The first time Bitcoin was introduced to the world, many people saw it as a revolutionary idea. They thought we would have digital cash that could eventually replace fiat currencies as a medium of exchange. Unlike fiat currencies, Bitcoin does not have any centralized entity that could easily print a new supply of the currency anytime they want.
A lot of people suddenly joined the Bitcoin’s movement, and they literally believed that it would be the time for internet money (like Bitcoin) to replace the US dollar. Some of these Bitcoin early believers assumed that the history of fiat currencies was full of breaches of trust, and it was time for a decentralized currency to give them a run for their money.
So, how successful is that movement, nowadays? In recent years, many skeptics accuse that cryptocurrencies are only used for pump and dump by the crypto traders. These skeptics are not entirely wrong because Bitcoin could easily go up and down within just a few months. Many altcoins also suffer from the same price volatility, even more volatile than Bitcoin.
How did we get to this point? Well, let’s analyze where the problem was and how healthy the current crypto space is compared to the earlier days. Then, we might be able to find the correct answer.
Decentralization And Scalability
Bitcoin was intended to be the ultimate alternative to fiat currencies, which were full of breaches of trust. The underlying technology behind Bitcoin is called the blockchain, which prioritizes decentralization to remove the need for trust. Yes, unlike fiat currencies where everything is “centralized” in the hands of the central bank, the blockchain is maintained by hundreds or thousands of nodes with the same copy of the ledger.
The need for decentralization is also the primary reason for scalability issues in the blockchain. The analogy is like this. When only five individuals have the same map to tell you “where is point A from point B,” it is not hard to give them a new update of the map. However, when you have 1000 different individuals who don’t know each other, and they live all over the world, it would be slower and harder to give them all the same updates to the map.
That’s the biggest issue with decentralization. The more decentralized a blockchain network is, the harder it is for them to “scale.” And, this is also the problem with money transfer. Most people want it to be fast and cheap. Bitcoin’s transaction per second (TPS) is very limited and much slower compared to more centralized currencies. When thousands of people are trying to transfer Bitcoin at the same time, it will clog the blockchain, and everything would become much slower, and the transaction fees would be much more expensive as well.
The issue with scalability does not just hit Bitcoin. Ethereum (the second biggest cryptocurrency in the world) also suffers from the same issue. When CryptoKitties (a popular decentralized game built on Ethereum) became popular, the entire Ethereum network got clogged. At the time, it became much harder to transfer ETH or ERC20 tokens due to the popularity of CryptoKitties.
The Change Of Narrative
The lack of scalability has made some people feel frustrated with Bitcoin and the entire crypto space. They believe it would take a lot of time before the existing blockchain tech can eventually scale without sacrificing a degree of decentralization.
With the passage of time, the narrative of Bitcoin slowly changed as well. From a “peer to peer digital cash” to “digital gold”. Yep, nowadays, many people see Bitcoin as digital gold, as a store of value. They see it as something that could worth more in the future. They HODL it because they want to make a profit out of it.
This change of narrative does not just happen to Bitcoin. Most of the crypto space nowadays is about traders HODL-ing them for a certain period of time and eventually, the same traders would put selling pressure when they believe they already make enough profit.
When Everything Becomes Unhealthy
Let me get this straight. If you see cryptocurrencies as “store of value,” there’s nothing wrong with that. To see Bitcoin and altcoins as digital gold or alternatives to precious metal is perfectly fine. However, many whales (big traders) do not see Bitcoin as a long-term store of value. This is where the problem begins and becomes unhealthy.
Many whales who can control the market only see Bitcoin from the short-term perspective. They would pump Bitcoin at a specific date, and when everybody else followed and pumped Bitcoin price even more, suddenly, these same whales would just dump their Bitcoins on the less-experienced traders.
This type of scenario is often called “pump and dump.” Pump a certain cryptocurrency until a certain price point and dump it once everybody else starts buying it. There are traders who use the same type of strategy in the stock market.
I do not want to blame any individual for doing this, but unfortunately, the crypto market becomes highly unhealthy when everybody does this “pump and dump” scheme on various cryptocurrencies. It is not what crypto space is supposed to be. Every crypto is supposed to have its own use cases and purposes, not only meant as a vehicle for speculation.
What We Can Do To Become Better
Cryptocurrency’s primary purpose was to be used as digital cash. Since the era of Ethereum, cryptocurrencies have expanded their use cases thanks to the addition of the smart contracts. Nowadays, you can use cryptocurrencies for various reasons, from cross-border transactions to incentives for the blockchain-for-supply chain industry. There are a lot of things you can do with crypto.
In my opinion, what we have right now is that most people are just HODL-ing and doing “pump and dump,” without any willingness to actually spend crypto for what they were intended for. This problem can be solved if there are enough people (in the crypto community) who encourage other HODL-ers to spend their cryptocurrencies.
For example, Travala.com allows people to book hotels with cryptocurrencies. Other websites are also starting to adopt cryptocurrencies for other types of services. Instead of always HODL-ing your cryptocurrencies, you might want to think to start spending some of your crypto and change your mindset.
Most of crypto trading volume, as reported by coinmarketcap, is still dominated by crypto speculators. Until people can spend and take crypto as a medium of exchange (like how they are supposed to be used), this won’t change anytime soon.