CRYPTO - EXAMPLE
Assessment
Every Bubble Bursts: Why Crypto’s Golden Child Bitcoin Will Fail
Key Judgements
Cryptocurrencies such as Bitcoin are experiencing rapid growth, leaving some to believe that they
are the future of money. Bitcoin is the largest cryptocurrency by market cap and the most widely used
cryptocurrency to transact. However, up to this point Bitcoin and other cryptocurrencies have proven to
be nothing more than speculative investments, with Bitcoin facing a gloom future due to a few major
flaws.
• Bitcoin has no central regulatory authority to help in the event of a crisis. This makes Bitcoin
incredibly susceptible to hyperinflation, theft and fraud.
• Bitcoin is much too unpredictable and volatile to ever function as a viable currency. In the short-
term, Bitcoin is over three times more volatile than the Nasdaq and more than ten times more
volatile than the EUR / USD exchange rate. No one will ever be willing to use Bitcoin as a
medium of exchange when a coffee may cost ten times more on Friday than it did on Monday of
the same week.
• Bitcoin has no intrinsic value. Stocks have intrinsic value because they provide the investor with
ownership stake in a company, bonds have value because they provide the investor with the right
to future repayments that include interest, and commodities have value because they are raw
materials that are used in the production of goods. Bitcoin investors are relying solely on greater
fools theory.
• An investment in Bitcoin is not an investment in blockchain technology. Without a doubt
blockchain technology will play a major role in the future. However, an investment Bitcoin does
not provide an investment in blockchain technology.
• Although an investment in Bitcoin does not provide an investment in blockchain, an investment in
Ethereum does. Overall, other cryptocurrencies offer more utility than Bitcoin does. In addition to
Ethereum, stable coins such as Tether derive their value from corresponding external assets, such
as gold or the U.S. dollar and Siacoin eliminates the need for expensive cloud storage by replacing
signup, server and trusted third parties with blockchain-based data-storage marketplaces.
• Governments will never allow Bitcoin to transact at scale. Bitcoin enables citizens of a country to
undermine government authority. In its current form Bitcoin presents three challenges to
government authority: it cannot be regulated, it is used by criminals and it can allow citizens to
circumvent capital controls. Governments will never relinquish their power and will continue to
do everything possible to ensure Bitcoin does not exist at scale.
Introduction
Over the last 15 years Cryptocurrencies such as Bitcoin, have provided a unique investment
opportunity, with crypto Evangelists believing that they are the future of money. While some
cryptocurrencies are valuable in some respects, they also have some major flaws. Bitcoin, the largest and
most widely accepted cryptocurrency, may be the most flawed of all.
Background
Cryptocurrency (Crypto) is a digital currency designed to work as a medium of exchange, in
which transactions are verified and records maintained by a decentralized system using
cryptography, rather than by a centralized authority. Peer-to-peer networks called blockchains
monitor and organize cryptocurrency transactions, such as buying, selling, and transferring, and also serve
as a ledger of transactions. By using encryption technology, cryptocurrencies can serve as both a currency
and an accounting system. Because cryptocurrencies operate independently and in a decentralized
manner, without a bank or a central authority, new units can be added only after certain conditions are
met. Units of cryptocurrencies are added through a process called mining, which involves using computer
power to solve complicated mathematical problems that generate cryptocurrencies. For example, miners
of Bitcoin will only be rewarded with the Bitcoin after a block has been added to the blockchain, and this
is the only way new Bitcoins can be generated. The limit for Bitcoins is 21 million. After this, no more
Bitcoins will be produced.
The global cryptocurrency market cap is around $1.23 trillion, Bitcoin makes up a dominate
share of the market cap as it accounts for more than 40% of crypto’s market cap globally. Bitcoin
was the first cryptocurrency created and is now the most traded and well-know. It was originally launched
in January 2009, by a computer programmer or group of programmers under the pseudonym Satoshi
Nakamoto, whose actual identity has yet to be verified. Currently, Bitcoin is considered to be more of a
speculative asset than a payment tool. The price volatility and the potential for profit, together with the
prohibition, make investments in cryptocurrencies such as Bitcoin very attractive to some.
Substantiation
Bitcoin has several flaws that will ultimately lead to its demise.
Bitcoin has no central regulatory authority to help combat macroeconomic issues and
protect against fraud and theft. Much of Bitcoin’s allure is that the democratization of currency,
however, this decentralization provides some substantial risks. More than ever Americans should
understand the power of a central regulatory authority, as the Fed has steadily hiked interest rates
1
Market Cap as a percentage pie chart was retrieved from thenewscrypto.com
over the past 12 months in order to combat inflation. Without a central regulatory authority to
control the coin’s supply and put in place policies to ensure Bitcoin functions as it is intended,
Bitcoin risks massive price instability. This lack of central authority also puts Bitcoin at extreme
risk of fraud and theft. If someone is able to successfully tamper with the blockchain no one is in
place to punish them or redistribute coins to owners.
Bitcoin will never be a viable currency due to its unpredictability and high levels of
volatility. Because of this unpredictability and volatility Bitcoin will never be able to function as a
practical medium of exchange. Cryptocurrencies in general are incredibly volatile and Bitcoin is
no different. Bitcoin is more volatile than almost all other non-crypto securities. A study observed
that Bitcoin is almost three times more volatile than the Nasdaq in the short term (5.7% average
daily excursion vs. 2.0% of the hi-tech index). When compared to the EUR/USD exchange rate,
Bitcoin is over 10 times more volatile2. No one in their right mind would use Bitcoin to purchase a
coffee for $5 coffee when the same amount of Bitcoin might very well be worth $50 just a few
days later. The first ever Bitcoin transaction is a perfect example of why the coin will never
function as a successful medium of exchange. Laszlo Hanyecz paid 10,000 Bitcoin to have two
Papa Johns pizzas delivered to him. At the peak of Bitcoin’s pricing in 2021, these two pizzas
would have been worth $630 million3.
Bitcoin has no intrinsic value. Stocks have value because they provide the investor with
ownership stake in a company, bonds have value because they provide the investor with the right
to future repayments that include interest, and commodities have value because they are raw
materials that are used in the production of goods. But according to Brookings, “Bitcoin investors
seem to relying on the greater fools theory – all you need to profit from an investment is to find
someone willing to buy asset at an even higher price4.” Essentially Bitcoin is only valuable
because people say it is. While, Bitcoin enthusiasts may argue that the same could be said for the
U.S. dollar. As money, after all is a construct like Bitcoin. What these people fail to recognize is
that the U.S. dollar is backed by the full faith and credit of the U.S. government, which can
guarantee its currency by selling public assets, issuing bonds and demanding that individuals and
businesses pay taxes in the same currency that it issues.
An investment in Bitcoin is not an investment in Blockchain Technology. There is no
disagreement that blockchain will play a major role in the future. According to
PricewaterhouseCoopers, blockchain technology is poised to completely revolutionize the auto
industry by successfully managing fractional ownership of self-driving vehicles. It is also poised
to streamline the financial industry by greatly reducing transaction costs, make voting more
accessible and secure data-sharing in the health care field5. All of this may be worthy of
investment, however, investing in Bitcoin does not provide access to any of these possible
applications of blockchain technology.
Governments around the world are eyeing Bitcoin’s advance warily and have an incentivize
to make Bitcoin fail. Bitcoin enables citizens of a country to undermine government authority by
circumventing capital controls imposed by it. It also enables and even incentivizes illegal activity
by criminals as it provides them with a way to evade detection. Additionally, by removing
2
Retrieved from medium.com
3
Retrieved from money.usnews.com
4
Retrieved from nasdaq.com
5
Retrieved from nasdaq.com
financial intermediaries, Bitcoin can potentially wreck the existing destabilize and wreck the entire
financial structure of the world. Until Bitcoin’s ecosystem matures and a significant use for
Bitcoin that does not put governments at risk is found, Bitcoin will continue to provoke distrust,
and criticism from established authorities6
Other Cryptocurrencies offer more utility and being the first cryptocurrency does not
ensure longevity. Ethereum, for example, provides access to the Ethereum blockchain, where
NFT-based digital art sales and peer-to-peer lending take place. Stablecoins like Tether derive
their value from their corresponding external assets, like gold or the U.S. dollar. Siacoin
eliminates the need for expensive cloud storage by replacing signup, server and trusted third
parties with blockchain-based date-storage marketplaces7. Bitcoin is unable to do any of these
things. Netscape Navigator was the first web browser, yet it passed into history as newer, better,
more functional alternatives like Internet Explorer rendered the original an obsolete relic of the
past. Bitcoin seems to be headed down the same path as Netscape Navigator.
Scope of the Industry
Cryptocurrency was initially created as a way for people to engage in financial transactions
without exclusively relying on banks or governments, however, crypto is currently more-widely
used as a speculative investing tool. Since Bitcoin’s inception in 2009, the hype around Bitcoin and
other cryptocurrencies has exploded. As of February, of this year (2023), outside of Bitcoin, the most
popular cryptocurrencies are Ethereum, Tether USD, BNB and USD Coin. These other cryptocurrencies
all have a significantly lower market cap than Bitcoin with Ethereum being the largest with a market cap
of a little over $200 billion. What these other cryptocurrencies lack in market cap, they make up for in
hype and potential growth. However, the fact of the matter is we have not found any real widely-
applicable uses for cryptocurrencies outside of speculating on their returns.
Outlook
Cryptocurrencies’ golden child Bitcoin will soon fail because of a few fatal flaws that will
lead to its demise. Cryptocurrencies such as Bitcoin have no central regulatory authority to help combat
issues that arise with the currency such as hyperinflation, fraud and theft. Additionally, Bitcoin will never
be a viable currency due to its extreme levels of volatility. Unlike other cryptocurrencies Bitcoin also has
no intrinsic value and an investment in Bitcoin is not an investment in blockchain technology. It is also
important to recognize that governments have the incentive to make Bitcoin fail.
Bitcoin’s lack of central authority leads to more problems than advantages and the coin is
much too volatile to ever be seriously considered for use as a medium of exchange. A decentralized
currency provides many unique risks. Without a central regulatory authority to control the coin’s supply
and put in place policies to ensure Bitcoin functions as intended. Bitcoin risks massive price instability.
This lack of central authority also puts Bitcoin at extreme risk of fraud and theft. Those who are able to
successfully able to tamper with the blockchain could walk away from millions or possibly even billions
of dollars without any consequences. Additionally, Bitcoin will never be able to function as a viable
medium of exchange because of its extreme volatility. No one is going to transact with a currency that is
three times more volatile than the Nasdaq stock exchange.
6
Retrieved from investopedia.com
7
Retrieved from nasdaq.com
Bitcoin has no intrinsic value, as it is not an investment in blockchain technology, while other
cryptocurrencies have more to offer. Investment in other cryptocurrencies such as Ethereum provides
intrinsic value. An investment in Ethereum provides you with access to the Ethereum blockchain, Tether
and other stable coins derive their value from external assets such as gold or the U.S. dollar, Siacoin
eliminates the need for expensive cloud storage by replacing signup, server and trusted third parties with
blockchain-based date-storage marketplaces. Just as Netscape Navigator took a free fall from its pedestal
years ago, Bitcoin is going to fall.
Bitcoin will never be used to transact at scale because governments will never allow it.
Bitcoin provides citizens of a country a way to undermine government authority by circumventing capital
controls imposed by it. It also enables and even incentivizes illegal activity by criminals as it provides
them with a way to evade detection. Additionally, by removing financial intermediaries, Bitcoin can
potentially wreck the existing destabilize and wreck the entire financial structure of the world. Until
Bitcoin’s ecosystem matures and a significant use for Bitcoin that does not put governments at risk is
found, Bitcoin will continue to provoke distrust, and criticism from established authorities. These same
authorities will never allow Bitcoin to be widely accepted and used to transact at scale.
