Speaking to Yahoo Finance senior writer Dan Roberts at the outlet's All Markets Summit: Crypto conference in New York City on Feb. 7, CoinDesk director of research Nolan Bauerle discussed his firm's recently released report, "State of Blockchain: 2018." The two addressed developments over the past year, from bitcoin's spiking transaction fees to Ripple's skyrocketing price and leveraged investments in cryptocurrencies.
The most memorable line from the conversation by far, however, was Bauerle's insistence that "bitcoin is the alpha and omega of all of this."
The late-2017 cyrptocurrency bubble saw investors in hot pursuit of the next big coin, the blockchain's killer app, and any number of other holy grails. While bitcoin logged incredible returns over the same period – before experiencing a profound correction around the New Year – the conversation in cryptocurrency investing often seemed to treat bitcoin as a given, if not old news.
Without directly addressing that perception, Bauerle emphasized turned the focus decisively back to the original cryptocurrency, saying that bitcoin is "the most secure financial system in the world." (See also, How Bitcoin Works.)
He cited the increase in the bitcoin network's hash rate over the past year, equating it to "security" (as in safety, not "a security" in the regulatory sense) and stressing that it was a more important metric than the notorious volatile price. Hash rate, the computing power bitcoin miners lend to network, shows the growth of "a whole network of computers to secure and protect this ecosystem."
Bauerle was less enthusiastic about XRP, Ripple's cryptocurrency, which saw the highest returns of any major token in 2017. Significant concerns have been raised about XRP, also referred to as "ripple" after the company that provides it, most recently by BitMEX, which wrote on Feb. 6 that XRP's "apparent distributed consensus mechanism doesn't serve a clear purpose" meaning that "Ripple does not appear to share many of the potentially interesting characteristics crypto tokens like Bitcoin or Ethereum may have." (See also, Should You Short Ripple?)
Bauerle did not endorse these sentiments, but explained cyrptocurrency enthusiasts' doubts about XRP in terms of the confusion they feel about "the idea that the coin and the company are two different things," a tension he compared to the confused terminology around Ripple/ripple/XRP. "You don't necessarily have a role to play in the consensus," Bauerle said, meaning "you own the coin" but not a "stake in the network."
He stressed, however, that Ripple is pursuing "incredible innovation" in attacking existing systems such as SWIFT.
The conversation turned to bitcoin's transaction fees, which spiked to over $50 per transaction on average in late December 2017. Bauerle lent a positive spin to what could be considered one of the crytpocurrency's major drawbacks, saying that the rise in transaction fees reflects increased demand. The surge in demand can also be seen in the rise in the average size of a bitcoin block over 1 megabyte, he said, as well as – of course – the price.
Forks, ICOs and the Leverage Myth
CoinDesk found that more value was created through forks of cryptocurrencies in 2017 than through initial coin offerings (ICOs). They also found that, while the dollar value invested in ICOs increased precipitously (146%) in the fourth quarter, the increase in ether value invested in ICOs was milder (56%). What was not addressed, oddly enough, was the role ether's rising price almost certainly played in that disparity. Addressing the mentality retail investors should have when approaching ICOs, Bauerle said as long as you "don't come at it with an unserious mood," there's "nothing to be afraid of." (See also, Bitcoin's Biggest Unresolved Tax Question: Hard Forks.)
Finally, Bauerle addressed a common trope in reporting on cryptocurrencies: the idea that investors are buying bitcoin and its peers on leverage, even mortgaging their houses to do so. According to CoinDesk's survey, 82% of respondents did not use leverage to invest in cryptocurrencies; of those who did, 52% have paid it back. While that debt-fueled minority of investors can certainly experience – or cause – problems, Bauerle pointed out that "if this is a bubble, it would be the first one that's not built on leverage."
There are a lot of "hard numbers" underpinning bitcoin's growth, he concluded.
Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author does not have a position in any cryptocurrencies.