Why I fear holding cryptocurrencies

So I've promised to write this piece for a while now, i'm going to explain why I have little faith in the longevity of cryptocurrencies in their current form. The first three are things you've probably heard before.

One: Valuation

I see a lot of people point to the market cap as proof of market valuation. But market cap doesn't mean anything for cryptocurrencies. Its most likely used by trading bots to essentially do index trading to hedge risks, but that's about it.

In the stock market, the market cap is the value if everyone sold all of their shares of everything at the current price. Its something that wouldn't happen, because the price of a stock would go down the more its sold, but each stock is linked to a company which is linked to actual physical assets which have an actual value. If you liquidated all of a company's assets, you'd get some amount of money which could be distributed to the shareholders. Selling shares below this value would be essentially forfeiting money. Cryptocurrencies do not have this, because there are no underlying assets.

Two: Production of value

All publicly owned companies produce value which is, in some way, returned or removed from shareholders. This is done by a number of different ways. Dividends and stock buy backs essentially directly give profit to the investors. Re-investment of profit into the company will drive stock prices up and indirectly give money to the investor. So the stock market is not a zero sum game, money flows into it, but it also produces new money and distributes it back out. The production of new money prevents the constant need for more people to invest to keep the system afloat.

However... cryptocurrencies are an inherently deflationary system. For every trade that takes place, money is removed from the system and given to third parties (exchanges, miners). These third parties do not necessarily re-invest this money back into the system.

If new money stops following into cryptocurrencies, the system will eventually collapse. It is mathematically impossible to continue trading cryptocurrencies unless more and more people buy into it.

Three: Volatility

Currencies can't be this volatile. It is impossible to establish a system of trade on something that can swing multiple percentage points after you click buy on something. Period.

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OK

============ So maybe Cryptos derive value from being useful in ways that traditional money is not. They can be used anonymously, circumvent government currencies, the system for using it is almost unhackable because its distributed. These are valuable features.

But these things do not replace traditional money... At the end of the day, you still want to convert money back into your country's fiat currency.

So what is the purpose of tokens? It sounds like the useful portion of this is the blockchain, not the tokens.

The only use I can see for valuing the tokens is for anonymity and to pay the system that upkeeps the network that allows transactions to take place.

Since anonymous transactions is basically just codeword for money laundering and drugs, lets say we value tokens based on the cost to upkeep the network. We have to pay the miners to hash the transactions to make things continue to work.

So as time goes on, it requires more and more infrastructure to support the blockchain as difficulty increases. So the underlying value of the token, derived by the cost of maintaining the network, grows.

...

So why is that a good system? Thats a system that increases costs by design. What prevents someone from making a better, more efficient version that costs less to maintain and probably charges lower fees to use? What prevents people from switching to these networks if all they care about is traditional fiat?

Nothing.

What prevents the miners from switching their hardware to service this newer, better network?

The price of the coins they've already mined? Which is derived from the difficulty of mining it? Which is derived from the cost of energy and the value of their mining equipment?

Shouldn't the value constantly be going down as power and hashing technology improves? Why is it going up?

Lets recap

1: No physical value

2: Produces no extra value

3: Continuously decreases total market liquidity... by design.

4: Coins give very little additional value to the blockchain. You can implement a blockchain without Coins and it wouldn't have to have the weaknesses of 1, 2, and 3.

5: The current systems are designed to inflate the value of the Coins through mining difficulty. Which in a perfect world would increase the incentive to release a competing product that doesn't.

6: There is no graceful way to re-issue destroyed money, so its not possible to adopt most of the less granular systems like bitcoin without a re-design. Its possible that a large potion of the pool of coins could be rendered unusable and unrecoverable within a generation. Thats not good design. (I didn't actually talk about this one above)

TL;DR

This writeup was a bit of a mess because I honestly didn't feel like spending the amount of time I actually need to fully detail out everything. I write slow, it would take me like an entire day.

But these systems are designed like garbage and are irreparable. They do not solve the problems they need to solve well, do not scale, and are loaded with perverse incentives. Investing in the current coins is like investing in dial up modems. They're going the right direction, but you just can't fix these systems. They need to be re-designed.

Blockchains have a future. Cryptocurrencies probably have a future, but not in this form.

Also its possible that the entire market is controlled by bad actors and it could collapse at any moment. But thats a whole other story.