Last updated on September 25th, 2016 at 07:35 pm
I’ve been watching the evolution of cryptocurrency over the past 5 years since Satoshi Nakamoto first unveiled his brainchild Bitcoin. In that time well over 300 new cryptos have arrived on the scene, many of them fading away rapidly, not even footnotes in the greater history of the crypto movement. The reason for each failure was different, and I don’t want to get bogged down in a discussion of them. Instead I’d like to discuss some ideas that I think the crypto community as a whole needs to embrace. Some of them may seem odd, and some may seem accusatory, but I think that I’m more or less correct in my reasoning. In order to make my case I’m going to have to name some names and possibly offend some people. That’s not my intent, it’s just going to be one of those unavoidable instances. This isn’t personal, this is business, so let’s proceed with that understanding.
1. The Laws of Thermodynamics Cannot Be Ignored
The two most important physical laws in the multiverse are the 1st and 2nd Laws of Thermodynamics. The first one says that energy cannot be created or destroyed, merely changed from one state to another. The second states that, eventually, everything falls apart. It is absolutely critical that these two laws be taken into consideration by every coin developer, and every coin investor. Whether you are mining with a CPU, a GPU, or an ASIC miner, you are burning electricity, and electricity is not free. Unless and until we resolve the problem of energy production and consumption, it is going to be an ever-increasing factor in the long-term viability of any and all crypto currencies. You cannot get something for nothing. This is a fundamental law that governs the universe, and arguing that point is stupid. When Jackson Palmer created Dogecoin he did it as a joke, and everyone, including Palmer, was surprised that it took off. Granted, that little Shiba Inu is adorable, but no one could have guessed that doge would take off like it did. A lot of people, however, did correctly predict that it would run out of steam and crash.
Bitcoin was designed to take nearly a century to fully mine, and Nakamoto likely never foresaw it achieving widespread mainstream adoption. Certainly not in the space of a decade. Doge, on the other hand, was designed for the express purpose of mainstream adoption to create a “tipping currency” and was designed to produce 80 billion units. Then the decision was made to produce them indefinitely, a situation that flies in the face of the laws of supply and demand. With no limit to their production, there would soon be no profitability due to the ever-rising supply and the constant, or rising, cost of production. Once the profitability fell off, the incentive to continue to work would diminish, and the miners would move on to greener pastures. As you can see in the following chart, the price of doge has been on a consistent downward slope. Notice how doge spiked in January in response to the community sending the Jamaican bobsled team to Sochi. Then it spiked again in February before dropping .Another, smaller, spike resulted from the successful sponsorship of Josh Wise at NASCAR. After that, the value has consistently fallen. The above graphic is a 30 day snapshot of doge’s market. By comparing the two graphs you can see how doge has gone from $60 million to $30 million in 90 days. Not coincidentally, there are currently 80 billion doge in circulation, with another 20 billion expected by year’s end. While there have been a few businesses that have recently begun to adopt doge as a payment option, I don’t expect this trend to continue. There is no reason for them to do so if the value continues to drop. And it will continue to drop as more and more doge come into existence, thus leading to hyperinflation. Why would I accept doge valued at .00049 in the morning knowing it will likely only be worth .00045 when I close shop? Bitcoin has had volatile price swings, but since it was known that only a finite number of bitcoins would ever be produced, commercial adoption was a calculated risk made with the long view in mind. There will never be an end to the supply of doge, therefore no reason to expect the price to ever rise. Even if Doge was to switch algorithms to PoS and/or merge-mining, the price is never going to rise.
2. Bigger Is Not Necessarily Better
Numerous other coins, seeing the success of Doge and, completely misunderstanding it, jumped on the bandwagon and decided ridiculously high numbers was the ‘Next Big Thing.’ Kittehcoin (25 billion), Infinitecoin (90 billion), and others coins decided that they would dethrone doge and become the new Internet darling. And all of them have failed miserably, much to the surprise of quite a few observers, myself included. If you had told me in 2011 that a crypto currency with a dog for a mascot would absolutely crush TWO cryptocurrencies with feline themes (Kittehcoin and Catcoin) I would have laughed at you. And yet, it happened. The reasons are plentiful, and I’m sure someone is going to write the “How Doge Beat the Felines” and I will gladly read that article because I enjoy learning new things. The most absurd example of this More Coins= More Popularity race, in my mind, is XXL coin which promises to release “2,800 billions (sic).” To give you a frame of reference for why this is ridiculous (in case it’s not immediately apparent), the human population is 6 billion. That means every man, woman, and child on the planet could receive 400 of these XXL coins, and there would still be some left over. This pretty much guarantees they would never be worth much of anything.
3. Less Is Not Always More
The obvious take-away from the above lesson is is that you should limit the number of coins produced, yes? After all, Bitcoin is coded to only produce 21 million units, total. While each can be subdivided to 8 decimal places, this still leaves bitcoin capable of wielding significant power in the market, even with the number of bitcoins that have been irretrievably lost in the early days before they actually had any real value. (Not to mention Satoshi Nakamoto’s enormous holdings.) Working on the scarcity principle, and likely trying to prove that dogecoin wasn’t the silliest idea to hit crypto, someone developed 42 Coin, a reference to the Douglas Adams classic “The Hitchhiker’s Guide to the Galaxy.” There would only be 42 of these ever produced, a situation that led to an absurdly high initial value of $800,000. Needless to say, the bubble burst almost instantly and the price has cratered at $9,000. That precipitous crash, by the way, brings me to my next point…which will be covered next week, in part two.