The presence of a bubble does not mean that the economics and businesses related to cryptocurrencies are not viable businesses. Rather, a bubble suggests that the return-on-investment could be considerably lower than investors currently expect. Many forecasts made during the Technology bubble regarding the internet’s impact on the global economy have turned out to be true. However, those who invested in the Technology sector during the bubble have largely been disappointed with their returns because so many internet-related companies were severely overcapitalized.
“Mining” Cryptocurrencies Is Simply Playing An On-Line Game
As any player of on-line games can attest, the goal of most games is to win coins, tokens, jewels, or the like that are helpful in reaching new levels in the game. One receives a certain number of coins when one wins a level, and is allowed to proceed to the next level of the game. Depending on the game, coins can be used to enter new levels of the game or to purchase accessories that help win. Additional coins can typically be purchased for real money via a credit card.
Winning game coins or tokens is remarkably similar to “mining” of cryptocurrency coins. Coindesk.com actually uses the heading “solving the puzzle” for the description below (emphasis is mine), which can be found on their website under the heading “How Bitcoin Mining Works”.
One needs considerably more computing power to mine cryptocurrencies than to play on-line games because the puzzle is very complicated. However, one cannot deny the similarity between on-line games and cryptocurrency mining. One solves a puzzle and wins a coin.
The only difference between cryptocurrency mining and on-line games seems to be whether the accumulated coins or tokens are tradeable. One would imagine that the folks who developed Candy Crush never thought to make the game nearly impossible to win and allow winners to trade their limited Candy Crush coins outside the game.
Regulation: 6th Grade Stock Market Game
When I was in 6th grade, our teacher formed a stock market game so that the class could learn how financial markets worked. The game included currency (made of construction paper), stock certificates, and daily business updates on the fictitious companies on our exchange. Looking back on our 6th grade stock market today, I realize there were crashes and bubbles, undervalued companies, and even long-term investors and short-term traders.
However, the aspect I remember the most was that the game ultimately needed a regulator. Some rather devious members of the class bought shares using counterfeit money (remember it was only construction paper). The game ultimately failed because many members of the class didn’t trust their counterparties and one would receive a failing grade if caught with counterfeit money.
Similar to my 6th grade experience, cryptocurrency speculators should want regulation and oversight of the cryptocurrency markets to ensure proper counterparty protection, eliminate fraud, etc. We are not as certain as are cryptocurrency advocates that blockchain technology will truly eliminate these risks. There are now over 1300 cryptocurrencies with “circulating supply,” and it seems reasonable to assume all 1300 are not of equal quality. Cave etiam speculatoris.