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Bitcon has been rocketing higher lately, as it gains widespread official approval and more people figure out how to use it.
 
As the first of its kind to emerge, Bitcoin has become synonymous
with “cryptocurrency”. But lately it’s been joined by a lot of others –
which together now account for more than half of the cryptocurrency
ecosystem:
(Forbes) – For the first time, Bitcoin’s market capitalization as a
percentage of all cryptocurrencies has dropped to below 50%.
It is a symbolic turning point for the first cryptocurrency, which
for a long time accounted for more than 90% of the value of all
blockchain-based assets combined, particularly through a period when
so-called alt-coins that were only minor tweaks to bitcoin proliferated.
Its market capitalization then comprised over 80% of all
cryptocurrencies for years, a range that held true until two months ago
when it dipped below 80% and not only did not recover but did a quick
dive straight down.
Several factors are driving the drop from its status as the clear leader.
1. Bitcoin’s development is stalled.
A more than two-year-long saga has left progress on its network stymied.
With the various factions unable to compromise and no clear method for
moving beyond the impasse, the network has been stuck staring down the
same question of how to expand the network to accommodate more
transactions that it first faced in early 2015. Meanwhile, as no
decisions get made, transaction fees have risen from about 11 cents a
year ago to $1.70 now, and the time to confirm a transaction has nearly
doubled to almost 20 minutes. Because the community has been unable to
resolve its divisions, some of the technological advances people were
excited to see on bitcoin will be adopted on other tokens, such as
Litecoin, which could emerge as the payment token, while bitcoin evolves
more into a digital gold, because its software will only ever release
21 million units.
2. Ethereum continues to grow.
Ethereum has, for a while, been the cryptocurrency with the
second-largest market cap, but in recent months, its greater rise has
further has eroded bitcoin’s dominance. While throughout 2016, its share
of the market cap of all cryptocurrencies was in the single digits, it
has, in the last couple months, inched closer to 20% as its price has
risen from $8 in early January toward $100 in recent days.
3. New ICOs add value to the crypto space every day.
Third, a wave of new cryptocurrency launches in crowdsales called
initial coin offerings has so far raised $380 million for new networks
that have functions beyond just currency. For instance, a few new
storage coins aim to facilitate payments between computers needing more
storage space and computers with excess drive space to offer in networks
like Filecoin, Sia and Storj. Meanwhile, Golem Network Tokens are used
for payments between computers that need extra computing power to, say,
train a machine-learning algorithm, and computers that have spare GPU
and CPU cycles to offer while its owner sleeps. So many new tokens with
uses different from bitcoin’s are bound enlarge the pie, but still
narrow its dominance.
4. Speculation is driving up the value of all tokens.
Because the ICOs are proving to be such an easy way to crowd fund, they
are also being used just as that — as an easy way to raise money — for
projects for which tokens don’t even particularly make sense, as well as
scams. Speculation is also running rampant as investors who don’t
understand the technology or what makes a token valuable snatch up both
promising as well as poorly conceived tokens. One project that raised
eyebrows recently was a crowdsale of Gnosis tokens, which, because of
the way the ICO was designed, left Gnosis, which is only in beta and
doesn’t yet have a product to offer consumers, with a valuation of $300
million right after its ICO. Now, speculative trading has now multiplied
its valuation to $1.2 billion.
5. Ripple is seeing a big spike.
While the other trends have been driving bitcoin’s share of all
cryptocurrency market caps down broadly, what appears to have finally
tipped bitcoin below the 50% mark is the 24% surge of XRP, the token of
the Ripple network, in the last 24 hours. Since Chinese regulators began
enforcing basic know-your-customer, anti-money-laundering procedures
earlier this year, Japan has overtaken China as the country with the
highest crypto trading volume. XRP is popular in Japan, and one writer
surmises it is because of the work Ripple does in Japan, such as through
its joint venture, SBI Ripple Asia, with SBI Holdings.
7. Tezos is about to launch.
Okay, so this last one might not have pushed bitcoin below the 50%
threshold, but it is likely to help keep it below that threshold. Tezos
may be one of the most anticipated ICOs, about to launch in June and
stay open for two weeks. The code is written in OCaml, a language that
has the ability to formally verify smart contracts to ensure that they
execute as the creators intended them to. Tezos is also generating
excitement because the software has, built into it, a mechanism for
resolving issues such as the scaling debate in bitcoin. Therefore, even
if bitcoin exceeds 50% market share for now, it will likely again fall
under that threshold once the Tezos ICO begins.
Those increasingly common predictions of bitcoin going to $20,000 or
more are premised on the fact that its algorithm limits its supply.
There are many more ounces of gold, for instance, than there are
bitcoins, which implies that Bitcoin should ultimately trade at a
(possibly substantial) multiple of gold’s price.
But if Bitcoin is just one of many cryptocurrencies in circulation,
it makes sense to consider their aggregate supply – and the growth rate
of that supply. Which is where it gets scary.
The number of new “ICOs” now in the pipeline implies that barriers to
entry in the cryptocurrency space are laughably low. Apparently anyone
with relevant coding skills can create and launch another Ethereum or
Litecoin.
With both demand and supply soaring, it’s possible that
cryptocurrencies will go through a 1990s tech stock-style boom/crash
cycle in which their usage rises but their average price falls.
This is a brand-new concept (it’s not clear, for instance, how
governments will react to bitcoin being the ransomware currency of
choice), which means there’s no way to predict what share of the global
currency market cryptocurrencies will eventually capture or which
cryptocurrencies will end up dominating. So there’s no way at the moment
to trace out a base case trend for bitcoin’s future value.
But low barriers to entry do create some very obvious risks.
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John Rubino runs the popular financial website DollarCollapse.com. He is co-author, with GoldMoney’s James Turk, of The Money Bubble (DollarCollapse Press, 2014) and The Collapse of the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street(Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He currently writes for CFA Magazine.
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The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.
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