Tempting as it is to analyze several cryptocurrencies, the economic data, regrettably, are only available for one. Even Ethereum and Litecoin, though popular, have too short pricing histories for a reliable projection. So in what follows we limit ourselves to the bitcoin as the most popular cryptoasset (using the BTCUSD ticker, the bitcoin – USD exchange rate) and look at the way its price behaves from different angles.
The Bitcoin as an Exchange Asset – Wave Analysis of BTC/USD
There is no point to analyzing the BTCUSD price graph – it is a pure example of “to-the-moon”, only demonstrating how cryptocurrencies have been coming in vogue. An analysis of the graph of a log of BTCUSD is much more informative. The table contains data and graphs for the bitcoin-USD exchange rate in two periods:
- The entire available history since 2011
- The last interval of explosive growth since 01.01.15
We chose Quandl as our data supplier.
The data from 17.07.10 to 12.09.11 were taken from archives of the Mt-Gox exchange, after 12.09.11 we use quotations from BitStamp. 5 errors have been fixed and missing intervals 1-3 days long filled with arithmetic projections (all adjustments are shown in the table).
The big graph shows a 1st wave that ended on 08.06.11 (going with the classic wave theory of Elliott, Frost and Prechter ). It also shows a 3rd wave that ended on 30.11.13 and a period of much slower, logarithmically speaking, growth that continues.
This slow-growth phase may indicate that we are in a 5th wave, the last wave in the cycle soon to reach the end of its course.
Once the 5th wave is over, an inevitable correction will follow to terminate around the previous 4th wave (see the graph), which means a catastrophic plunge to somewhere around $150-$450 for 1 BTC (and definitely below $1163).
All that means that the current exponential growth of BTCUSD is going to lead to a major rebound, which might mean that the public will lose a good deal of interest in 1st generation cryptocurrencies or move on to easier and better scalable protocols than the bitcoin blockchain.
Unlike the bleak general outlook for the bitcoin, its current growth is nowhere running out and promises glorious heights.
The small graph is a wave structure of a 5th wave that seems to have been rising since 14.01.15. According to this structure, we are in a 3rd wave inside a 5th wave inside an extended 5th wave. The 3rd wave (subwave) should run out before the end of the year in the $6000-$8000 per 1 BTC price range (crazy growth is making exact predictions difficult). It will be followed by a 4-5-5 correction and a finishing 5-5-5 wave. How high the next crest will be is going to depend on the depth of the preceding correction. For now all we know is that the highest point is in no event going to exceed $60 000.
A structure with such a large extension in a 5th wave may seem unusual, but we have witness completely analogous wave dynamics in late fall-winter of 2014 for USDRUR when the ruble was free-falling. It then appeared as if the dollar would grow forever…
So why can we expect the bitcoin price to swell so before an enormous correction? The answer is easy: current capitalization of the bitcoin under $100 bln is nothing for the global scale, so even a cautious entry into BTC by funds may boost capitalization tenfold. On the other hand, because of volatility BTC will sit in fund portfolios as a risk asset, the first to go as sooner as there is any sign of an impending crisis.
This makes the bitcoin a poor candidate for a “safe heaven” asset; that role goes mostly to gold and, to a lesser extent, the yen and Swiss frank.
All in all, the bitcoin is suitable for short-term speculation, but one should keep in mind its huge volatility and a possible major deflation in the mid-term.
The Bitcoin as a Currency
Let us now consider BTCUSD as a regular currency pair. We see that the swap rate for this pair on various exchanges is quoted at 18-180% of interest for 1-30 periods (here we ignore instant quotations, and there are hardly any quotations longer than a month on the market yet). The BTC in the pair enjoys a large percentile advantage.
These strange rates have to do with BTC loans that exchanges extend to short- players who want to bet on a fall of BTC. Nobody takes dollars at 100% interest at exchanges, even though BTC is growing faster. And no wonder – cheaper dollars can be gotten locally in any country, the same cannot be said for the BTC, whose market is international, somewhat transparent as far as exchange price dynamics are concerned and visible to all, except in cryptopyramids, of course.
A currency with such a swap rate should lose its value over a long period of time, e.g. as we have seen, historically, on the USDRUR graph. But a looming fall does not mean there can be no lengthy perk-up periods with so-called carry trade. Or let us point to how the Italian lira showed strong vs. The German mark in 1996-1999, when the swap rate reached 11% annual. An even more immediate example is carry trade with USDRUR in 1999-2008 and 2016-2017 at higher interest rates (rates have decreased a bit, but the process continues).
Carry trade cannot go on forever and when it stops, it is sudden. Just think of the enormous price increase of the yen for USDJPY in 1998-1999). In the bitcoin’s case one of the following can be expected to happen:
- The bitcoin will greatly depreciate
- The bitcoin rate will be zero or negative
All that is needed for one of these scenarios to come true is a civilized market of derivative instruments – forwards, futures, options, derivatives of interest rates. Such a market is already shaping up, and early in 2018 the first professional products from providers more trusted than today’s cryptoexchanges will make an appearance.
For instance, at a swap rate of 18% on BTCUSD, a very modest rate for the current market, a fair forward rate for the pair a month ahead will be some 1.5% below the going rate. In a situation like that month-long loans in BTC, prohibitively expensive at the moment, will start to make sense, and bitcoin holders’ hope that the currency is going to grow forever will start to crack.
The Bitcoin as an Energy-Intensive Trade Product
Now let us imagine the bitcoin as an expensive asset to be traded – one that is quite common but requires an insane amount of energy to generate in a way useable for the public.
A historical comparison: when metallic aluminum was discovered by Humphrey Davy in 1807, it cost much more than gold. In 1852 a kilo went for $1200. After Heroult and Hall in 1886 came up with a process to use electrolysis for industrial production of aluminum, the price dropped to $1 a kilo, and most of that was electricity cost. Then again, the 1900 dollar went far – silver then cost $15 a kilo. Things have changed much since then, aluminum costs $2 and silver costs $550, probably because electric power is so much cheaper to churn out.
If we consider the bitcoin as a sort of high-tech cryptoaluminum, whose self-cost depends on the amount of electricity spent, we will get a new angle on the cryptocurrencies and mining boom. Here is a useful article: http://digiconomist.net/bitcoin-energy-consumption
|Bitcoin’s current estimated annual electricity consumption* (TWh)||16.37|
|Annualized global mining revenues||$4,029,787,569|
|Annualized estimated global mining costs||$818,705,008|
|Country closest to Bitcoin in terms of electricity consumption||Cuba|
|Estimated electricity used over the previous day (KWh)||44,860,548|
|Implied Watts per GH/s||0.338|
|Break-even Watts per GH/s (based on 5 cents per KWh)||1.661|
|Electricity consumed per transaction (KWh)||176|
|Number of U.S. households that could be powered by Bitcoin||1,516,120|
|Number of U.S. households powered for 1 day by the electricity consumed for a single transaction||5.95|
|Bitcoin’s electricity consumption as a percentage of the world’s electricity consumption||0.08%|
The same piece makes a comparison with the VISA payment system:
|VISA annual consumption of energy (TWh)||0.54|
|Consumption of power per transaction (кWh)||0.00651|
|Seconds a U.S. household can be powered by energy of 1 transaction||19|
|Number of VISA transactions possible for energy per 1 bitcoin transaction||26103|
What conclusions suggest themselves?
- Currently the bitcoin accounts for over 0.07% of the world’s power consumption, all cryptocurrencies together account for 0.1%
- The economy share the bitcoin or the bitcoin blockchain services is nowhere near as large (we cannot count the blockchain idea itself for development of other products with different consensus protocols)
- The much more common VISA system consumes 1/27th of the power the bitcoin needs
- One VISA transaction is 26 000 times less energy-intensive
We already know that the maximum bitcoin capacity, sans SegWit and other modifications, is around 150 000 transactions a day, or about 2 transactions a second. For comparison, the VISA system can handle up to 56 000 transactions a second.
So what is this insane amount of electric power, already more than many countries consume, goes to? Maintaining security in the decentralized network that supports the bitcoin blockchain. In 2010 Satoshi Nakamoto came up with an elegant solution to the “Byzantine generals” problem – consensus would be secured by a Proof-of-work (PoW) protocol. This solution demands massive calculations which serve no further purpose once they are known to be correct. Continued calculations just serve to increase entropy (heat). In this connection it might make sense to start producing high-tech “cryptoradiators” that will efficiently warm up apartments and buildings as well as mine.
The power also goes towards the bitcoin blockchain’s pseudo-anonymity. Is that really worth a loss of capacity to 1/30 000 of VISA’s (without SegWit and Lightning Network) or to 1/1000 with them? Bitcoin owners can decide for themselves, but there is no magic – the numbers above incline us to believe in potential for lowered VISA commissions and a likely change along those lines rather than in bitcoin transactions getting cheaper. In fact, bitcoin payment commissions may well grow.
The logical conclusion is that the bitcoin blockchain is a reliable, cracker-proof system for expensive operations with equally expensive assets. It is handy for sending an ounce of gold or buying real estate, but hardly for ordering pizza or day-to-day expenses. All this pushes the bitcoin towards a role as a payment medium only for high-end assets.
Let us sum up possibilities for bitcoin use and its rate growth.
- The share of the global economy serviced by the bitcoin and its blockchain will grow faster than consumption of energy required for its upkeep. In this case the bitcoin price will continue to grow, but the currency will become an elite medium for expensive transactions, to service some capital-intensive segments (shares, real estate, precious metals etc.
- The bitcoin economy will slow down for objective reasons. Then the world may give up on 1st-generation cryptocurrencies that use the PoW consensus protocol, and their price will drop, perhaps to nothing.
- The bitcoin economy will shrink to fit the market share where power is wasted – “smart” “cryptoradators,” smartphones, most of whose computing power is wasted anyway, and so on. Then the coin and the chain will serve this market share with this kind of derived power, and the bitcoin will become much cheaper.
In the last few years several less energy-expensive consensus protocols have been suggested:
- PoS (Proof-of-Stake)
- Its modifications (DPoS, PoA=PoS+PoW – Proof-of-Activity)
- PoC, PoB – Proof of capacity and of burn
- New ideas from industry leaders (PoET – Proof of elapsed time)
- Many others, even more obscure
We are not going to discuss these protocols in this article but only say that their limitations include a lack of studies of their ability to resist community attacks , security of deployment software, there are other programming and mathematics-related issues. But given the size of the pool of qualified programmers involved in cryptoeconomics today, crypto- and mathematical auditing of these and future protocols will take months, not years or decades .
One protocol deserves a special mention here – the Intel-developed PoET (Proof of elapsed time). It is used by the blockchain consortium Hyperledger fabric (IBM, Intel, Linux Foundation, many respected experts and, as usual, many are Chinese). The protocol is lite enough compared to the bitcoin blockchain’s PoW, consumes little energy and latest Intel hardware supports it.
1350 transactions per second is not VISA, of course, but much better than the bitcoin. The Hyperledger fabric project only left beta-testing in June of 2017, so the promise is there.
GoldMint and PoS-based Protocol as a Rational Alternative
Considering the above, we can recommend a new Russian cryptoproject – GoldMint.
It involves emission of two tokens – GOLD (unlimited and tied to the cost of the gold ounce) and MINT (10 000 000 tokens, owners confirm transactions in GOLD using a PoS-based protocol). In addition, owners of MNT tokens get 75% of income from GOLD transactions as a reward for confirming them (the number of GOLD transactions they can confirm is tied to the number of MINT tokens they own.
This arrangement, on one hand, guarantees constant growth of MINT as a money-making asset and on the other makes this income active, since owners have to vote on transaction confirmations. This is better than “pseudo-dividend” plans with passive income, where SEC control puts the lucrative U.S. market out of reach.
We will discuss cryptoassets that tokenize real assets in the next article.