Blockchain Vs. Bitcoin: Is the Pendulum Swinging Back?
This is a very much abridged version of an article published by Profit & Loss. The full article can be accessed here.
The first working implementation of a blockchain that the world had ever seen was in the bitcoin software released in 2009. Bitcoin the cryptocurrency then rose to prominence in 2013 when, driven in part by a flurry of media attention, its value rose past $1,000 for the first time.
Following that, 2014 represented a long and painful year of price decline for bitcoin as an asset, but it continued to garner a lot of attention, not always for good reasons. Then in 2015 the narrative began to change as people really started talking about the potential applications of blockchain technology distinct from any digital assets.
In October 2015 Blythe Masters appeared on the front of Bloomberg Markets magazine with the headline caption “It’s All About the Blockchain”, while the October/November edition of The Economist ran a story about blockchain, “The Trust Machine”, on its front cover.
Google search volumes for “blockchain” begin to noticeably spike upwards around this time period as a result of the attention on this technology. Although a new cryptoasset called Ethereum began to get some attention in 2016, the overall message coming out of financial institutions was that blockchain, or distributed ledger technology (DLT), was useful to them and cryptoassets were not.
In 2017, however, demand for cryptoassets has soared, driving the value of bitcoin on a strong upward trend, from $802.83 per bitcoin on January 12 to $2,476.30 on May 24. Ethereum, meanwhile, went from $8.29 at the start of the year to over $204.31 by May 30.
“If we think of this space as a pendulum, on the left hand side you have just the blockchain technology itself and on the right side you have bitcoin and all the other cryptoassets,” says Christopher Burniske, blockchain products lead at Ark Invest, which became the first public fund manager to invest in bitcoin back in 2015.
“The pendulum started on the right hand side with the assets in 2013, it then swung towards blockchain and away from the assets and that swing peaked around the summer of 2016,” he continues. “That’s around the time that the DAO hack occurred, questions were starting to be raised about smart contracts and about blockchain technology more generally and bitcoin prices were starting to make another big move.
“I would say that since that period the pendulum has started to swing back towards the assets, and ultimately I think that cryptoassets will have a much wider reaching impact on our world and business processes than blockchain technology will as a software update in financial markets,” he adds.
Why are people buying cryptoassets right now?
- Some quant traders like them because they offer de-correlated returns.
- Some portfolio managers have a "lottery ticket mentality" towards them.
- Some people are using them as a remittance avenue, particularly in countries where the domestic currency is under severe pressure.
What are some of the barriers to the adoption of cryptoassets by mainstream financial institutions?
- A fragmented and uncertain regulatory landscape.
- The KYC/AML implications of public, permissionless ledgers.
- Challenges in balancing scalability and privacy while achieving peer-to-peer settlement.
- A lack of certainty and control about how decentralised networks might evolve and develop going forward.
- In some cases a lack of understanding about the nuances regarding how these cryptoassets function.
