Is Bitcoin’s sovereignty in jeopardy?

The cryptocurrency markets kicked-off the year on a mixed note.

Bitcoin traded capped below the $4100 mark in January, roughly 78% below the levels seen during the same period a year earlier. Nearly 80 billion USD worth of value was wiped out within a year, only in terms of Bitcoin.

Not only that the much-expected recovery in cryptocurrency markets delays to happen, but Bitcoin has been proving unsuccessful attracting both the risk-on and the risk-off trades since last year.

This letdown rules out the idea that Bitcoin is the new ‘gold’, while raising doubts about the most-traded coin’s sovereignty in the crypto-space in the foreseeable future.

Though Bitcoin stands for more than the half of total market capitalization, according to data compiled by coinmarketcap.com on February 20th, and is still responsible for most price movements across the crypto-sector, there is a clear rise in interest for altcoins.

In fact, some major altcoins, especially Litecoin, were able to diverge positively from Bitcoin in the first two months of the year, a behavior that has rather been rare in the past but should increasingly be the case in the future.

The question is, could cryptocurrencies survive? The answer is yes; cryptocurrencies should survive the 2018 debasement, but the forces at work across this market may be about to change.

In this article, we discuss about the possible direction that cryptocurrency markets could take, that could change the rules of the game.

What purpose do cryptocurrencies serve?

Bitcoin is the first and the most popular cryptocurrency, yet it is one out of 2104 cryptocurrencies (coins and tokens) listed on CoinMarketCap. And, not all cryptocurrencies offer the same services and not all of them serve the same purpose.

Today, it is more important than ever before to distinguish between different types of cryptocurrencies, in order to understand the factors that could give a different spin to the cryptocurrency markets and to predict which ones have a better chance to survive and to thrive.

Could cryptocurrencies replace traditional currencies?

Some cryptocurrencies emerged as alternative to replace traditional currencies, such as the US dollar, the euro or the British pound. Bitcoin, Litecoin and Dash are part of this category. They aim to become globally accepted currencies for making payments, transferring and storing value.

The idea of a decentralized, peer-to-peer fund transaction mechanism emerged after the 2007-2008 financial crisis, as many disliked the central banks’ way of managing the market turmoil and desired to shift the control on money from a central authority to people. The cryptocurrency pioneers wanted to get rid of the third-party intervention in transactions.

No matter how the idea of peer-to-peer transaction network is interesting, the recent years showed that there are still severe caveats to a solid implementation of such structure worldwide.

First, the central banks and financial institutions in place are, of course, thoroughly opposed to the idea of leaving the power in the hands of individuals. Although, they are interested in offering digital currencies as alternative to paper money, coins and bank cards, this digitalization has little to do with a crypto-like set-up. Hence, the non-governmental cryptocurrencies offering an alternative to the fiat money will likely suffer from regulation, or more precisely, the lack thereof.

Second, the emergence of one and single cryptocurrency is highly compromised in a decentralized structure, where decisions are taken according to a consensus and there is little chance that the developer communities always agree on all matters. This gives way to hard forks, leading to the creation of multiple cryptocurrencies and injecting an undesirable price volatility which prevents cryptocurrencies from acting as a reliable storage of value.

This being said, Litecoin has been one of the best performers of 2019 so far, as its chief executive officer Charlie Lee announced that the blockchain is ‘now focused on making Litecoin more fungible by adding Confidential Transactions’. Litecoin’s outperformance means that investors and traders are still willing to explore the idea of cryptocurrencies as medium of exchange, yet the risks associated to this type of cryptocurrencies increase with governments’ inability to provide a basic regulatory framework to ease tensions.

Decentralized applications could be the future

Unlike Bitcoin, some cryptocurrencies offer a shelter for dapps, the decentralized applications, which are computer applications that run on a distributed computing system rather than a central server.

Ethereum and Tronix are part of this category. Both offer a platform for building decentralized applications, where the Ether and Tron are used as the currency of their respective ecosystem.

Although Ethereum lost a lot of blood during 2018, the platform may have a promising future in terms of the product it proposes. As we had discussed in our previous articles, such platforms will likely become essential with the development and the spread of the crypto-based businesses, as they offer a basis for tokens, willing to use the blockchain-based models yet without building a platform on their own.

It is important to note that the latter business model is not a threat to the existing financial system; it does not interfere with the central authorities’ power on monetary decisions. This is why, it has even been proposed that Ethereum gets listed on the regulated stock markets, rather than floating on unregulated cryptocurrency markets. But Ethereum, as many other cryptocurrencies offering a platform for dapps, has a blockchain-based business model that is perfectly suitable for the crypto-market setting. Hence, Ethereum has little incentive to move to a less suited trading environment, but there is a rising probability that this type of crypto-based businesses become regulated in the close future. If this is the case, the cryptocurrencies that have solid business models should diverge positively compared to the ones which interfere with the sensitive alternative ‘banking’ models.

At this point, it is worth opening a short parenthesis about Ripple, which is one of the major cryptocurrencies which doesn’t fit in the frameworks discussed above. Ripple is a category on its own. It is a privately-owned company, that offers innovative payment services on blockchain. The company doesn’t defy the existing financial system. In contrary, it aims to cooperate with financial institutions to speed up international payments and cut the transaction fees dramatically. Among all cryptocurrencies, Ripple is certainly the closest to a traditional stock, and is not subject to the risks faced by its competitors.

Ripple is a good example that the blockchain technology does not need to be a decentralized, open-source system. The technology could well be explored by existing, regulated sectors – including government services, banks, hospitals and more.

Therefore, it is worth keeping in mind that the blockchain technology remains a powerful digital revolution and despite the burst of the market bubble, cryptocurrencies have a bright future ahead of them. However, investors and traders should carefully investigate the underlying business models, before making an educated guess on which types of cryptocurrencies will make their way to a long-term success.