bridge21 — May 3 2021 update
An aside on cryptocurrency & USD:MXN rates
An aside on cryptocurrency features vs. valuations (and some history)
Bitcoin’s history
Bitcoin in the early days was very different than today. Its enthusiasts were excited; here was an invention that transferred value directly to another person without a gatekeeper in the middle. This was just after the 2008 financial crisis, when the mainstream was more acutely aware of the issues with financial systems.
If you read about the history of Bitcoin and cryptocurrency you’ll hear about libertarians excited for a currency beyond the control of the state (and the usual tropes).
What’s not so readily mentioned is that there were plenty of centrists (like me) from the early community that believed cryptocurrency could act as a “check and balance” on government and central bank monetary policy. The existence of a viable alternative to national currencies would, in theory, force governments and central banks to exercise restraint in their deficit spending. While disruptive in the short term, this check and balance would serve as a longer-term stabilizing factor. In short, cryptocurrency would create monetary competition and therefore improved economic conditions for the majority of people.
Well, things changed from 2014–2017. Nearly the entirety of the early community was pushed out of the Bitcoin project as venture capital moved in. The major community forums were (literally) taken over, which was followed by censorship of the concept of Bitcoin as a transactional currency. The early software development community was replaced by outside developers who were not part of the early project and did not share its values. The focus of the project shifted from electronic cash to “store of value”. The new development team refused to increase the number of transactions Bitcoin could process, which rate-limited its ability to act as a currency. By fixing the supply of Bitcoin transactions, fees became exorbitantly high. As of this writing, the average Bitcoin transaction costs over $20 US dollars to send. These average fees are well above what you would pay using Paypal or Venmo, and even exceed fees levied by international money transfer companies such as Western Union for smaller payments.
The larger problem is that Bitcoin can only support about 500,000 active users transacting daily. This renders Bitcoin non-competitive and non-functional as a form of currency, devaluing the property which gave Bitcoin value in the first place. This dramatic shift in the ethos of Bitcoin wrecked many startups, forcing them to pivot or go out of business. bridge21 had to re-engineer our core systems so that we no longer sent money transfers as individual Bitcoin transactions, because doing so would make it impossible to compete on cost. Full disclosure: I have an axe to grind, because this change disrupted our product roadmap, and nearly put us out of business. Today we use Ethereum to process the vast majority of transactions instead of Bitcoin, because the fees are more reasonable, and the trading volumes are sufficient to support our business.
Cryptocurrency valuations today — making sense of nonsense
As we’ve illustrated above, Bitcoin is non-functional as a form of electronic currency, beyond a small group of half a million active users. There are grand projects, such as “L2” networks, that promise to greatly expand Bitcoin’s throughput. These projects all suffer from fatal flaws; they either create bank-like custodial hubs which negate Bitcoin’s value proposition as decentralized money, or they simply don’t work smoothly and cheaply enough for mass adoption. Unfortunately, when one peels back the onion on “L2” networks, they do not appear to be a solution for Bitcoin scaling that preserves the properties of Bitcoin itself, without recreating the same banking systems it was meant to replace.
Forks, alt-coins, and more alt-coins
Ethereum
These issues with Bitcoin caused the majority of the early adopters to switch to alternative cryptocurrencies or forks of Bitcoin itself. Most are unaware that Ethereum was originally planned to be a layer on top of Bitcoin. The only reason Ethereum wasn’t built on top of Bitcoin is because the development team that took over the project refused to allow OP_RETURN sizes sufficient to allow Ethereum as a layer, and had no plan for scaling that didn’t involve proprietary solutions. This is the true origin of Ethereum, which defines itself as a cryptocurrency for smart contracts, allowing greater programability than Bitcoin.
Bitcoin Cash
The holdouts from the early Bitcoin community finally gave up in 2017 when it became clear that Bitcoin would never increase its block size parameter, allowing the currency to support more users. These holdouts forked the Bitcoin chain in 2017, creating Bitcoin Cash, a cryptocurrency with the aim of continuing the original vision of Bitcoin as electronic, peer-to-peer cash. Bitcoin Cash supports block sizes 32x larger than Bitcoin, and removed the hard-coded limit on block size, signaling that it could scale as needed. While the market capitalization of Bitcoin Cash is presently <2% than that of Bitcoin proper, the fork processes more transactions than Bitcoin itself, and with fees of less than 0.01 USD (versus over 20.00 USD for Bitcoin). Bitcoin Cash has a far more decentralized development community, with multiple active implementations supported by different development groups, a stark contrast to Bitcoin, whose development is monopolized by “core” developers. This makes Bitcoin Cash’s development roadmap messy, but more resilient to control by centralized groups who might steer the project in unanticipated directions.
Privacy Coins and much more
Monero, Dash, and Zcash are all interesting projects that aim to improve upon Bitcoin’s lack of privacy properties. While Bitcoin’s ledger is fully public and relatively easy to de-anonymize, privacy coins obfuscate their ledgers using various forms of cryptography. They typically do not scale as well as the less private cryptocurrencies, but offer far greater privacy.
Transaction Volume vs. Valuations Today
Cryptocurrency valuations today are disconnected from reality. Ethereum processes by far the most transaction volume, dwarfing all other cryptocurrencies. Bitcoin Cash now regularly exceeds Bitcoin’s transaction volume, and appears to be trending upwards. While in terms of value sent in US Dollars, Bitcoin’s still out in front most months, but its lead is dwindling and is sometimes exceeded by other cryptocurrencies.
Markets are irrational, but strictly on a fundamental basis, the major cryptocurrencies are not valued rationally. All have inflated valuations because of market hysteria, but their relative valuations are even more out-of-whack. Bitcoin must increase its block size (unlikely) and be adopted as a fiat replacement using bank-like L2 technologies to justify its current valuation. Ethereum’s valuation relative to Bitcoin is still dramatically undervalued when you look at its functionality and ability to scale today (although it has suffered from its own scaling challenges). Bitcoin Cash is perhaps the most undervalued of the bunch, as it preserves Bitcoin’s original functionality, has greater potential scaling due to smaller transaction sizes, and shows signs of wider adoption.
It will be interesting to see how the relative valuations between Bitcoin, Bitcoin Cash, Ethereum, and other major cryptocurrencies ossify after the bull market corrects and valuations return to less stratospheric levels.
Short-term USD:MXN forecast
The USD:MXN rate snuck higher last week, now trading solidly above the 20 MXN to 1 USD level. We think higher exchange rates are likely in the short-term.
Longer-term USD:MXN forecast
Our long-term forecast is still higher for the USD:MXN exchange rate through 2021.
Best regards,
Will
bridge21
The content in this update is for informational purposes only. You should not construe any information or other material in this update as legal, tax, investment, financial, or other advice. While we took care to share correct information from reputable sources, bridge21 cannot guarantee the accuracy or timeliness of the information.
