The cryptocurrency ecosystem is agog with Bitcoin price so much that events happening around the underlying technology are forced to take a back seat from the eyes of the public. This, however, does not take anything away from the plenty technological inputs going on in the background with Bitcoin, Blockchain and the entire crypto ecosystem.
For instance, due to the amount of its user base, miner base and network size, Bitcoin is a very secure yet isn’t very adaptable to market’s needs. This is where smaller scale cryptocurrency such as PIVX, Litecoin and Dash come in where they are able to innovate and improve its underlying technology utilizing the different block consensus and governance system. This allows adding of new Blockchain technology without guesswork if its users will support the change.
Investors are pouring into Bitcoin
Simply put, such developments allow people to experience new technology earlier while the developers are able to gain new knowledge and data sooner rather than later thus helping the overall growth and development of Bitcoin and the entire cryptocurrencies.
The meteoric rise of Bitcoin’s fiat value is doing what it took geeks more than 20 years to accomplish: convince regular people that there was something worth looking at in this new experiment of creating, storing and safely transact digital value.
Recently, we have even heard about people taking out mortgages to invest in cryptocurrency. A lot of the new market participants only need a few pieces of information to engage –
- Cryptocurrency is continually going up
- People have been making millions with it
In fact, with little knowledge about the underlying technology, exchanges like Coinbase make it easy to get started with their simple and friendly user interface, a limited number of coins supported and the ability to integrate payments for your crypto with familiar western banking tools (i.e. checking accounts and credit cards).
Understanding forks and altcoins
“2017 will be known as the year of the Bitcoin forks.”
Jason Cassidy, president of Blockchain TV
There are dozens of these forks, which bring varying degrees of change and value to the space. If a fork (which is for all intents and purposes a copy) brings little value to the ecosystem, it is often generally disregarded. However, not all forks are created equal.
A very small percentage of these forks come into existence due to real needs in the industry, regardless of whether the entire community shares that view. These forks often give a 1:1 matching to the Bitcoin you hold at the time of the event. If timed correctly, one can make a decent amount of wealth from simply holding a Bitcoin. Understanding what each fork brings and if there is any long-term, inherent value is a question that requires due diligence on behalf of the investor.
On the other hand, the CEO of Netcoins, Michael Vogel believes that most forks end up serving as a gateway into Bitcoin for investors and a fantastic way for new ideas and features to be tested and later implemented in the “mainstream” Bitcoin.
“The irony is that many forks and altcoins have no real substance from a function perspective. And although a lot of alts have had meteoric price increases (even greater than Bitcoin on a percentage basis this year), investors ultimately realize that Bitcoin already has the infrastructure and user base that other coins don’t yet have,” says Vogel.
Therefore, the dominant pattern sees users entering into the ecosystem by converting their fiat currencies first into Bitcoin in most cases via the exchanges. This enables them to purchase the tokens that are usually on sale during the ICOs of these forks, and most often after the ICOs they head right back to Bitcoin whose value has been sustained over time.
Insufficient risk awareness
Blockchain Evangelist, Melvin Petties explains that limited intelligence of the underlying protocol fundamentals, dynamics and nuance make cryptocurrency speculation for everyday folks a more risky endeavor than they may be aware of.
“I doubt if the “new money” in the game can talk at length about inherent risks or present/potential uses cases of these new asset management systems as a supporting argument for the positions they have taken.”
Human beings are wired to try to make sense of new phenomena by processing all the information of the past. Sometimes that can bite in the rear as may assume similarities where there are none. As such, it helps to assimilate any new or additional information in the context to help make more sense of it in comparison to other experiences.
For example, imagine your buddy invites you to “catch some waves” and to your surprise, after two hours on the road you finally pull up to an indoor resort water park where they have one of those cool new “wave pools;” the waves are generated mechanically and are meant to impress, but not utterly frighten well-meaning vacationers. This is not the same as a trip to the beach right. The same can be said of traditional investment vehicles vs. cryptocurrencies and assets. Some key interactions with each are very familiar; however, the context of operating within a purely virtual universe where the data is publicly distributed and infrastructure is community owned is very important to how you choose to engage.
Bitcoin vs. traditional investments
Anyone might want to know some of the machinations and nuances that make HODLing and transacting in this new medium different from the traditional experience that they are used to. Let’s identify some of the ideas that could raise some eyebrows:
- All the data created on the Bitcoin Blockchain is available for anyone to see. That means that someday it will be possible for someone to back-trace any user’s entire transaction history assuming they have enough supporting clues. In fact, this is how law enforcement catches criminals today.
- There is no one to “sue” if transactions are ever posted in any consumer-friendly medium outside of a public protocol’s native ledger (generally incoherent to most people).
- Every hacker on the planet right now has an interesting new dataset to play with and add to their arsenal of tricks for getting information about users.
- Artificial Intelligence and Machine Learning make it possible to make correlations between big data easier than ever before. What used to be “inside information” will possibly be available to anyone who knows how to ask the “right questions” of their queries and pattern recognition algorithms to predict future transaction flows.
The point of these considerations is not to scare people away from using or investing in cryptocurrency, but to better illuminate the context of this new environment and how it differs from our closed network design today. Hopefully, this perspective encourages investors to weigh the pros and cons of each coin they buy and judge the overall utility and value by present and future context.
The importance of the ‘rule-of-law’
One of the important inventions that we take for granted as society is the rule-of-law – a common and agreed understanding/ social construct for the proper/expected behaviors and consequences for various interactions between humans and the things they make. To be perfectly clear, we are just scratching the surface on how to do this in a coherent, dynamic, and flexible way as it relates to globally operated asset management systems. Rules for a Flat World dives into some of the challenges and opportunities we face in getting there, but take a look at some of the cool rules we have created regarding data privacy and the stewardship of information managed by private institutions today:
- Right to Forget – If I cut ties with a company, they don’t get to keep my data
- FDIC – If someone robs the bank, my money is insured up to an established amount
- Identity Management – If someone steals my personal information, I can put a flag on my records and be issued a new card to protect against future theft
None of these constructs have a way of being expressed just yet, but folks are working on the problem and some really fun and interesting business models will be built to fill the gap. Cryptocurrencies are here to stay and we need a new governance mechanism to help us cope with the inevitable mistakes and hacks that will occur.
Types of cryptocurrencies
Most cryptocurrency platforms and projects could fall into one of two buckets: currency and non-currency. Of course some protocols like Ethereum straddle the fence, but in general this rule is pretty sound.
Humans are always doing work on something, whether that’s serving each other or entertaining ourselves. At the end of the day, lots of developers and entrepreneurs decided to go the “non-currency” direction as they explore Blockchain technology for other purposes. On the currency side, you have projects that form out of dissent with existing implementations (known commonly as forks) or projects that are built from the ground up to address shortcomings they discovered in predecessors.
Bitcoin is and will continue to be the leading cryptocurrency but alternative cryptocurrencies through continuous innovation fuel the growth of the cryptocurrency ecosystem as a whole. For example, the PIVX combined proof of stake with the zerocoin protocol provides a case study for Bitcoins development and also opens up other avenues of entry for users who may want more privacy. Other innovations that have been forked off the Bitcoin protocol with the specific offerings to the ecosystem include Litecoin, Dash, Bitcoin Cash, Bitcoin Classic, among others.
A classic example
Bitcoin vs. Ethereum is a classic study of currency vs. non-currency. Just look at how they each describe themselves:
- Bitcoin: “Bitcoin is an innovative payment network and a new kind of money.”
- Ethereum: “Ethereum is a decentralized platform that runs smart contracts:…”
Again, the point is to highlight how better information and the idea of context can go a long way to shape decisions about investing. Everyone who endeavors to create and support a cryptocurrency or Blockchain project is effectively raising the collective consciousness of the community. Therefore, users and investors are expected to give great feedback through their actions by evaluating them more on their merits.