May 4, 2017
There’s a discernible pattern in the interesting aspects of blockchain and the extended distributed ledger technologies over the years. We took to Google trends to map this evolution over past five years and the results are fairly interesting:
The X-axis depicts timeline while the Y axis quantifies Google search interest. It shows here that until late 2015, bitcoin had by far been the most popular search term pertaining to anything blockchain. The year 2015, incidentally, also marked an awakening of enterprises to the fancy technology underpinning bitcoin, while actually pushing bitcoin to the sidelines. Blockchain became the poster boy of financial technology, enjoying regular mentions in boardroom conversations. However, the beginning of 2017 revived the currency use case of blockchain because that is when the funds have started moving at an unprecedented pace.
Towards the end of the graph, we can see the yellow line approaching to overtake the red line, yet again, taking cryptocurrencies to the mainstream.
With the cryptocurrency hype just around the corner, as iterated before, there have been two major observations: 1. New money coming into overall cryptocurrency market and 2. Money flowing from bitcoin to altcoins. The Bitcoin Dominance Index shown below beautifully captures the situation at hand:
The overall cryptocurrency market capitalization stood at ~$41b at the time of writing; however, bitcoin’s dominance has steadily declined from 95% in 2014 to the current 60%.
The natural question here is: do we now have better currencies than bitcoin or is the market far bigger than we imagined? Well, it seems the answer is both. Bitcoin, with its archaic transaction speed and the never-ending block-size debate, is the giant elephant which is too large to move fast and there are better currencies out there. Having said that, the fact that the cryptocurrency market has seen tremendous growth cannot be ignored. Of the current $41 billion market value, almost $20 billion was added in the past five months. And this new influx of money has greatly staggered the distribution of value across cryptocurrencies:
Each of the currencies in the list above has its unique value proposition. Ether has smart contracts, Ripple has its network of banks, Litecoin has its segregated witness update enabling fast transactions and lighter network, Monero has its private transactions feature, and so on. That being said, trying to compare these currencies/projects is like comparing apples and oranges.
Since we attempt to study cryptocurrencies, the obvious conventional counterpart here should be well, fiat currencies. The Global Foreign Exchange markets run a daily trading volume of $5.1 trillion in April 2016, a figure which is on a steady year-on-year decline and is about 10,000 times the current cryptocurrency daily trading volume. Cryptocurrencies derive their value from government authorized fiat currencies and the former shall remain a subset of the latter for the foreseeable future. Now, let’s take a look at the top fiat currencies:
It is important to note here that the above structure is an outcome of numerous historical events and agreements between nations; for example, the Bretton Woods agreement cemented the worth and dominance of US Dollar. Interestingly, the underlying value of a cryptocurrency is fairly independent of the community backing it and more concerned with the technological capabilities of the protocol.
This shift from human consensus to an incentive driven machine consensus creates all the difference for cryptocurrencies and is beautifully captured by Vitalik Buterin, the creator of Ethereum:
This is one of the perfectly valid thoughts on the current state of crypto affairs and indeed, the recent events have remarkable similarities to a financial bubble. Nevertheless, the crypto-markets have an intricate involvement of underlying technology in asset pricing which might call for an altogether different perspective towards its analysis.
There are numerous ways to try to make sense out of this: some advocate for a crowd sentiment analysis considering the current big data capabilities while others advise seeking a balance between technical and fundamental analysis. That being said, we are open to hearing out ideas and perspectives on this potentially revolutionary trend; I can be reached via LinkedIn, Twitter or mail.