Three Key Differences Between Traditional and Crypto Markets

What is the real market value of cryptocurrencies like Bitcoin?

The numbers used to explain the performance of Bitcoin and other cryptocurrencies are less meaningful than most assume.

Cryptocurrencies are not exactly like stocks, and cryptocurrency exchanges do not work like traditional securities markets. As a result, many crypto-asset investment strategies based on conventional definitions of market share, capitalization, volatility, and trading volume are deeply flawed. Misleading numbers mean that cryptocurrency valuation and adoption is poorly understood, which creates a false perception by the media and investors about cryptocurrencies such as Bitcoin.  One implication of this analysis is that Bitcoin has captured the vast majority of the long-term upside in the cryptocurrency market despite having about half the nominal market share.

Most cryptocurrencies and crypto exchanges manipulate numbers in ways that publicly traded companies and traditional exchanges like NASDAQ and NYSE wouldn’t dream of.  As a result, “market capitalization” and “trading volume” are at best rough and relative measures of cryptocurrency adoption. Even when intentional manipulation is not involved, crypto-asset markets fundamentally just do not function like securities markets. It’s important to understand these differences to asses the state of cryptocurrency and crypto asset adoption.

Let’s look at three important differences between how cryptocurrencies and traditional securities markets work:

Will Bitcoin burn the planet to ashes? Not so fast.

Environmentalists have recently become concerned about the impact Bitcoin mining has on global warming. Headlines such as “Bitcoin Will Burn the Planet Down. The Question: How Fast?” and “Bitcoin Mining Alone Could Raise Global Temperatures Above Critical Limit By 2033” suggest that Bitcoin is an unfolding environmental disaster.

However, those panicking about crypto make three fundamental errors. First, they do not understand how Bitcoin works, second, they do not understand what mass adoption would look like, and third, they do not understand the problem Bitcoin is intended to solve.

Regardless of your opinion on the danger of global warming, Bitcoin does not use nearly as much energy as claimed, will become far more efficient as it grows, and most importantly, solves one of the greatest causes of resource inefficiency, corruption, and human suffering.

Bitcoin mining is a market-based process that taps underutilized energy sources

When Bitcoin critics focus on the raw energy usage of Bitcoin mining, they miss the bigger picture: cryptocurrency production is a competitive market process.

Because the cost of Bitcoin mining comes mostly from electricity consumption, Bitcoin mining is concentrated in places with cheap or surplus energy. Industrial-scale mining facilities are located in far-flung locations with cheap hydro-electric, nuclear, geothermal power, or undeveloped industrial regions with excess production. Energy costs money, and miners will always look for the world’s best sources of cheap and efficient energy. Cryptocurrency mining is a means to tap underutilized energy resources for a valuable purpose—the maintenance of a monetary system. No other industry can rapidly move into an industrial ghost town and create value the way Bitcoin mining firms do.

Furthermore, the total energy usage of Bitcoin is limited by economics: crypto-miners will only keep mining when their profit is higher than the cost of electricity. The Bitcoin network automatically adjusts the difficulty of mining new blocks in response to the “hash rate” or the net mining capacity of the network. This means that Bitcoin has a built-in cap on energy use, and can dynamically adjust in response to energy prices and innovation in computational hardware.  Currently, humanity consumes around 17.7 Terawatts per year. The Economist estimates that Bitcoin uses 2.55 gigawatts or .014% of that. Some estimate the total use of cryptocurrencies at 7.7 gigawatts, but it’s likely that a single cryptocurrency will dominate after the current shakeout period.