When a single Tweet could mean the difference between a bull run and a fatal crash, you know you’re gambling on dangerously shaky ground.
When bandwagons drive a $300 billion market
The past few years, the attention garnered by cryptocurrencies has led people rushing to online exchanges hoarding whatever coin they hear about. The cryptocurrency industry is now at a $300 billion market cap, with predictions it will hit $2 trillion next year. To this day, more and more newcomers are feeding more money into the industry in hopes of getting in on the get-rich-quick hype. As the cryptocurrency boom marches on, a lot are wondering when the bubble will burst.
Yes. The bubble will burst. While the technology behind cryptocurrencies is one of the biggest technological disruptions in history, that doesn’t negate the fact that cryptocurrency values are bubbling. It’s just blind faith to say “it will never burst.” In fact, it is idiotic. Do you really believe the price will rise forever?
In the case of BTC which is now soaring over $16,000, if one were to assume that it will keep rising, it will end up in a point where it is unaffordable even to the tiniest transactable fraction, the satoshi (100 millionth of a bitcoin). If it comes to the point where the tiniest unit of bitcoin becomes inaccessible to most of the population, then Bitcoin has failed. To understand this, first you must understand why Bitcoin was created in the first place.
Ironically, the core purpose of the blockchain seems lost to the majority despite having dumped a huge amount of their savings into the cryptocurrency. A lot of enthusiasts tend to forget (or are oblivious of from the very beginning) that cryptocurrencies have promised use cases. Bitcoin, for one, was made to eliminate third party intervention—along with the costs and the waiting time associated with it. It was made to be a fast and cheap platform for secure transactions, which in its current form, the legacy chain (BTC) is absolutely not. In fact, Bitcoin Cash (BCH) was born out of the infamous scaling conundrum as an attempt to preserve the values and principles outlined by the Satoshi white paper. If Bitcoin becomes too expensive and too slow, then it has failed the financial inclusion advocacy it pledged to afford. It shuns the unbanked, the people who cannot afford traditional banking fees, those who fall under micro-economics and are excluded from trade due to lack of access to basic financial services. In short, it shuns the people it swore to serve while only benefiting those who can afford its current fees—an utter contradiction to its original vision.
So then why are values skyrocketing despite the broken system? Here, we outline the current situation and the human tendencies that propel it. We also analyze how this patterns apply to blockchains, particularly in the case of the public and open blockchain—and undoubtedly the most politically supercharged, Bitcoin.
The internet-powered bandwagon
One of the core values of Bitcoin is that the system is resistant to corruption by any central authority, as it is decentralized. By enforcing a mechanism that requires consensus by miners, the blockchain has a protective barrier from manipulation by individuals or groups that aim to push their own self-serving agenda. But not completely.
Much like government politics, winning by gaining majority support is a real and crucial thing in blockchain wars. To bypass this security mechanism, a maligning or self-serving group needs to convince the mass population. But here’s how current technology works to their advantage: the digital age enables rapid spread of information—whether legitimate or fake. Bandwagoning is a historically powerful propaganda device, and the internet enables such campaigns on a global scale, at dangerously rapid speeds.
Bandwagoning is consensus by ignorance.
Agreeing to the majority simply because they are the majority means you are giving your blind consent in terms of protocol changes. Whether this will propel the system into success or catapult it into a catastrophic implosion is not determined by the number of people who blindly nodded their heads.
It’s hard not to doubt yourself when your research and analysis points to a direction that is contradictory to mainstream stance. But this is the exact same thing that could have prevented the market crash of 2008. If people analysed things objectively, independent of groupthink and widely echoed sales pitches, more people may have realized that the numbers weren’t adding up and bailed themselves out sooner instead of just believing the sales pitches because they conveniently matched what they wanted to hear.
A critical, well-informed, and vigilant public is the best defense against corruption and manipulation.
But whether we like it or not, unless Bitcoin lives up to its promises, the critics are right: it is a Ponzi. In fact, this applies to any cryptocurrency. Unless the promises made in the roadmap are met, then they were a pump and dump-Ponzi hybrid that only gained market value out of FOMO and the false promises of getting rich quick. You may argue that the value of the token remains high due to this demand, but when it loses its utility, it only takes a certain percentage of HODLers to decide to sell off their tokens before a domino effect possibly ensues, leaving those who were last to ditch their coins to suffer the biggest losses. In this aspect, it does seem like a Ponzi, doesn’t it?
Is the system really broken?
To make an easier, logical picture, let’s create an analogy within a context more familiar to the common people. Here’s what’s happening: the blockchain itself has a huge backlog of transactions (over 107,000 as of last check) and is charging higher and higher fees as transactions get ever so slower. Meanwhile, HODLers are happy because the value of the BTC they’re HODLing is shooting up, regardless of the sluggish and expensive service the users are getting.
In traditional business, this is the equivalent of a company that keeps investors happy even though consumers are not. This is not going to end well, especially with an entire battalion of cryptocurrencies now competing for mass adoption.
For an even easier, physical world translation, here’s a more relatable analogy:
If SegWit1x (BTC) is an internet service provider, then:
Users (those who transact in BTC) = customers/consumers of the service
BTC HODLers = shareholders, investors
If SegWit1x were an internet service provider, then in its current situation, it is the investors (HODLers) who are rejoicing as their shares keep shooting up, regardless of the reason. Meanwhile, the consumers that the company swore to serve are suffering a sluggish service while paying premium fees.
Yet, despite the obviously broken system, people jump in, buying more stocks of the company and subsequently feeding more and more money into the system and driving up stock values. This benefits the stockholders, particularly those who invested first.
But put yourself in the consumer’s place. We’ve all probably been there, paying a premium for a service that isn’t delivered to us. It’s frustrating. In such a case, in any type of service, consumers have a logical tendency to find better alternatives. And with several cryptocurrencies in the race, and with more popping up as we speak, now is not a time for complacency.
What holders neglect to recognize is that their holdings will collapse if they continue to piss off two of the major components of the Bitcoin community: the miners and the users. If the system is expensive and slow, users will stop using the system for value transfer. You may ask, “but who cares, so long as my BTC is shooting through the roof at over $16,000 and still rising?” Well, you should. And here’s why.
Theoretically, if all the regular users migrate to a more efficient value transfer service, and all that’s left in the original chain are the HODLers, and if all (or most) transactions are put to a halt because no one wants to let go of their bitcoins (again, this is a theoretical scenario), that means miners will be idle. If they are idle, they are not earning fees. And guess what they’re going to do in that scenario? Yep. They’re going to mine a different blockchain. Miners can switch to a different blockchain for different reasons—mostly due to a lack of profitability such as when the difficulty is too high. After all, they’ve invested money into mining hardware specifically to make money, not to sit and wait around for somebody or something to move. For those who are not aware of it, miners are the bloodline of any blockchain. If a majority of miners abandon a chain in favor of a more profitable alternative, this could lead to what is referred to as the chain death spiral (CDS). And the legacy chain has come dangerously close to and can still be brought to this annihilation by Bitcoin Cash.
So while you and your pals are “shooting to the Moon,” the system could very well be deteriorating. Yes, HODLers will still profit from the price shoot—that is, if they pull out before the impending crash. “Shooting to the Moon” in terms of trading value does not mean Bitcoin has succeeded. It just means HODLers got richer.
Shooting to the Moon means jack shit in terms of Bitcoin as a system.
Unfortunately, when someone tries to argue about Bitcoin as a system and defend or oppose protocol proposals, but then says something like “going to the Moon,” it’s hard to take them seriously. It automatically defeats their argument when it looks like all they can see is trading value. The only time “going to the Moon” makes sense in the context of Bitcoin as a system independent of its speculative value is literally being able to use the system while physically being on the Moon. And this isn’t metaphoric. Theoretically, it can happen.
It’s common to see people posting motivational speeches on HODLing specific cryptocurrencies. Instead of making an objective assessment of its value and understanding proposed protocols to be able to contribute to a constructive discourse, we are simply enticing others not to sell them off primarily because when others do, the value we hold drops.
If “investors” didn’t care about the underlying protocol and rules behind a blockchain system and all they wanted was quick, exponential gains, then what they are looking for is nothing but a Ponzi. It seems utterly unfair, however, to the people that Bitcoin vowed to serve that most of the community only ever talks about profiting from hoarding and holding the coins—which were meant to be circulated in the first place.
HODLing is not forever
BTC, BCH, ETH, and similar tokens created as a value of exchange were not primarily meant to be taken as investment products. Sure, they can be used as a store of value. But above all else, they were meant to flow.
Of course that doesn’t mean people can’t bet on them, much like foreign exchange traders bet on different fiat currencies. But ultimately, they were intended for a different primary purpose. They were not meant to be hoarded. While hoarding them means one is able to profit from contributing to the scarcity, this will not go on forever. Here’s why.
Imagine a country where nobody wants to spend their fiat because they think it will rise in value and they hope to profit through flipping it in the foreign exchange market after a long while. For a little while, there will be a standoff and commerce will stand still. These bills will rise in value—but only for a while. What happens next is that people will start trading using other possible financial instruments, and this will go on until their fiat starts to lose value—contrary to what the hoarders wanted to happen. Similarly, altcoins emerged to serve, as its name suggests, as alternatives to Bitcoin, and to address certain necessities and inadequacies that Bitcoin could not meet at the time.
Eventually, a choice will have to be made: either start circulating the goddamn bills (or coins) as that’s what they were intended for, or let it collapse and start sticking those bills in a photo album for display on the coffee table while everybody else uses alternatives. When everybody wants to hold, the system fails as a currency of exchange.
Additionally, when a generation hoards something, not only are they limiting access to the next generation by supply. They are also hiking up prices unnecessarily, meaning whatever is left to the younger people have already been jacked up in price by the time they need them. In fact, this is what’s happening now in Britain where house hoarding has turned into a crisis, keeping properties unaffordable from the younger generations.
Modern day shoeshine boys
Despite the entitlement HODLers award themselves in the cryptocurrency race, their quick and high gains end when the system gains stability. Ultimately, the success or failure of a blockchain is not defined by its token’s trading value. On the other hand, when a blockchain implodes, its token value collapses with it. But how do we know when to bail out?
“You know it’s time to sell when shoeshine boys give you stock tips. This bull market is over.”- Joseph Kennedy, 1928—he sold his entire portfolio right before the stock market crash of 1929.
Nobody shines shoes on the streets anymore. So where do we eavesdrop to find out when to nope the hell out of the market?
When celebrities start promoting ICOs, one can’t help but shake his head, especially when the celebrities in question aren’t exactly known for their intelligence throughout the years. Can we say that the bubble will burst when Paris Hilton tells you to invest in it?
The problem with bubbles is that no one wants to budge in fear of missing out. We don’t want to have to do anything, we don’t want to have to pull out, and most importantly, we don’t want to be wrong. But that doesn’t mean we can’t be. Yet we’d rather not do anything than face the fact that we have to pull out before it’s too late. It’s just blind faith from here on: “I already dumped my money in there and don’t want to be wrong.” So we stick to the narrative that is more convenient to our current state despite its potential long-term dangers.
In about five years or so, this cryptocurrency boom will end. Things will simmer down and when the dust has settled, only a few cryptocurrencies will be left standing. There is an impending mass extinction event for cryptocurrencies. Why? The world does not need 1,500 cryptocurrencies to fulfill its needs. All of these coins in existence are in competition one way or another—with the end goal of becoming the “universal” or at least dominant, global, digital medium of exchange.
Bitcoin apocalypse: a race to outbribe miners
Although blockchains are immune to a lot of things, it’s vulnerable to imploding in on itself.
While campaigns and bandwagon played a huge role and was largely responsible in spiking up the BTC you hold today, the dangerous thing is it can also spell its downfall. When the community relies on what’s “trending,” it’s hard not to see how bandwagons can also work against a blockchain.
In an article on TechCrunch, programmer/writer John Biggs compared the current Bitcoin traders to “the jolly colonists selling stocks under buttonwood tree,” driving up what could very well be the foundations of trading in this new and untested arena. But at the same time, noting that this horde is very unstable:
“This small but influential market is prone to panics based on a single tweet and users work together to at least bolster themselves with cries of ‘HODL!’”
As we’ve seen very recently, it’s very easy for big names to affect or even deliberately “manipulate” trading values, with some suggesting that market manipulation is currently at play.
But in the same way that a single positive Tweet from a notable personality or institution can drive values up, a tirade, such as that of Jamie Dimon’s, can bring it down just as fast. This could be temporary, however, and trading values could recover. But should news spread about an impending collapse, a blockchain and its token can fall as quickly as they rose especially if there is no solid service to back its value. Just one nudge in rumour could cause a domino effect, and a massive panic selloff can ensue. (Btw, 40% of the BTC’s in existence today are in the hands of only 1,000 individuals).
So in such a scenario, what happens to a blockchain whose system just doesn’t work?
Without a working system behind the cryptocurrency, its trading value has no ground to stand on. It only takes a few to sell off and potentially trigger a fatal mass hysteria—a dumping stampede.
It becomes a simple matter of who gets out first—the last to cash out loses. When a panic selloff happens, guess who loses the race in bailing their funds out? With the replace-by-fee (RBF) mechanism still in force in the legacy chain, guess who loses the race to bail their funds out? Yep—those with more money to offer miners will have their transactions confirmed first, leaving those with less bidding money holding the bag as the BTC price plummets. By the time these last HODLers finally get their turn to cash out, the value of their coins would have already been sucked dry by those who were first to dump.
“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”
― Charles Mackay, Extraordinary Popular Delusions & the Madness of Crowds, 1841.
For analogy, imagine if the Earth was about to be obliterated by a comet. Hypothetically, let’s assume (and hope) that we already have a backup planet to inhabit by that time—say, Mars. But the ticket to salvation is ordered based on who has more money to offer. This bidding goes on in the nick of time as the comet draws closer—those who bid the highest make it out alive and those who can offer the least—well, we’ll launch Facebook prayers to save you.
This is how things are going to go down when things get really ugly. Everyone will be begging miners to bail them out, except in this scenario the beggars are actually the ones offering money in hopes that everybody else is offering less than they are. If that time comes, HODLers will be trying to outbribe the miners, bidding—begging for dear life. #BFDL to trend on Twitter?