What is cryptocurrency: An economic explanation
This and next couple of articles are extracts from our whitepaper. They may not be pleasant reading to some, but for the sake of sanity and commonsense in crypto, we implore you read them. Comments are always welcome: firstname.lastname@example.org
Crypto is mystic. But beneath that façade, those who have been there long enough know that it is seedy, dark, unequal and prone to scam unprecedented in any other civilized trade. All that good, bad and ugly happen routinely within a vast information asymmetry; thus until you get bitten, or even after that, you are made to think that it was your fault, and not the problem with the crypto, or the way it is structured. Thus, information asymmetry presents cryptocurrency as different things to different people. Those who unabashedly shill it, tend to project (or just feign) crypto as the future of money, a revolutionary technology that would democratize the transition of digital assets. Those folks are also the early adopters of crypto, hence are best placed to benefit from each cycle of boom and bust.
On the other extreme, there are cynics who view crypto as nothing more than a glorified pyramid scheme. Economic logic of crypto is such they have a very strong point. Crypto enthusiasts had a field year of 2017. And this year (2018) has vindicated the cynics to a good deal. Cryptocurrency market cap hit nearly US $ 800 billion in January 2018, rising from barely US$ 18 billion, January, 2017. Then when the speculative driven purchase binge ran out of steam, the market crashed to one fourth of its peak time value. This exponential boom and bust cannot be explained by any of the implied technology of the underwritten token. Instead, there is a more straight forward economic explanation.
An economic explanation
Ask yourself why you buy ( or are not inclined to buy now) crypto? You buy cryptocurrency to sell at a higher price to another potential buyer. He or she buys from you with the same intention. It was this speculative buying spree of tokens and coins of otherwise no tangible value that drove cryptocurrency to its all- time high market capitalization. The market impact of the speculative binge was magnified by the artificially limited number of token supply and regular market manipulation through wash trading. Thus an economic explanation of crypto boom has little to do with an implied technological superiority of cryptocurrency. The truth is that, crypto is a long way from mass adoption. In that sense, cryptocurrency looks more similar to a guilty- free pyramid scheme shrouded in a fictitious technological valuation- than to Tesla or Google.
Crypto enthusiasts argue that the limited supply of tokens create its value. However, not everything that is limited in supply has value. Photographs signed by the developers of EOS INEREST may be rare, but, alas, there are hardly any buyers. Instead, cryptocurrency acquires its market momentum through a wave of speculative purchasing, of which effect is magnified by market manipulation by the big players in the industry.
Such a momentum can go on only until new money keeps coming into the crypto market. Crypto market sustains the system by funneling new money and redistributing gains according to the hierarchical structure of the pyramid scheme. Sound familiar? This is what Ponzi is all about.
This system can go on as long as new investor money keeps coming in. when the new money runs out, the entire scheme comes crashing down. That is where we are now.