This is an important time to be talking about cryptocurrencies. Bitcoin is down -56% from its December peak.
- Question: If you lost -56% of your money, what would your return need to be just to get back to breakeven?
- Answer: +128%
While skittish investors lost sleep over a -6% selloff in the S&P 500 over the past few days (before the bounce, of course)… cryptocurrency investors watched as $432 billion in total market capitalization evaporated into thin air… in just 30 days.
You’re probably wondering…
- Is this the beginning of the end for Bitcoin?
- What does the future hold for cryptocurrencies?
- Is the technology behind crypto as revolutionary as its devotees claim it is?
We’ve got answers.
In this special Hedgeye webinar, hedge fund manager and MacroVoices podcast host Erik Townsend joins Hedgeye CEO Keith McCullough for an in-depth discussion of the future of Bitcoin, cryptocurrencies and why blockchain is “one of the most-important breakthroughs of all time.”
Below are three key takeaways from the conversation. CLICK HERE to watch this webinar in its entirety.
1. BITCOIN BASICS, BLOCKCHAIN EXPLAINED
The first bitcoin was “mined” on January 3, 2009. And with that the cryptocurrency revolution was born.
So what the heck does it mean to “mine” bitcoin? And how does bitcoin work?
Here are a few basics. Bitcoin is based on a distributed ledger technology called “blockchain.” At its core, bitcoin solves something cryptography experts have puzzled over for some time. How do you create a decentralized peer-to-peer network – completely independent of some rent-seeking intermediary like a bank – that prevents people from cheating the system? In other words, without an intermediary clearing each transaction, how do you prevent the classic “double-spending” problem, whereby people spend money more than once?
The unknown, legendary bitcoin inventor Satoshi Nakamoto proposed an elegant solution. Each bitcoin transaction would be verified by “miners” or “nodes,” a network of people around the globe who would compete for compensation to clear each payment. Every ten minutes, as bitcoin transactions take place, this network of miners compete with each other, using massive computing power, to solve complex math problems and thereby verify each transaction’s validity.
Once solved, the transactions are stitched into a cryptographically sealed “block.” Each block of transactions is then securely stitched to the rest of the previously verified transaction blocks on the blockchain. The competition to solve bitcoin’s math problems and verify transactions requires a significant amount of computing power – since the difficulty of the math problem being solved ratchets up based on the amount of computing power trying to solve the problem.
Why? If a hacker wanted to alter a single block, they would have the herculean task of also altering all subsequent blocks in the blockchain. In other words, the difficulty of modifying blocks increases with time.
Sounds great, right? There’s a problem.
2. BITCOIN’S BIG PROBLEM
"Once every 10 minutes a network-wide contest starts to see who can waste the most computing resources in the shortest time,” says Townsend. “That’s why you hear about the bitcoin network consuming more electricity than entire nations." Currently, the total energy consumption of bitcoin mining is the equivalent of the entire country of Singapore (a population of 5.6 million).
“The blockchain network is not scalable,” Townsend says. “Somebody can design a proprietary product that’s not designed on an asinine contest to waste as much electricity. You know there’s got to be something better than blockchain coming.”
Townsend pokes holes in other arguments put forth by bitcoin believers, like the cryptocurrency’s artificial scarcity and the idea that bitcoin is better than government-backed “fiat currency.”
3. GOVERNMENTS WILL STEAL CRYPTOCURRENCY TECHNOLOGY
"The bitcoin guys invented the technology. The government is going to steal it,” Townsend says. “People say, 'If that were true why do they allow bitcoin to exist?' Because they want the bitcoin guys to keep doing free engineering before they steal it!"
Townsend hypothesizes that governments will ultimately co-opt cryptocurrency technology to control transactions globally. “I think there’s a huge future for digital currencies but they will be state backed and designed by the government.”
“The real goal is if you come up with a digital currency that can become the new reserve currency that replaces the U.S. dollar as the new reserve currency.” That way a coordinated digital currency regime allows countries to “audit, seize and claw back any transaction.” In the video, Townsend explains in detail how this global digital cryptocurrency, which he dubs the “Orwell,” would require each transaction to be identified by Social Security numbers and country codes.
So while the bitcoin devotees extol cryptocurrency virtues, Townsend sees the imposing hand of governments spoiling this decentralized peer-to-peer payment network. "The real tragedy here is that the libertarian people who invented Bitcoin are going to be co-opted. Governments are going to steal this technology and create their own digital currencies. It will be the exact opposite of bitcoin's intent."
