Classic Ether’s Decline Highlights Bitcoin’s Biggest Potential Weakness

Digital currencies are still, relatively speaking, in their infancy, and as a result, the field is ever changing. New currencies, and new versions of old currencies, seemingly come and go every day. Most, admittedly, go pretty much unnoticed, known only to those with an early interest in the creation and a few who have learned to jump in to (and out of) new currencies quickly to benefit from any early surge of enthusiasm.

Ever since Satoshi Nakomoto published the Bitcoin white paper in 2008, though, the status of the original virtual currency as the leader of the pack has pretty much remained unchallenged. The recent problems of one of those challengers, however, should serve as a warning to the bitcoin community as to where the danger to that currency lays.

Back in March, I wrote here about the bitcoin “rival” that seemed to have the best chance of taking the concept of a distributed ledger (the blockchain) and putting it to a practical use that could eclipse bitcoin. That rival was Ethereum, and the currency was its associated token, Ether (ETH). (It should be pointed out, as it was in the comments on that deliberately simplistic article, that Ether is not strictly a competitor with Bitcoin. It is a token for exchange within Ethereum rather than a currency designed to be spent outside of the system. Whereas in Bitcoin’s case the blockchain exists to enable the coin, in Ethereum’s case the opposite is true. Ether exists to enable the distributed ledger system to function.)

Despite that fundamental difference, limited, albeit increasing, investment funds and public interest left many with the feeling that rapid growth in Ethereum would inevitably result in a decline in interest, and therefore value, when it came to Bitcoin. Not long after that article was published, though, some problems within Ethereum began to emerge. The DAO hack, in early summer this year, ultimately resulted in a hard fork, with two essentially competing currencies emerging.

The idea was that the compromised blockchain, which became known as Ethereum Classic (ETC) would fade away as people switched to the new version, but it didn’t quite work out that way. A controversial technical change resulted in many supporting the old system (ETC) and that caused a rapid rise in ETC’s value.

Recently, however, Ethereum Classic has declined almost as fast as it climbed, with both value and transactions falling rapidly. The reason for the drop cannot truly been known, but given that there are two competing Ethers, of which Classic is but one, it is reasonable to assume that it is at least in part due to a feeling that the other (ETH) will emerge as the system of choice. The fact that ETC declined so rapidly once the perception took hold that it had little beyond speculative value is what should serve as a warning to Bitcoin.

The advantage that Bitcoin has maintained over all of the rival altcoins that have come and gone is that it has value outside of the blockchain, and therefore beyond the speculative. To put it simply, it is a currency that can be spent. If it ever loses that advantage, though, it will go the way of many others that have tried and failed. Bitcoin is modeled on gold, which cannot readily be spent in its original form, but given the history of that and other commodities that have value based on scarcity and speculation alone, any newcomer has to offer an improvement of sorts. I mean, if not, why not just buy gold or silver that you can physically possess? It is the ease of transaction and ultimately of use that sets Bitcoin apart.

On the surface there seems to be little danger of that going away. What data I could find suggest that the number of businesses accepting bitcoin around the globe is continuing to rise. There are, however, a few problems with that. Firstly, it seems that a large number of the new recruits, at least here in the U.S., are gambling websites, using the anonymity that Bitcoin provides to get around restrictions. Future growth in that area there is naturally limited, and it would only take one crackdown on the gambling sites by the Federal government for that whole outlet for the currency to disappear completely.

In addition, while legitimate new companies are undoubtedly being added to the list as well, that doesn’t matter if they never do a transaction. I have a friend that owns a bar that has been prominently displaying several “Bitcoin accepted here” signs for over three years now, and I asked him recently how much business they get using the digital currency. His answer was that they had never done an actual transaction, but it didn’t cost him anything to be prepared to do so, so he never took the signs down.

The point here is that the Bitcoin community needs to get out and spend some coin. A failure to do that will render all of the other problems that the currency faces, such as blockchain expansion, completely moot. ETC’s rapid decline should serve as a warning that despite an efficient blockchain and a rising price relative to, for example, the dollar, Bitcoin’s real value lays in its ability to be spent. It is tempting to hold onto Bitcoin as that price rises, but doing so could be extremely damaging over time.

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