A Bitcoin Future

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We are living in the future. The most exciting time in the history of cryptocurrency is certainly upon us, as prices swell unhesitatingly upward and mainstream attention continues to be firmly fixed on bitcoin. The examination by outside observers of the bitcoin ecosystem continues to dredge up unwanted details, along with positive technology and price notes. For all that bitcoin has done right, there are warning signs that a bubble may not be the biggest concern for bitcoin believers. A price correction is almost definite, but other dangers could do permanent harm to bitcoin and the cryptocurrency ecosystem: North Korea, Tether, and volatility.

North Korea as a nation is not a candidate for being technologically innovative. The Hermit Kingdom, which is obsessively pursuing advanced missile technology with which it can threaten the United States, intersects with bitcoin in a highly specific way: crime. Simply put, cybercrime is a natural way for a nation under physical siege to acquire the cash it needs without risking any physical assets, like people or goods. Recent hacks of the banking system and the spread of ransomware point toward North Korean recognition of the value of cyber vulnerabilities. The inclusion of bitcoin-related exploits should cause concern for bitcoin believers. If North Korea continues to pursue nuclearization and attempts to derive any significant funding via the anonymity and easy movement of cryptocurrency, especially bitcoin, the United States may feel compelled to act in the interest of national security. Depending on how events play out, regulation could cripple cryptocurrency in the Western world.

Tether is a ticking time bomb. Alliterative fun aside, the prospect of several key cryptocurrency exchanges being propped up by assets that don’t exactly exist, on the back of a Bitfinex hack that ended up shaving off user’s assets through a dilution process somehow tolerated by users and regulators, and the recent removal of a warrant canary from a Bitfinex employee, conditions are set for a dramatic end to Bitfinex and Tethers. From the start, Tether was an institution set up to fail. Pegging a made up commodity to the dollar, backed with a number of shell corporations and tenuous Hawala-style banking reserves, was always going to attract attention from governments and their regulators. My best guess is that the owners of Bitfinex recognized their insolvency and decided to engage the Tether concept as the least worst option. It is unlikely to last as a viable option, and may take bitcoin down with it. While Tether certainly won’t kill bitcoin, it can do significant damage, bringing the price back down to earth. The Tether debacle will also confirm to the mainstream that bitcoin is linked to criminals, and should be treated with caution.

The last bogey man in this hydra is volatility. If you’ve been around bitcoin for a long time you are no stranger to volatility. Many bitcoin believers have adopted a gatekeeper approach to volatility, “remember the LAST crash?”, using terms like weak hands and HODL to express a culture that tolerates volatility for the perceived opportunity it creates. The price rise is good because there are no assets that are priced in bitcoin. Consider the mainstream economy – car loans, student loans, mortgages, and credit in general is denominated in mainstream currencies. If a person borrowed a car loan in bitcoin they’d now owe around 2,000% more in USD. That is simply unsustainable as a unit of account, or anything other than a speculative asset really. Unless bitcoin can level out its value swings, it will remain a niche investment for anti-government techno-activists and dark market denizens.

The status quo today, as of writing this, is bitcoin is nearly $20,000. That’s good! price is up. And the real value of bitcoin continues to be as a speculative asset – which it is excelling at. But the downturn is approaching, it is only a matter of time before the bubble pops. Optimistically, no scandal or wide reaching scam will cause this downturn. Pessimistically, or perhaps realistically given the history here, a major event will tip the scales and cause huge losses for bitcoin users. My money is on Bitfinex going the way of Cryptsy and Mt Gox, and taking a huge slice of the market with it. Where there is smoke there is fire. Where there is fire, there is another unregulated, illiquid order book that has never been audited and is held outside U.S. extradition by a plethora of shell firms.

Image credit – Sirius  (CC BY 3.0)