This article was originally published on ValueWalk.com by Mark Melin. For additional behind the scenes insight, see commentary provided in the last paragraphs.
Why has Bitcoin almost tripled in price over a handful of months? Is it a mirage, an asset backed by nothing of tangible value, as critics have charged, or is it more an omnipresent technology that will power the future? These are the questions that shape fortunes and the future. In part, the answer can be seen in the price relationship between Bitcoin and its acceptance of the related Blockchain technology. And what of the new kid on the block, Ethereum, which helps enterprises code business logic into Blockchain? Will this continue to rise in value more than the 1000% it has already increased?
Bitcoin, Blockchain, Ethereum, cryptocurrency
Note that Morgan Stanley tracks the general acceptance of crytpocurrency Bitcoin, Blockchain and Ethereum relative to mainstream news mentions
Which is the biggest buzzword: Blockchain, Machine Learning or Artificial Intelligence? Ethereum could get on that list.
It is somewhat difficult for Morgan Stanley to determine which is the most elite fintech buzzword of late, but they do a good job framing the issue.
“AI (artificial intelligence) and Blockchain have been among the buzzword elites the past couple of years,” they wrote in a June 13 report. “We can’t help but wonder if they shouldn’t actually be competitors, or whether they will complement one another.”
This is the same sort of head scratching that is seen in the dramatically rising prices of “currency” related to the technical innovation.
On Friday, March 24, 2017 the price of Bitcoin was trading at $935.95 – a significant level, given that critics had hammered the cryptocurrency for being based on nothing of value. In fact, Bitcoin isn’t backed by a sovereign state. Currently, it is the ultimate definition of a “fiat” currency ability to scale is being called into question by developers.
But in little more than two months, the value spiked to over $3,000, to trade today near $2,632, according to digital exchange Coindesk.
What is driving such a price rise?
In part, the price of Bitcoin has been correlated with the wider acceptance of the concept and trust in the technical underpinnings of what some argue is not an asset at all, but more a technical platform that will drive the future.
Bitcoin and its technical sister Blockchain have made significant strides recently, a Pitchbook report noted. In fact, they have met or exceeded many of the benchmarks set forth in a Morgan Stanley report, both of which point to potential causation for the technology’s rise and why it is occurring.
Key question: How much does acceptance of Blockchain technology drive Bitcoin value?
Pitchbook notes the rise of Bitcoin, Blockchain, Ethereum, cryptocurrency
The real question: How much does technical acceptance of Blockchain drive the price of Bitcoin and Ethereum?
Given the spectacular price rise in Bitcoin, and the unequaled blossoming in technology derivative Ethereum, the question of why this has occurred vexes traditional economists.
While causation is not always equal to correlation, correlation can sometimes provide clues.
In part, analysts have noted a persistent trend of acceptance of the core technical underpinnings of Bitcoin as seen in Blockchain. The more the technology is used and accepted, the higher the price of Bitcoin and recently Ethereum.
This recent correlation can be seen on one of the last pages of a recent Morgan Stanley report. The recent spike in global Bitcoin Mining Energy Consumption from March 2017 to present correlates with the recent price action of both Bitcoin and Ethereum.
In part, the energy consumption level is an indicator of how much the technology is being used – and it has recently broken into all time new highs.
This can, in part, also be seen in a recent Pitchbook report that stated: “…cryptocurrency investment(s) have instead focused capital to flow into the protocols themselves.” In other words, a key insight is that Bitcoin price appears to some degree driven by the acceptance of the underlying technical protocols and their widespread adoption.
While Bitcoin is the new age “financial asset,” Blockchain, the financial ledger technology, has a much more nuanced definition. It is part encryption methodology, part database node, and part security protocol. Increasingly, financial exchanges and back office transactions are being eyed as a method to make more efficient what can be a long and often human process to get to trade settlement.
This is a promising Blockchain technology that is crossing regulatory jurisdictions
Blockchain has not passed its first test, Morgan Stanley says
Blockchain has been advancing at a significant pace, a 33-page report from Morgan Stanley observes. But even still the technology “hasn’t had a true test.”
While early signs are promising, the report titled “Blockchain: Unchained,” noted speed bumps amid what has been spectacular growth. “Many of the big questions have yet to be answered, and it hasn’t been tested at scale in a complex, fast-moving business environment,” it said, painting a picture of financial engineers who recognize the opportunity but have yet to piece together the entire puzzle.
In the age of cyberwarfare, a technology with a reputation of being secure and resilient, as the report categorized Blockchain, the key is to answer all business case questions and create a central regulatory framework across jurisdictions. That will be no easy task.
Driving the prices of Bitcoin, Blockchain, Ethereum and the cryptocurrency concept is trust and usage adoption
While there has been significant progress and “proofs of concept are in the process,” the fact is “there is no killer app yet, which we think is needed to kick-start adoption,” the Morgan Stanley report observed.
The need for a big bitcoin winner comes as a Pitchbook report notes that “VC investors have tapered their participation in deals in blockchain companies as alternative forms of fundraising.”
While categorizing Bitcoin as a “trusted store of value,” there are developers who are taking “a hard look at its perceived flaws.” If technical adoption is questioned, money flows could slow.
In a Pitchbook report titled “As interest in Blockchain booms, Ethereum gains ground,” authors Evan Morris and Bryan Hanson note problems in the developer community that need to be overcome. This includes scaling to more widespread adoption and integrating Ethereum, which has been recently been authenticated “by various high-profile enterprises.”
As the US Securities and Exchange Commission reviews commentary on a potential Ethereum ETF coming to market, “the combination of developer interest and increased ease of investment will only drive prices higher,” Pitchbook said, pointing to the correlation between technology adoption and price.
In terms of adoption and the ability to see actual use case scenarios, Morgan Stanley has been closely watching five case studies to benchmark progress.
While some in the venture capital community may be looking for actual success stories, they might be found in BNY Mellon’s government bond settlement project, the Australian Securities Exchange (ASX) and cross-border payments solutions in Project Ubin.
The industry is poised to take off, as several prospective big wins are illustrating.
There is, of course, a significant caveat: “So long as the community avoids further hacks and scandals,” the popularity will continue, the Pitchbook report observed.
Analysis / Insight / Opinion:
Early on — when three major government agencies all released a joint statement on the acceptance of bitcoin and key banking insiders such as Blythe Masters entered the field — the establishment proclivity to accept and advance the technology had momentum. Some in the artificial intelligence space tell me that there is much hype around Bitcoin and Blockchain, which can be seen in the level of obfuscation of how it works to solve real world technical problems, but that even if only a percentage of the hype is true there could be significant advancements ahead.