miners. A transaction with a high fee is given priority on the network because miners form mining pools and compete against each other to earn transaction fees and freshly minted bitcoins. Due to the increasing demand to send Bitcoin transactions and the limited supply of space in each block, transaction costs increased from 0.40 Swiss francs (CHF) in early 2017 to over 8 CHF in December. Transaction confirmation times also increased. Originally, transactions took 10 minutes to be confirmed on the network. Now transactions take several hours to be confirmed. Unsatisfied demand for a global payment system is overflowing into alternative cryptocurrencies like IOTA, Dash, and Ethereum. Bitcoin hard forks such as Classic, Gold, and the cancelled Segwit2X also garnered attention by investors captured by the Hayekian dream of privately competing currencies.