The Altcoin Risk: Regulation Backlash

Bitcoin already has already grown to over $36 billion market cap at the time of this writing. It will either grow much more and become mainstream like the Internet, or fail completely.

One way it might fail is aggressive regulation. If all states decide that Bitcoin needs to go, they have quite a lot of instruments to make that happen. It might still survive, but by definition only criminals will be able to use Bitcoin, and it will be impossible to become mainstream in that case.

So it was interesting to note this Tweet by Riccardo Spagni quoting an article about the situation in Bolivia, where 60 people were arrested for spreading information about Bitcoin, which is illegal in the country. Aaron van Wirdum reports on these arrests.

This is not what you want to read if you support Bitcoin.

The reason for the Bolivian government to oppose Bitcoin is that they think it is a pyramid scheme aimed at separating investors from their hard-earned money.

I don’t agree with that as far as Bitcoin is concerned. The main point of Bitcoin is that there is nobody issuing it. Pyramid schemes have issuers running them. Bitcoin is no pyramid scheme in the same way that gold is no pyramid scheme.

But I agree with the point Spagni makes in his Tweet. It reads:

This is what happens everywhere in the future if this token garbage continues unabated.

The risk from Ethereum and “tokens” based on Ethereum is exactly that.

Some Ethereum supporters get somewhat cocky and explain that Bitcoin is “Myspace” while Ethereum is “Facebook”.

I just checked, and it turns out that Myspace never reached a $36 billion market cap. It was sold for only about $580 million in 2005, when it was the world’s leading social network. Bitcoin is already way past that.

But it may be correct that Ethereum has vastly superior qualities to Bitcoin, and that we will see a “flippening” of market cap, with Ethereum winning against Bitcoin. I for one don’t see any such vastly superior qualities, but who knows. Obviously Bitcoin may fail by being replaced with something better, in which case the world will still be better off (though Bitcoin holders may see some losses).

That’s one altcoin risk.

The other altcoin risk is the point Spagni makes. Bitcoin may become banned because regulators are unhappy with “garbage tokens” separating investors from their hard-earned money. There’s a reason we have securities laws. And that reason doesn’t disappear because you call your shares “tokens”.

Many of the “token garbage” unleashed on investors will lead to massive losses for said investors. That in turn will lead to a backlash. I already said a couple of days ago that I would be surprised if no one gets arrested for this.

So one scenario for Bitcoin failure is this. Lots of tokens get distributed far and wide in “initial coin offerings”. Lots of those go bust. A wave of arrests sweeps the industry. Once the dust settles, all countries have securities laws in place that are like Bolivia’s is now, broadly outlawing all cryptocurrencies, including Bitcoin.

The fact that Bitcoin didn’t contribute to that particular mess may get lost in the noise.

In the scenario where some super superior Altcoin wins against Bitcoin on the market, the world is left with a cryptocurrency, and said cryptocurrency will be better than Bitcoin is now.

In the scenario where some Altcoin provokes broad regulation that hits Bitcoin as well, we may be left with no mainstream cryptocurrency whatsoever.

I for one think that this risk is higher than that of an Altcoin beating Bitcoin in the market. And the consequence would be worse.

Therefore, people need to be careful. Initial coin offerings need to pay attention to securities laws. And the fact that Ethereum is making it way too easy for people to collect way too high amounts of money from investors is a bug, not a feature.