Bitcoin And Other Cryptocurrencies Are Victims Of Their Own Success

Posted: Mar 09, 2018 10:14 AM
Bitcoin And Other Cryptocurrencies Are Victims Of Their Own Success

An Overview of Cryptocurrency  

Cryptocurrency growth has been exploding over the past year. From January 2017 to January 2018, the total market capitalization of crypto grew from $17.68 billion to over $610 billion – a growth rate of over 3,300%. This tremendous surge in capital is due to two factors. Firstly, cryptocurrency token prices rose across the board, making existing crypto more valuable and secondly, money has been pouring into new cryptocurrencies through their Initial Coin Offerings, or ICO’s. 

It’s important to understand the contribution to market cap growth from both angles. When looking at the two largest cryptocurrencies available: Bitcoin and Ethereum, their token prices grew 964% and 10,369% respectively. What’s interesting to note is that Bitcoin’s growth is significantly below average when compared to the total crypto market growth. While new money is flowing into Bitcoin, it has been widely recognized in the space as an older and a more inferior technology and so. a lot of capital is flowing into so-called alternative cryptocurrencies such as Ethereum or Tangle, which have been built and iterated to solve the issues associated with Bitcoin. 

In 2017, ICO’s raised a total of $5.6 billion. While this number may seem minuscule in comparison with the total growth of crypto, it’s important to keep track of how cryptocurrencies performed after their ICO. According to the venture capital firm Mangrove Capital Partners, a blind investment in every ICO offered would have netted an average return of 1,320% - meaning that the total amount of the market cap growth in relation to ICO’s is more in the range of around $80 billion. 

When looking at the numbers, it’s clear that the vast majority of cryptocurrency’s growth is linked to the increased value placed on existing cryptocurrencies – such as Ethereum or Tangle. While the influx of capital associated with ICO’s seems high, it contributes to under 14% of total market value growth over the past year. At first blush, the exceptional growth in the market seems to be a good thing, but when digging deeper, there are clear signs that infrastructure growth failed to keep up with the crypto gold rush. 

Growing Pains

The surge of cryptocurrency is due largely to greed. Capital from unsophisticated investors has poured into the space, pushing the prices of existing cryptos sky high and prompting a wave of ICO’s. While the total market cap of cryptos has exploded, the infrastructure has degraded with each subsequent ICO. The cryptocurrency industry is incredibly fragmented

There are thousands of different cryptocurrencies that are publicly traded today, but liquidity between many of these small-cap cryptos is poor. What this means is that a tremendous amount of capital is trapped in these small-cap cryptos because navigating in and out of them is much more complicated than navigating in and out of Bitcoin or Ethereum. The intention behind creating cryptocurrency was not to introduce a new alternative investment. Rather, the first iteration (Bitcoin) was created as a means of pushing towards a future of decentralization. The strength of crypto’s blockchain technology is the foolproof transaction that’s guaranteed and irreversible. This means that using cryptocurrency instead of traditional cash will effectively bypass the middleman companies that hold enormous market power. By eliminating these companies in the transaction, cryptocurrency offers a cheaper, more efficient transaction solution for consumers.

Achieving “True Currency” Status

However, there are significant hurdles when trying to use crypto in place of cash. The fragmentation in the industry means that each crypto can have different criteria that need to be met in order for vendors to accept the token. The huge upfront cost of accepting crypto means that many businesses will likely never go through the effort to accept a single crypto, much less hundreds. This means that a huge portion of cryptocurrency’s value is locked away behind illiquid small-cap cryptocurrencies that will likely never be widely used.

Fortunately, there are startups that are looking to unite different cryptocurrencies by creating a means of easily swapping between the different currencies. One startup called, Fusion looks to bridge all blockchains, including off-chain assets, together on a single platform. The company’s vision has been described as a “blockchain for blockchains,” and it looks to create an inclusive platform that leverages smart contracts to create a highly-connected ecosystem

What this means is that Fusion introduces a solution to the industry fragmentation. By allowing various cryptocurrencies to be swapped for each other and for other assets, such as currency, Fusion will gradually lead to a more liquid market. Currently, Fusion is going to be the only platform that supports off-chain data support, multiple triggering mechanisms, and parallel computing – meaning it’s more flexible and more powerful than any of its competitors. 

By creating the infrastructure that allows for exchanges between all kinds of assets without a centralized source near-instantaneously for low fees, Fusion represents a step towards a future where cryptocurrency can be used much like traditional currency, where only a single set of criteria need to be matched in order to access the entire cryptocurrency market. This makes it possible for small-cap cryptocurrencies to be easily exchanged with Bitcoin, Ethereum, or even U.S. dollars. 

A More Inclusive Future

One of the main weaknesses of cryptocurrencies as a whole is fragmentation. Whether it’s the money spread across thousands of tokens or huge differences in technologic processes between different cryptos. In order for cryptocurrency to have widespread use, it’s important to ensure that crypto as a whole is easily accessible and being forced to sift through the processes of each new token makes this nearly impossible.  As weaknesses within cryptocurrency are slowly being patched and solves, a future with digital currency seems more and more possible.