Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Cryptocurrencies Go Crazy

The Cryptocurrency market is going crazy. Bitcoin (BTC) has hit its highest price in years.

Mr. Market paid $17,651.27 for a Bitcoin on 18 November 2020. That was the highest price since the Bitcoin bubble in 2018, CoinMarketCap estimates.

Interestingly, Bitcoin’s 18 November 2020 Market Capitalization of $327.382 billion is close to the 18 December 2018 Market Cap of $317.432 billion. Mr. Market paid $18,951.46 for a Bitcoin (BTC) on that day.

I think these prices are insane because Bitcoin is clunky and old technology that could be obsolete. Stupidly, speculators are paying big money for Bitcoin and ignoring better cryptocurrencies that use the latest technology.

Bitcoin Beats Better Cryptocurrencies

For example, Mr. Market paid $2.59 for EOS (EOS) a crypto that could have a solution to the Blockchain Scalability Problem on 18 November 2020. Mr. Market gave EOS a $2.433 billion Market Capitalization on 18 November 2020.

Similarly, Mr. Market paid $472.89 for Ethereum (ETH) which they base on the most widely used Blockchain technology. For instance, Bitrates claims that they created 100,000, new Ethereum accounts a day in 2017.

Moreover, Ethereum is faster than the slow Bitcoin (BTC). In 2017, they could create a new Ethereum block every 14 second, Bitrate claims. In contrast, it took 10 minutes to create a Bitcoin block.

Additionally, the Ethereum Request for Comment (ERC20) technology in Ethereum makes it easy to create new digital currencies or tokens. In fact, they create most cryptocurrencies with ERC20. Well-known ERC-20 cryptocurrencies include; Maker (MKR), the Basic Attention Token (BAT), Augur (REP), Tether (USDT), and OmiseGO (OMG).

Investopedia estimates there were over 200,000 ERC-20 tokens on Ethereum’s network in October 2019. You can convert those tokens into Ethereum and other ERC20 tokens, which makes Ethereum more flexible than Bitcoin. In contrast, it is difficult to convert Bitcoin into other cryptocurrencies or fiat currencies.

The Big Problem with Bitcoin (BTC)

This gives rise to the Great Blockchain Scalability problem. Essentially, scalability is the ability to expand a digital platform to enormous sizes to serve a mass market.

For example, Amazon (AMZN) is scalable enough to offer an inventory of 12 items from 350 million Marketplace sellers. That enabled Amazon to control 45% of US ecommerce spending in 2019, recpricerexpress claims. Amazon can serve all those people because it can scale.

Bitcoin is not scalable because of its slow speed. Remember, it took 10 minutes to create a Bitcoin block in 2018. Bitcoin is slow because of all the encryption and security features.

A good metaphor for Bitcoin is driving a battle tank to work. You will be safe from almost any accident in your M-1 or T-14 Armata. However, your tank will be slow and incapable of taking many routes. You won’t be able to drive the tank on the freeway, so it could take two or three hours to make a 20 minute commute.

People who use Bitcoin are like people who drive tanks. They sacrifice scalabilty, speed, usability, and convertibility for safety and security. Unfortunately like a tank, a Bitcoin is so heavily armored it is useless outside battle.

When you use Bitcoin, your money is safe but it is hard to use because of its slow speed. On 17 November 2020, Bitcoin was only processing 5.317 transactions per second (TPS), estimates. Consequently, some observers think it takes an hour or longer to transfer a Bitcoin.

Why Cryptocurrencies Need Scalability

Consequently, a Bitcoin payment app could crash if it tries to process over six transactions a second. Therefore, a massive-multiplayer online game (MMOG) with tens of thousands of players could not accept Bitcoin payments.

To explain, the players will have to wait to pay for weapons or more play. I cannot imagine the average gamer waiting several hours to buy weapons or more play. The players will have to pay ahead of time or use another payment medium.

That could include other less-encrypted cryptocurrencies such as EOS (EOS). The EOS Network Monitor estimates EOS’s maximum transaction rate at 3,996 TPS.

The Cryptocurrency Market is insane

Thus, speculators paid a $17,651.27 Coin Price for a “currency” that cannot people cannot use for most payment transactions on 18 November 2020.

I think Bitcoin’s Coin Price offers three important revelations about the cryptocurrency market.

First, most cryptocurrency investors and speculators do not understand what cryptocurrency is or how it works. In particular, these people know little or nothing of the technology behind it.

Second, people are not buying Bitcoin (BTC) as a currency or a payment medium. Instead, they are looking for a safe investment similar to gold. To elaborate, people want something safe from a wider economy they fear .

I think Bitcoin (BTC) is popular because it is easier to buy, store, and sell than gold. However, Bitcoin is too slow to use a payment medium. Note; I think the slow speed is part of Bitcoin’s attraction. To explain, I think some speculators and investors want mediums ordinary people will not use.

Third, many people buy Bitcoin (BTC) because they do not know of any other alternatives.

The Danger from Bitcoin (BTC)

I think the Bitcoin (BTC) bubble is an example of Nicholas Nassim Taleb’s “Green Lumber Fallacy.”

In his writings, Taleb tells the story of a trader who made a fortune by trading green lumber futures. One day somebody asks the successful trader some detailed questions about the lumber market. During the conservation, the questioner learns the successful trader does not know green lumber is wood.

Therefore, the Green Lumber Fallacy is the misconception that traders or speculators have detailed knowledge of or expertise in the things they trade. Taleb, a former trader, observes a person does not need a knowledge of a commodity or investment make money by trading it.

I think many cryptocurrency investors suffer from the Green Lumber Fallacy.  These people think Bitcoin Traders have expert knowledge of cryptocurrency when they do not.

I think most of the people trading Bitcoin know little or nothing of cryptocurrency, blockchain, economics, or the currency markets. However, the Green Lumber Fallacy convinces many of those people the speculators are cryptocurrency experts. In reality, the speculators could merely be expert speculators, as Taleb’s Green Lumber trader was.

Thus, the cryptocurrency markets frighten me because the people playing in it do not understand what cryptocurrency is.

Why are People investing in Cryptocurrency?

This raises the question why are enormous numbers of people investing large amounts of money in a market they do not understand.

I think fear explains the popularity of Bitcoin (BTC). Many people fear the traditional economy and traditional markets could collapse because of coronavirus and political unrest.

In particular, many people fear the collapse of the world’s reserve currency; the United States Dollar. The dollar is the basis of the global economy, yet coronavirus has hit the United States harder than other country.

Worldometers estimates the United States had suffered 255,310 coronavirus deaths and 11.782 million coronavirus cases on 18 November 2020. The next highest number of coronavirus cases in India which suffered 131,617 coronavirus deaths and 8.958 million cases by 18 November 2020. India had a population of 1.385 billion in contrast to a US population of 331.738 million.

Consequently, the United States cannot deal with a public health emergency while less developed nations such as China can. Worldwometers estimates the People’s Republic of China had suffered 86,369 coronavirus cases and 4,634 coronavirus deaths on 18 November 2020. China had a population of 1.439 billion.

Coronavirus has convinced many observers that the United States government is totally incompetent and dysfunctional and incapable of dealing with simple problems. Nor is it just coronavirus that raises doubt about America.

Recent events show the United States is incapable of holding a national election. It takes days or weeks for America to count votes. Meanwhile, it takes a day for Brazil with 213 million people to elect a president. Predictably, such news destroys whatever faith people have in America.

Bitcoin prices are high because tens of millions of people around the world; including many Americans, think the United States is about to collapse. America has gone from the world’s only superpower to the sick man of the world.

Thus, I think purely irrational factors motivate the demand for Bitcoin (BTC). I advise smart investors to avoid Bitcoin because I think a bubble driven by fear is unsustainable. The Bitcoin bubble will collapse even if history the fears about the United States correct.

I think cryptocurrency has a future, but that future is not Bitcoin (BTC). I predict we will see a widely adopted cryptocurrency at some point soon, but that cryptocurrency will not be Bitcoin.

Smart investors need to avoid Bitcoin because the market for it is insane. Bitcoin proves Mr. Market is insane.