E Zero Limits: The Trouble With Crypto

"He that lieth down with dogs shall rise up with fleas" -  Benjamin Franklin's Poor Richard's Almanack.

The FUG continues for Bitcoin as the long winter gets longer in 2019. The technical failure of the rally over $4200 and the revisiting of $3600 looks ominous to chartists. The futures of digital rests on the quality of its community and the confidence that they generate in developing new technology to solve old problems in the economy. The gloom in BTC and the rest of the crypto markets starts with the frustration of bad press and continues with the lack of technological acceptance. The glitterati of Davos agree.  Jeff Schumacher, founder of BCG Digital Ventures, said during a panel in Davos: "I do believe [bitcoin] will go to zero. I think it's a great technology but I don't believe it's a currency. It's not based on anything."  

The BIS released a new paper that argues Satoshi’s process has two key competing problems – high transaction costs to ensure payment and a system that can’t generate transaction fees high enough to guarantee such payments. The BIS argues that proof-of-work can only work if mining income is high enough and that users are free-riding on the security provided by the transactions fees of others in the chain – limiting “mining” income.They conclude -   So-called second-layer solutions such as the LighteningNetwork  can improve the economics of payment security (in addition  to  mitigating  scaling limits). However, they are no magic bullets, as they face their own scaling issues.

The tragedy of the commons problem in digital currencies maybe more complicated than just the mining issues. Digital trust via a process requires some validity from its use in the real economy. One of the biggest issues facing crypto in 2019 comes from regulation and the expectation that more rules will come down to limit its acceptance in places like the US and China. BTC volumes transacted doubled in 2018 on the darknet to $2m average a day according to Chainanalysis.  This even as the overall value fell to $600mn in 2018 from $700mn in 2017. The dip was attributable to the closure of major markets AlphaBay and Hansa in mid-2017 which hampered flows until the start of last year when transaction volumes started to steadily grow again, Kim Grauer, senior economist at Chainalysis, said in an interview. “The reason for that drop is more law enforcement activity,” Grauer said. “It would be misleading to think that this year it (the volume) will go down.”

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