Despite the rapid development of blockchain technology, the current research and development is still in the “infant period”, which needs more external forces to help, and there are still many risks and uncertainties for practitioners. What is predictable is that in the next 5 to 10 years, blockchain technology will be widely used in everyday life.
Many companies have been focused on blockchain since the birth of Bitcoin, but Bitcoin uses are currently explicitly limited and have even been labeled as a solution in search of a solution to a problem. Many investors now see bitcoin as a digital store of value comparable to gold, housing or fine wine.
At the moment, cryptocurrencies, as represented by Bitcoin, are an emerging field. As technology and consumer preferences continue to change, bitcoin may lose its leadership position if the network fails to adapt quickly, and the first-mover advantage is equally tenuous. As a result, Bitcoin could eventually lose its throne as the dominant digital store of value to another cryptocurrency with greater practical use and technical flexibility. Today, ETH looks like the most likely candidate to overtake Bitcoin, but the final outcome is up in the air.
This post breaks down why Bitcoin and Ether have value from a digital value perspective and how to understand that digital cryptocurrencies are here to stay with high volatility until they achieve value-driven status.
What is a store of value?
Simply put, a store of value is any storage that retains its value over time. While financial stores of value like stocks and bonds will maintain their value by generating a certain amount of cash flow, the return is not a prerequisite for value. Art, wine, gold, etc. are also widely used as stores of value. However, all of these non-revenue assets have a clear practical purpose beyond being stores of value, reflecting the utility and relative scarcity that consumers derive from using them. The store of value attribute of an asset places it in a store of defined future value over a continuous period of time, and it provides the owner with the right to future returns or the promise of growing value over time.
Value stems from application
Value always arises from application. Stores of value like gold and houses and make them more valuable by exchanging them for a vehicle of value (usually money). In fact, all significant non-revenue stores of value develop a real use before they become investment assets. For example, gold was first used as jewelry to signify permanence, promise or immortality. On an economic level, value carriers also needed permanence, and gold’s durable and inert elemental properties solved this problem. Given the state of technology at the time, gold was the only solution to this problem, which explains why so many societies have adopted gold for this purpose.
Economic value arises when marginal benefits exceed marginal costs, and cryptocurrencies do not pass this test.
When the international community becomes complex and needs a means to regulate international trade, gold is also the natural choice to solve this economic problem due to its indivisibility and consensus value. Consumer demand tends to be price sensitive, and actual use is important for the store of value, thus having an offsetting effect on investment demand fluctuations and moderating price volatility. For example, jewelry demand is a volatile factor in the gold market, and when gold investment demand pushes prices higher, jewelry demand falls, and vice versa.
Ether beats Bitcoin as a means of storing value
Given the importance of real utility in determining the store of value, Ether has a great chance of overtaking Bitcoin as the dominant digital store of value. The ethereum ecosystem supports smart contracts and provides developers with a way to create new applications on its platform. Most decentralized financial (DeFi) applications are built on the Ether network, and most NFTs issued today are purchased with Ether. As cryptocurrencies become more widely used in DeFi and NFT, Ether will establish a first-mover advantage in the application of crypto.
Ether can also be used to store almost all information securely and privately on a decentralized ledger. And that information can be tokenized and traded, meaning that the Ether platform has the potential to become a large marketplace for trusted information. Today, NFT’s online sale of digital art and collectibles is just the tip of the iceberg, and it’s a small glimpse into practical uses. For example, individuals can store and sell their medical data to pharmaceutical research companies through Ether. A digital archive on Ether can contain personal data, including asset ownership, medical history, and even intellectual property. Ether has the added advantage that the network runs on a decentralized global server base, rather than centralized servers like Amazon or Microsoft, potentially providing a solution to concerns about sharing personal data.
Real demand for gold is a powerful tool to stabilize prices
One of the main arguments for Bitcoin as a store of value is its limited supply, demand also drives the success of the store of value, there is no fixed supply of any store of value. The supply of gold has grown by nearly 2% per year for centuries, and it is still an accepted store of value. A large number of scarce elements, such as osmium, are not stores of value. In fact, a fixed and limited supply has the potential to drive price volatility by incentivizing hoarding and forcing new buyers to outbid existing holders, potentially creating a financial bubble. It is more important to have low risk in a sharp and unpredictable increase in new supply than a limited supply to preserve value. And Ether, with its uncapped total supply but capped annual supply growth, meets this criterion.
Rapidly evolving technology breaks the first-mover advantage
The most common arguments in favor of Bitcoin maintaining its dominance over other cryptocurrencies are its first-mover advantage and large user base. But history shows that first-mover advantage is difficult to maintain in an industry where technology is changing rapidly and demand is growing. If an incumbent fails to adapt to changing consumer preferences or technological advances by competitors, they may lose their dominant position. Think Myspace and Facebook, Netscape and Internet Explorer or Yahoo and Google.
For the cryptocurrency networks themselves, the number of active users has been very volatile. In 2017/18, Ether was able to gain an active user base in a year that was 80% the size of Bitcoin. Ether’s governance structure, with a central development team driving new proposals, may be best suited to today’s dynamic environment, as cryptocurrency technology is rapidly changing and systems that fail to upgrade quickly may become obsolete.
In fact, Ether is in the process of upgrading its protocol more rapidly than Bitcoin. That is, Ether is currently transitioning from a proof-of-work (PoW) to a proof-of-stake (PoS) authentication method. Proof of stake has the advantage of greatly improving the energy efficiency of the system, which will end the power-burning race that miners are rewarded for. Bitcoin’s energy consumption has reached Dutch proportions and could double if the bitcoin price rises to $100,000. This makes bitcoin investment challenging from an environmental perspective.
The user base is still very volatile, which means leadership can change quickly
While the PoS protocol raises security concerns due to the need for a trusted overseer in the verification process, Bitcoin is not 100% secure. Four large Chinese mining pools control almost 60% of the bitcoin supply and could theoretically collude to verify fraudulent transactions. Ether also faces many risks, and its ascension to dominance is by no means guaranteed. For example, if the upgrade to Ether 2.0 is delayed, developers may choose to move to a rival platform. Similarly, Bitcoin’s usability is likely to improve with the introduction of the Lightning Network, changing the protocol to support smart contracts and moving to PoS. all cryptocurrencies are still in their early stages, with fast-changing technologies and unstable user bases.
High volatility is here to stay until value-driven is achieved
The key difference between the current cryptocurrency rally and the 2017/18 cryptocurrency bull market is the presence of institutional investors, a sign that financial markets are starting to embrace crypto assets. Bitcoin’s volatility still continues to move higher, and just in the past while, the price has cut back from its highs. This volatility is unlikely to abate until Bitcoin has a potential real economic use independent of price to quell selling pressure. Indeed, institutional participation has slowed recently, as reflected in reduced flows into cryptocurrency ETFs, while the stellar performance of cottage coins suggests that retail investors are once again taking center stage. The shift from institutions to an increasing number of retail investors, similar to the market in 2017/18, increases the risk of a material correction. Only a real need to address economic issues can end this volatility and usher in a new era of maturity for cryptocurrencies based on economics rather than speculation.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/from-a-digital-storage-value-perspective-why-high-volatility-will-persist-until-value-drivers-are-realized/
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