Whether you follow Bitcoin and cryptocurrencies or not, you’ve likely seen the headlines report on China’s recent crack down on Initial Coin Offerings (ICOs) and public cryptocurrencies markets. Russia recently held a high profile conference with Ethereum creator Vitalik Bucherin, which was thought to be a huge boon. But then Russia began to disavow cryptos, in favor of their own national cryoto. Many people reduced their holdings after this news broke and shouted dooms day epithets to anyone who will listen. This was followed by a handful of influential financial magnets (e.g. CEO Jamie Dimon, and others) publically denouncing bitcoin. The markets crashed by over 25% in a matter of days.
Now with the summary of recent events out of the way, I want to address at least part of the story: the part where China and Russia’s actions don’t really matter for Bitcoin and other cryptocurrencies.
Distributed means there is no central source of control
It is virtually impossible for any single authority (e.g. China or Russia) to exert full control over Bitcoin. Ignoring some theoretical problems which are technical in nature, as long as the Bitcoin network is secured by miner nodes all around the world, it remains distributed and highly resistant to singular attempts to control it. Even using access control techniques to restrict access to the Internet can be easily circumvented using VPNs, cellular networks, and internet protocols like Tor.
Ultimately, the real question in my mind is whether or not cryptocurrencies have become popular enough that people will continue to want them despite what their government does. If the demand remains strong, then cryptocurrencies will survive in these countries. And so far, it seems like that is the case. One key aspect of cryptos is that you can do peer-2-peer transactions, without any banks or central institutions involved. This is very similar to dealing in cash! Imagine if the government attempted to block you from trading $10 in cash with someone else? Basically impossible!
Loss of mineing farms is another’s gain
China made a big impact in the past several years by steadily increasing their mining share of the Bitcoin network, ranging from having 30% to as much as 70% of the Bitcoin network hashing power. China has not cracked down on mining yet, but if they did, it would only open the doors for others to jump in. Russia, for example, has already begun courting miners who are seeking asylum from hostile governments.
Mining would perhaps be less of a vacuum phenominon if Bitcoin was still a completely nascent technology. But now that the cryptocurrency is making headlines in newspapers and news shows around the world, people are paying attention. Stories of how lucrative mining can be are everywhere. The problem for individuals and small time mining operators is competition. But if that competition drops, say by 50% or more, it would most certainly create a vacuum effect, being filled quickly by opportunists.
Several countries have very favorable outlooks on cryptos
We see several examples of countries, with a money system in shambles, increasing Bitcoin and other cryptos at exponential rates. Venezula is a prime example. Basically, because their national currency has lost their people’s trust, people are turning to alternative means of value transfer. In these countries, a single Bitcoin can trade for 20-40% or more versus the more open global market. Before you get excited and think you see an arbitrage opportunity, just know that I’ve looked into it a couple of times, and unfortunately there are almost always barriers to entering these nascent markets.
Other countries like Japan, South Korea, and the United States appear to be open to having cryptos around, but they want to regulate it a bit more. Whether it’s for tax purposes, or money laundry prevention, the point is that several big player countries see a future with Bitcoin and other cryptos in it.
ICOs do need to be regulated
Initial Coin Offerings (ICOs) have emerged as a new and novel way for startups to “crowdsource” their funding. In essence, they work by creating “smart contracts” along with “tokens” on cryptocurrency networks that support these features, such as Ethereum. A smart contract is basically just a small software application that runs in a secure and reliable manner on a blockchain. These “tokens” are simply arbitrary units of value. Tokens are typically sold by ICOs in exchange for a promise of service (e.g. the token can be used to pay for the new service once it launches) or for speculation that the startup will succeed, and others will want the token in the future, thus increasing the price.
The problem is that without any regulation, these startups can basically form at the drop of a hat, and ICOs can be about as valuable as dirt. Of course, this is true if you invest in any startup, be it on a publically traded exchange, Kickstarter, or another way. You run a very high risk of losing your investment. But in most of these cases, you have someone you can rely on (like the Securities and Exchange Commission) to weed out the frauds and scammers. ICOs often do not have this.
This post focused on the (lack of) effect countries have on the future of bitcoin and other cryptocurrencies. While the markets might react sharply to negative news, these swings are emotional and temporary. If nothing else, I look at these dips as opportunities to buy into cryptos while they are lower. Year-over-year, month-over-month, cryptocurrencies have gained in value. This makes the long term prospects too good to pass up!