The billionaire creator of Ethereum already expected the collapse of cryptocurrencies

The billionaire creator of Ethereum already expected the collapse of cryptocurrencies

May 21, 2021 3 min read

This article was translated from our Spanish edition using AI technologies. Errors may exist due to this process.

This week, the world of cryptocurrencies experienced a severe collapse, losing about 35% of its total capitalization in one day . Although this took investors and markets by surprise, Vitalik Buterin , the billionaire creator of Ethereum , revealed that he already expected the bubble to burst.

In an interview with CNN Business , the 27-year-old mogul said that cryptocurrencies are “in a bubble,” but it is difficult to predict when it will burst. “It could be over by now … It could be over in months ,” Buterin said.

According to the specialized cryptocurrency portal CoinMarketCap, on Wednesday morning the price of Ethereum fell to $ 2,092 . This is 41% less than the $ 3,559 it cost a day earlier. Although it managed to recover to exceed $ 2,900 on Thursday, today it is trading at $ 2,283 per unit with a downward trend.

Source: CoinMarketCap.

These figures are still a long way from the all-time record price of $ 4,337 that it reached on May 12, according to data from Coindesk .

Of course, the fall of Ethereum impacted the public portfolio of Vitalik Buterin , who just three weeks ago was crowned the youngest billionaire in the world . His account went from $ 1.1 billion to $ 870 million in a single day.

However, the crash of digital currencies did not surprise the Russian-Canadian programmer.

“We’ve had at least three of these big crypto bubbles so far (…) And quite often, the reason the bubbles end up stopping is because some event happens that just makes it clear that the technology isn’t there yet,” said the founder of Ethereum.

Currently, Ethereum is the second currency by market capitalization, only behind Bitcoin . One of the reasons for its growing popularity is that it is used in NFT transactions or non-fungible tokens , the new ‘crypto’ sensation .

The abrupt collapse of cryptocurrencies can be explained by two crucial events that occurred this week. First, on Sunday May 16, Elon Musk stated on Twitter that Tesla would no longer accept Bitcoin as payment . Second, the announcement that China would prohibit transactions with cryptocurrencies to the country’s financial institutions.

The 27-year-old behind ethereum isn’t surprised by the crypto crash: CNN exclusive

The crypto crash of the past few days has shocked investors around the world. Vitalik Buterin isn’t among them – even though the meltdown wiped out a huge chunk of his personal wealth.

In fact, the 27-year-old co-creator of ethereum told CNN Business in an exclusive interview Tuesday morning he believed cryptocurrencies are in a bubble.

He stressed, however, that it’s “notoriously hard to predict” when bubbles will pop.

“It could have ended already,” Buterin said. “It could end months from now.”

By Wednesday morning, ether, the in-house currency on the network Buterin invented, crashed below US$1,900 – a staggering drop of more than 40 per cent from Tuesday night, according to Coinbase. Ether rebounded to around US$2,700 Thursday morning, but that’s still down sharply from the record high of US$4,384 on May 11.

The nosedive may have cost Buterin, a Russian-Canadian programmer who dropped out of college, his newfound status as a crypto billionaire. The value of ether in Buterin’s closely watched public wallet stood at approximately US$870 million Thursday morning, down from around US$1.1 billion the morning before.

Even though he’s just 27, Buterin is a veteran of these crypto boom-bust cycles, at least as much as anyone can be.

“We’ve had at least three of these big crypto bubbles so far,” said Buterin, who co-founded Bitcoin Magazine in 2012. “And often enough, the reason the bubbles end up stopping is because some event happens that just makes it clear that the technology isn’t there yet.”

‘CRYPTO ISN’T JUST A TOY ANYMORE’

Buterin laid out his vision for ethereum in a 2013 white paper, and ethereum launched two years later. Today it’s the second-largest cryptocurrency, behind only bitcoin.

Unlike bitcoin, which is viewed as “digital gold,” ethereum is a blockchain-based platform for developers to build and operate apps. It’s like the Android or iOS of the crypto space.

In late 2017, Buterin published a tweet storm that questioned whether the crypto space had really earned its market valuation, which at the time had just surpassed half a trillion dollars. He noted how little had actually been accomplished and crypto prices soon tanked.

Unlike then, Buterin is encouraged by the “huge” progress the technology and applications have made in recent years.

For example, ethereum activity has skyrocketed in recent months because it is the network that backs the sale of many non-fungible tokens, or NFTs.

“It feels like crypto is close to ready for the mainstream in a way that it wasn’t even four years ago,” Buterin said. “Crypto isn’t just a toy anymore.”

Buterin added that although he’s not sure, there is a “possibility” that ethereum eventually catches up and surpasses bitcoin in market value.

THE ELON FACTOR

Yet ethereum, and cryptocurrencies broadly, still have problems. One, they remain extremely volatile, especially for retail investors used to tamer moves in the stock market.

And some billionaires appear to be treating crypto as playthings. Elon Musk’s on-again, off-again love affair with various coins have sent shockwaves through the entire space.

Crypto sentiment took a turn after Musk tweeted on May 12 that Tesla would stop accepting bitcoin as payment because of concerns about the cryptocurrency’s environmental footprint. (The complex bitcoin mining process requires vast amounts of computer power and electricity.) A stunning US$365 billion vanished from the crypto space that day, according to CNBC.

Buterin acknowledged that crypto markets tend to be “vulnerable” to disruptive events before they “build up an immune system over time.”

“Elon Musk tweeting is something that the crypto space has only been introduced to for the first time literally last year and this year,” Buterin said. “I think it’s reasonable to expect a bit of craziness. But I do think that the markets will learn. Elon is not going to have this influence forever.”

The Tesla billionaire also repeatedly pumped up dogecoin, a cryptocurrency that started as a joke, before poking fun of it during his Saturday Night Live appearance earlier this month.

Buterin chalked up Musk’s dogecoin fascination to an innocent interest.

“The fact that he is a 100-plus billionaire and he runs Tesla and SpaceX and all these things doesn’t change the fact that ultimately he’s a human – and humans get excited about dog coins. That’s just a thing that humans get excited about,” Buterin said. “I don’t think that Elon has a kind of malevolent intent in any of this.”

BUTERIN: PLEASE STOP GIFTING ME RANDOM COINS

Another dog coin that humans get excited about is Shiba Inu, which was started as a joke that plays off dogecoin (yes, a parody of a parody).

Shiba collapsed by about a third last week after Buterin donated what was at the time worth a billion dollars to a COVID-19 relief fund in India. The selloff underscored the lack of liquidity in some of these alt coins.

“The challenge with these dog coins is that the markets for them are still fairly thin,” Buterin said. “There is not actually a way to sell a billion dollars of Shiba coin and get more than a couple of million dollars out of hit.”

Buterin also recently announced plans to burn, or remove from circulation, 90 per cent of his Shiba holdings, which had been gifted to him. In the transaction hash, Buterin said he didn’t want to be a “locus of power of that kind.” During the interview, Buterin stressed he doesn’t want “random people” who create coins to give him coins for “marketing” purposes.

“First of all, I don’t really know or understand many of these projects well. So, I can’t endorse them,” he said. “I see in my wallet that I have like a few thousand dollars of something called free coin. I don’t know what free coin is.”

Buterin urged people who want to “do something warm and fluffy” with coin supply to donate it to charity directly.

GOVERNMENTS CAN MAKE LIFE DIFFICULT FOR CRYPTO

The latest crypto crash was triggered in part by concerns about a crackdown in China. A trio of Chinese finance and banking watchdogs said Tuesday that financial institutions and payment companies should not participate in any transactions related to cryptocurrency, nor should they provide crypto-related services to clients.

Speaking before the China news, Buterin acknowledged that regulation “is always a concern,” though fears of outright bans have faded.

“It just seems much harder and much less realistic to do anything like that,” Buterin said. “At the same time, governments do have a lot of power to make it more painful to participate in the crypto sector.”

Even though the blockchain is decentralized and “governments can’t completely take them down,” Buterin said government can block or limit access.

“It’s important to listen to regulators to try to do our best to address concerns,” Buterin said, adding that the risk is the relationship between crypto and regulators becomes “more confrontational than it needs to be.”

BUTERIN IS ‘VERY CONFIDENT’ ETHEREUM FEES WILL TUMBLE

Billionaire Mark Cuban complained to The Defiant in February that ethereum is being limited by “ridiculous” transaction costs, a problem that is inhibiting its growth.

Buterin acknowledged transaction fees are “very high right now” and that the ethereum blockchain can only process between 20 and 50 transactions per second despite very high demand.

But the ethereum inventor said he’s “very confident” costs will come down because of a major technical makeover underway that will allow it to rapidly scale up.

Ethereum is moving away from Proof of Work, the original algorithm in blockchain technology, toward a newer concept called Proof of Stake. In short, the upgrade will mean that the more ether a miner owns, the more mining power they have.

THE CLIMATE PROBLEM

At the same time, the switch to proof of stake will allow ethereum to cut its energy usage by between 1,000 and 10,000 times, Buterin said.

“We go from consuming the same energy as a medium-sized country to consuming the same energy as a village,” he said.

Bitcoin, on the other hand, runs on proof of work – a key difference that Buterin argues legitimizes the environmental worries around bitcoin.

“I definitely think [those concerns] are real,” he said. “The resource consumption is definitely huge. It’s not the sort of thing that’s going to break the world by itself, but it’s definitely a significant downside.”

Buterin added that it’s not just the power consumption of bitcoin miners, but the hardware required to do the mining.

That’s why Buterin said there will be more calls within the bitcoin community to either switch to proof of stake, or move towards a hybrid, as it evolves and adapts to technological progress.

“If bitcoin sticks with its technology exactly as it is today,” he said, “there’s a big risk it will get left behind.”

Why You Should Be Paying Attention to Ethereum

Cryptocurrencies have taken the world by storm. Since 2013, the value of all cryptocurrencies in circulation has soared from $1.6 billion to more than $1.6 trillion at Wednesday’s prices, and roughly $1.4 trillion of that value was added in the past year, according to CoinMarketCap.

Bitcoin (CRYPTO:BTC) has been the leader of the pack, thanks to its first-mover advantage as the original cryptocurrency. However, in recent months, Ethereum (CRYPTO:ETH) has stolen Bitcoin’s thunder. In the past year, Ethereum has gained roughly 1,600%, while Bitcoin is up 300%.

Ethereum has caught fire for a number of reasons, but the most important aspect of the Ethereum network is its use of smart contracts. These smart contracts built on the Ethereum network are spurring a couple of innovations that give Ethereum its value: decentralized finance (DeFi) and non-fungible tokens (NFTs), whose popularity should be closely followed by investors.

The DeFi movement can’t be ignored

One of the biggest innovations spurred by the Ethereum network is DeFi. DeFi uses smart contracts on the Ethereum blockchain to offer traditional financial products, like insurance or loans, without the need of intermediaries like brokerages or banks.

These smart contracts eliminate the need for a trusted third party to verify the transaction. Nick Szabo, an early pioneer of digital currencies, likened them to digital vending machines. Smart contracts are programmable contracts between two parties that self-execute when specific conditions are satisfied. The third party is eliminated because the contract is programmable and exists on the blockchain, a secure and decentralized form of digital ledger technology.

The ultimate goal of DeFi is to eliminate third parties and make financial products such as loans, insurance, and trading more accessible to underserved markets. According to World Bank, 1.7 billion adults across the globe lack access to banking services. However, two-thirds of those do have access to a mobile phone and internet connection, and could benefit from DeFi. Given the problem it looks to solve, DeFi is a very attractive space right now.

A real-world example

Munich-based Etherisc built its first product, flight delay insurance, with smart contracts on the Ethereum network. It works this way: When a customer purchases flight delay insurance, it’s recorded on the blockchain in smart contract form. If a flight is delayed by 45 minutes or more, the self-executing contract pays out customers instantly. The smart contract allows the customer to avoid making claims with an insurance company, making insurance more efficient.

Etherisc sees insurance as one industry ripe for disruption by utilizing smart contracts, saying they could make the purchase and sale of insurance more efficient, lower operational costs, and provide greater transparency into the industry.

Ethereum leads the pack when it comes to decentralized contracts, whose popularity has taken off this year. According to DeFi Pulse, over $63 billion was locked up in smart contracts as of Wednesday, a 65-fold increase from the $953 million locked up in smart contracts just one year ago.

Leading the NFT trend, too

The Ethereum ecosystem is perfect for another purpose as well: non-fungible tokens.

One of the problems in the digital age is the ease with which we can duplicate digital assets like images, videos, and songs. NFTs aim to make digital products more like physical ones, by giving them scarcity, uniqueness, and proof of ownership.

NFTs have exploded in popularity in the past year. According to NonFungible, there were nearly $67 million in sales related to NFTs in 2020. So far in 2021, sales are an astounding $840 million, representing over 11 times growth from last year’s total – and the year isn’t over yet. Comparing the full month of April to the same month last year, NFT sales were up 82-fold. To say NFTs have exploded is an understatement.

The Ethereum network plays a key role in NFTs, as most NFTs are priced in Ether – the digital token of the Ethereum blockchain. In fact, the earliest and most popular NFTs, with names like CryptoKitties and CryptoPunks, are run on the Ethereum blockchain.

Ethereum is my favorite cryptocurrency

While Bitcoin was the original cryptocurrency, I think the smart contracts built into the Ethereum network make it a better cryptocurrency to invest in over the long haul. After all, there’s no denying the popularity of DeFi apps and NFTs – which are largely hosted on the Ethereum blockchain.

However, when dealing with cryptocurrencies, investors must be careful of a potential bubble, especially in the NFT space. According to NonFungible, the average sale price for crypto art had dropped 60% from its February high through the end of April. If the NFT bubble does pop, Ethereum and other cryptocurrencies will take a hit.

As an investor, it’s important to understand the volatility of cryptocurrencies and allocate your capital accordingly. Despite how much I like Ethereum, I also know the price could potentially correct 40% to 60% or more due to rampant speculation in the space.

This doesn’t mean it’s a bad long-term investment, though. The best approach as a long-term investor is to allocate a small percent of your portfolio to the cryptocurrency and dollar-cost average into that position over time. Dollar-cost averaging will help smooth out the average price paid for your position, as you should be buying along peaks and valleys along the way while keeping a long-term investment perspective in mind.