Bitcoin, now rated 'B,' enjoys first phase of a new bull market

By Juan Villaverde on June 12, 2019

On Jan. 24, 2018, when we first launched our Weiss Crypto Ratings, we gave Bitcoin a "C+."

The crypto community responded with outrage.

Charles Hoskinson, the creator of Cardano and a founder of Ethereum, wrote that “any rating that doesn’t give Bitcoin an 'A' has got some screws loose.”

Others wanted our heads on a stake.

What they didn’t realize at the time was that our rating included algorithms that evaluate investor risk. That risk was very high. And it dragged down the overall rating.

In effect, our "C+" Weiss Rating for Bitcoin anticipated a major price decline. And sure enough, January 2018 marked the beginning of one of the worst crypto bear markets in Bitcoin history.

Now, however, the tides have changed, and dramatically so. As we documented in "Dark Shadows with a Bright Future," by early 2019, leading cryptocurrencies had experienced a unique convergence of three factors:

1. Vastly improved adoption, as the volume of on-chain transactions more than tripled compared to a year earlier.

2. A significant evolution of technology with upgrades in Bitcoin and new advances in altcoins.

3. Plus, at the same time, bargain-basement prices everywhere.

In short, we heralded the beginning of a new bull market, supported by the best combination of fundamentals and value in many years.

Today, Bitcoin’s overall Weiss Crypto Rating is “B” (good). And its Technology/Adoption grade, a longer-term measure that excludes investor risk/reward, is “A.”

As you can see from the table below, Bitcoin now leads our list of top-rated coins.

For continuing updates and details, go to https://weisscrypto.com/en/coins.

Let’s never forget: Bitcoin was the world's first cryptocurrency. As such, it pioneered the use of public key cryptography to create a decentralized monetary system under the control of no single institution.

Over 10 years have passed since then. And the crypto-asset industry Bitcoin fathered has moved far beyond the simple peer-to-peer payments it once aimed to revolutionize. But Bitcoin still sets the standard against which all other cryptos are measured. And it remains a key portal into the world of cryptocurrencies.

Clearing up Some Common Misunderstandings

Many people don’t really understand what a “crypto-asset” actually is. But mention “Bitcoin,” and they generally have some sense of what that means. So, let’s start from the beginning: what exactly was Bitcoin created for?

A lot of folks wrongly say Bitcoin is simply a “digital asset” — like paper money issued by governments, only there’s no paper involved.

But what distinguishes Bitcoin isn’t that it’s digital. Indeed, some 91.7% of the world’s money exists only in digital form.

What makes Bitcoin such a wrenching paradigm shift in world monetary history is not that it exists only as a series of zeros and ones on a computer. It’s that no one “owns” the Bitcoin ledger the way governments and central banks “own” the fiat money they create.

The Separation of Money and State

That Bitcoin is a fully digital payment system owned and controlled by no one is precisely what propelled its growth — from zero just 10 years ago, to a worldwide asset which, as I write, has a market capitalization of $142 billion.

Before Bitcoin, if you wanted an asset no central authority could control the supply of, you were limited to gold, silver or other commodities (such as copper).

Think about it. The beauty of a gold-based monetary system is that money acts as a totally neutral force within society. Nobody controls it. And nobody has complete ownership of it.

Governments can't abuse the currency in a gold-based monetary system. Because unlike paper money, they can't just print as much as they want. To create more money, they need to find more gold, mine it and mint it into coins.

Because gold has value in and of itself, a coin is only valuable because of the amount of metal it contains. Accordingly, the more coins a government mints out of the gold it has, the less valuable each one must be. This is transparent to everyone.

This is how the gold standard separated money from the state. And it was so stable, it was the world's prevailing monetary regime for thousands of years.

But something seismic changed when the world moved from physical money to digital. Money lost its neutrality, and became inseparable from the state.

Today, with a monetary system that's 91% digital, money is no longer a neutral asset. It’s become a tool, used and controlled by governments, to project and exercise power.

This is why government-backed (fiat) money has started to lose the very qualities that make money useful. Such as ...

1] Neutrality: Government-backed money isn’t neutral. If the government doesn't like what you do with it, you can be cut off from using, or even owning, it.

2] Borderlessness: Money needs to move freely across all jurisdictions to facilitate commerce. Government-backed money lacks this quality. Just look at the confiscations perpetrated by governments like Venezuela. Or the blacklisting of entire nations (Cuba, Iran, Russia, etc.) that the U.S. government has locked out of the dollar-based international payments system.

3] Controlled supply: A big part of what makes money valuable is being relatively limited in supply. But government-backed money has no intrinsic limits. That supplies are no longer being prudently kept in check is starting to reverberate around the entire world in ways we’re only now beginning to understand. This is a biggie.

Bitcoin returns money to the way it used
to be, while retaining all the properties
that make digital money useful

Before Bitcoin, the future of money faced a cruel choice. You could choose neutral money without central control. But that meant going back to cumbersome, physical gold coinage — which would slow the breakneck pace of 21st-century commerce to a crawl.

Or, you could surrender your freedom to government-backed digital money, and keep the digital qualities of money that have enabled the global economy to grow at unprecedented levels in recent decades.

Bitcoin eliminated this either/or choice. As such, it represents the next step in the evolution of money.

The Primary Use-Case for Bitcoin

Bitcoin was conceived as a new monetary system … as a new medium of exchange people could use in making payments. But since its birth, it’s evolved in a somewhat different direction.

The reality is Bitcoin has never really been much used as a payment system. And after 10 years of evolution, nothing in its future development gives us confidence it can ever become a form of money people widely use to buy and sell goods and services.

Ironically, this has nothing to do with how prohibitively slow and expensive it is to make transactions. (Transactions on the Bitcoin ledger can take up to an hour or even longer to settle. And as I write, the transaction fees on Visa or Mastercard are actually lower than they are on Bitcoin!)

The No. 1 reason Bitcoin isn’t used much in making payments: People believe it will be worth more in the future than it is today. Like gold, Bitcoin has an extremely limited supply. It's so rare, most people would rather hold on to it than exchange it for anything less scarce.

Gresham’s Law states that “bad money chases out good money.” In connection with Bitcoin, this means holders of Bitcoin would rather spend almost anything else than their precious Bitcoin. No amount of technology can change that.

But this fact doesn’t make Bitcoin useless. Far from it. It merely shifts Bitcoin's use case away from being a medium of exchange — and toward being an unconfiscatable store of value.

When you think about it, this makes a lot of sense. Bitcoin emphasizes security, censorship resistance and anonymity above all else. It was conceived and designed to be scarce, difficult to produce and expensive to move … but easy to store safely.

In this respect, it’s more like gold in a vault than paper money in your pocket. However, unlike gold — where custody and safekeeping can be a monster logistical headache — Bitcoin is weightless and costs virtually nothing to store.

This makes it the perfect store of your wealth if you want to make it practically impossible for bad actors to go after your property. If that’s what you need, it doesn’t get better than holding some Bitcoin in a personal cold wallet.

3 Future Challenges

If Bitcoin is to remain viable over the long run, however, there are still challenges to surmount. Three that merit particular attention are:

1] Scalability: In order to put such heavy emphasis on security and decentralization, Bitcoin sacrifices transaction-processing speed. As a result, most other major cryptocurrencies are faster. So are centralized payment systems like Visa and PayPal.

That said, transaction speed isn't a big worry when the No. 1 use-case is as a store of value. But the high transaction costs that stem from an easily congested network certainly are.

Fortunately, this problem is well-understood by developers. Their clever engineering has already resulted in upgrades such as SegWit, Lightning Network and Liquid Network. These allow Bitcoins to be traded quickly on separate ledgers, using the Bitcoin blockchain itself only for settlement finality.

2] Privacy: An area of bigger concern is privacy. Bitcoin is fully auditable — which means it’s possible to trace every transaction back to where those coins originated in the first place. This means you can track the movement of every single Bitcoin token on the Bitcoin network.

So, what’s wrong with that?

Well, remember that one of the key properties of money is its fungibility: A single U.S. one-dollar bill is always equivalent to another one-dollar bill. As Milton Friedman famously said: "A Dollar is a Dollar."

But is one Bitcoin always and everywhere exactly equal to every other Bitcoin in every aspect?

If all individual Bitcoins are unique and trackable, maybe not.

What if some of the Bitcoins in my digital wallet were part of an illicit transaction a few payments prior to me receiving them? Could I send these particular Bitcoins to an exchange to trade for other crypto-assets? Or might the exchange refuse to accept them on account their “tainted history”? (This is not a purely theoretical concern, because money-laundering laws nowadays seek to criminalize touching any assets alleged to be "proceeds" of illegal activity.)

Regardless of your personal views on financial privacy, even our fiat paper money system has enough privacy to ensure that one paper banknote will always be equivalent to another paper banknote of the same denomination and currency.

That's why this issue needs to be addressed in the near term by the Bitcoin community. And while many solutions have been presented and developed, none have been implemented thus far.

3] Energy Consumption: This has been well documented by many, and there's a good illustration of it here. Bitcoin now consumes more electricity than the entire country of Switzerland. And energy consumption keeps growing every year.

Bitcoin is an electricity hog, because its security model relies on thousands of miners around the world running big banks of servers 24/7 in the race to be the one to create the next block. This is great for security. But it’s massively inefficient, because there can be only a single winner for each block. All the juice burned by miners who didn't win goes completely to waste.

A second problem is that Bitcoin’s energy consumption is largely disconnected from its usage. That's because miners will mine regardless of whether there are few or many users on the network. In 2018, for instance, the energy consumption of Bitcoin more than doubled while actual usage fell by about two-thirds from its peak.

As I write, a single Bitcoin transaction consumes two or three times as much energy as 100,000 Visa transactions. So, you can see the ratio of usefulness to energy consumption is out-of-whack.

We’re don't claim this will be Bitcoin’s undoing. But such energy waste will have to be addressed. Could Bitcoin evolve to be less wasteful? Yes. But this will likely stem more from major increases in usage and adoption than on changing the equations that define its security model.

Bottom line: Despite these challenges, Bitcoin excels in adoption. Its technological deficiencies are being addressed. And its risk/reward metrics should continue to improve as a sustainable bull market unfolds.

Our recommendation: Wait for a substantial price correction. Then buy with funds you can afford to risk.

Best,

Juan

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