Ethereum 2.0: A New Hope

I wanted to write a followup to my negative posts about Bitcoin because I have discovered that there is a positive side to cryptocurrency tech, although it took until very recently to evolve and brings risks of its own.

I’m talking about the transition from electricity-wasting Proof-of-Work (PoW) to the collective trust schemes based around Proof-of-Stake (PoS), with the Ethereum 2.0 transition being one of the best examples of a thoughtful migration path away from the catastrophic diminishing returns of the economics of PoW cryptocurrency mining.

Ethereum 1.0 is already not worth investing in, because of the cost mechanics of the increasingly more powerful GPUs (4GB RAM is no longer enough) and PCs (SSD, lots of RAM, fast CPU) required to start a profitable ETH mine. Hobbyists have to join mining pools to have any hope of profit at all, because you need a sizable investment in hardware and electricity in order to hope to mine coins on your own. The enthusiasm in industrial mining will last until 2022 and then fizzle out with Ethereum 1.0 itself. So I’m not worried about them. I think ETH will drop to a fraction of its current value, but not to $0.

But I do have a new set of fears to add to my original fears that Bitcoin and the other “1.0” cryptocurrencies based around PoW are effectively a Ponzi-like scheme where the prices are bid up to stratospheric heights, and then drop to $0 when people collectively wake up and realize they’ve been swindled, and the big institutions start selling off their holdings. That could lead to a flash crash of the entire market because of all the other tokens tied to BTC.

My other set of fears revolves around greedy people swindling each other through the issuance of smart contracts that cheat them, NFTs that don’t have any lasting use because they’re not tied to any meaningful privileges, and “stablecoins” which appear to be backed by US dollars and are therefore used as a proxy for USD and trade at parity with it on exchanges, but may not be backed by anything of value if there’s a mass sell-off (run on the bank). Many stablecoins seem backed by other cryptocurrencies, including Bitcoin, so a catastrophic fall in that coin’s value could catastrophically affect Ethereum and many of the tokens that trade on it and other crypto exchanges.

My prediction is that BTC price relative to USD will get increasingly volatile, perhaps rise to $80,000 or even the magical $100,000, but as soon as it reaches whatever the peak value happens to be, the financial and investment world will realize that the real action is on Ethereum 2.0 and the other unregulated token exchanges (I’m particularly interested in Binance’s plans), and that holding BTC is literally just having a receipt to partial ownership of some past ill-defined waste of electricity to find random numbers with meaningless properties.

Owning a piece of Bitcoin will soon be seen as akin to owning a piece of a toxic waste site, which, in a sense, it is (not all of the electricity for mining comes from zero-carbon, renewable resources).

The new era of crypto will be about flash crashes and booms from which a lucky few will make a lot of money, while some unlucky others who try to buy in now will lose more than the stake they put up (those trading options on 10x margins betting the wrong way on the inevitable slow slide of BTC to $0).

But there are enough startup companies poised to be the “good guys” to stabilize these new markets, so I think proof-of-stake blockchains could fairly soon become an accepted way to transact business. Perhaps the entire value of the ecosystem will be $1 to $2 trillion, but it will be measured in ETH or some other coin that is accepted as less volatile and less ecologically harmful.

There isn’t that much life left to the proof-of-work cryptocurrencies. They’re too expensive to operate, so they’ll suddenly be abandoned when reality hits the markets all at once. It could happen at any time because trading is 24/7. It’s an exciting casino game, but I wouldn’t invest anything I couldn’t stand to lose. There’s a risk you could watch your investment fall to 20% or less of what you paid, and then the added risk of being locked out of selling or trading your suddenly-worthless coins, having to take a total loss, or worse, if you traded on margin.

Perhaps those left holding BTC when everyone collectively abandons PoW for PoS will have sufficient avenues to convert their winnings at the old casino into poker chips to ante up at the new tables, but the bridges between the cryptocurrencies are not guaranteed to continue operating if Bitcoin fails catastrophically.

I predict that by 2022, the entire 1.0 cryptocurrency ecosystem will be decimated like a failed dot-com, or will have suddenly transmuted into a non-proof-of-work form (like Ethereum is doing) in order to survive. There’ll also be a lot of bankrupt mining companies with useless ASIC investments and people will lose money on having invested in those stocks as well.

If you’re still a Bitcoin bull after reading this, try not to laugh too much: the same fate awaited the dot-com stocks that had non-viable P&Ls and business models after 2000. Bitcoin is a very close equivalent to Webvan or Pets.com. The only innovation of its business model (distributed trust) has enabled better business models to emerge, which will innovate it out of existence, even assuming that governments will do very little to try to outlaw it.

I suspect that the central banks and politicians realize that if they demonize Bitcoin, the value will only increase out of contrariness, but if they ignore it, the value will collapse all on its own. Either way, it’s not a threat to fiat currency or the existing financial systems, because the super-rich are able to convert their existing money to buy into the old games at the new casinos.

The rich will continue to stay rich. Elon Musk is a perfect example. He’s going to win no matter what happens to the price of Bitcoin. He’ll trade Tesla’s holdings to ETH or some other cryptocurrency just before the bottom falls out. He’s playing his legion of adoring fans for suckers, and they’ll continue to worship him even after he betrays their trust by not hodling until $100,000, or whatever price they were waiting for that it never quite reached.