Governments will never allow cryptocurrencies sop up their ability to spend by printing money and bonds. Eventually, and I don't think this all that far off in the future now, it will become crime to convert Bitcoin into dollars or Euros without the government getting a huge cut of the dough. The historical comparison you should be looking at is what happened to the gold dollar system in 1933-1975. If at any point the dollar starts to collapse because people are hoarding gold and/or crypto, the governments will simply ban the ownership of those stores of value- it has happened before and it will happen again.
Nice dive Gummi, sad to see your conclusion though.
A few comments:
1. "- Bitcoin mining is necessary to maintain the ledger of transactions upon which Bitcoin is based"
While miners are the ones who sign transactions, the energy they expend is also what secures the network from attacks. (Rather than having the US army do it)
2. Regarding HODLing - this is mostly a first-world phenomena. It makes much more sense to use Bitcoin as your savings account rather than checking account, since it doesn't depreciate like your national fiat currency (just ignore short term volatility). There is a lot more usage of Bitcoin as a medium of exchange in countries like Venezuela, Argentina, Turkey, Lebanon & Nigeria where the currency is collapsing, or in dollarized countries like El Salvador
For centralized cases, a database is much more efficient.
4. Volatility and final thoughts -
Bitcoiners usually point to the history of money from the Austrian perspective because it describes adoption of a new money in stages:
a. Store of wealth - from being a new collectible only a few people value, to a recognized tool for storing wealth with proven transferrable value over time.
b. Medium of exhange - After value is proven, people are willing to exchange their products for the money so that they can spend it later on what they want.
c. Unit of account - The money becomes the standard of how we measure value (As USD does today as the global reserve currency).
Gold went through these phases, and fiat built on its credibility and abstracted away its disadvantages, and once decoupled it just maintainted the facade of having value.
We're now witnessing Bitcoin's adoption from a mysterious cyberphunk project to possibly the world's next reserve currency/asset. That adoption has to include extreme volatility in price terms, otherwise the asset can't prove its value.
But the beauty of it all is that thanks to it being digital, it's happening simultaniously worldwide, with varying forms of adoption. (El Salvador for eg)
Investing/saving is the act of deferring consumption, not stopping it. The early holders will spend their coins when they want to buy something they want more than just holding, like a house for themselves or their children.
You come for the speculation and price appreciation, you stay for the revolution..
@gummibear or anyone: So are there cryptocurrencies that exist now that solve some, most, or all of the problems gummi identifies with BTC? BTW many thanks for this deep dive because I’ve very recently become interested in this topic and mostly heard the optimistic side of the topic.
China has really, and I mean REALLY cheap electricity and wages. I saw this video maybe 5 years ago and knew / intuited the whole thing was on the level of a scam: https://www.youtube.com/watch?v=K8kua5B5K3I
Your arguments are good, though they mix/substitute exchangeable currency with store of value at times. Bitcoin is like gold or water or real estate with no intrinsic value. But it does store, divide and move a lot easier. You’re welcome to your preferences - just like the old wealthy people hoarding dollars. You stack your common green pieces of paper, I’ll accumulate a mathematically-enforced, scarce store of value.
I think your best point is the risk of government killing it, although it would have to be a pandemic ie: kill it everywhere at once. Your blind spot is that you have not looked at the network effect which is how to really measure value of Cryptos. Also, you need to look beyond Bitcoin as everything in the future will be tokenized. As an easy example, every stock in the future will be tokenized. No more 2 days to settle a stock trade. Whatever token is used for that will see its value increase. Most people didn't think a search engine could be that valuable in the early days of dot com boom. Best to think of these as internet stocks that will grow in value with their associated network effect.
With that out of the way, I seriously considered buying a several thousand BTCs when the price dipped down to the 1-2 dollar range in 2011. I wish I had followed through, but I also know I would have sold to claim any profit long before now. I doubt I would have made more than $20-40K even if I had the foresight and conviction to buy in 2011.
Hi Gummi. You can’t get stuck on bitcoin, you really need to understand the entire crypto market including proof of work and proof of stake, Ethereum, Cardano etc. Your look into bitcoin is just baby steps into the entire ecosystem. Then start delving into nvidia and their Omniverse platform which melds reality with the artificial. Zuckerberg (who I think is a sick human being personally) has attempted to latch onto this. It’s so much bigger than bitcoin. And yes tether is a scam.
Excellent writeup Gummi and I enjoyed the read. I haven't had any real temptation to jump into bitcoin, but I see and hear about it all the time. I enjoyed the bitcoin overview.
Hi @gummibear, I love all of your stuff even if I don't agree with them sometimes. In this case, I think the notion that Bitcoin has no intrinsic value is a bit superficial. Bitcoin as a currency incentivizes the miners to continue to operate the decentralized Bitcoin network which requires quite a bit of resources to maintain 24/7/365. Bitcoin is required to participate in the Bitcoin network and reach its transnational community directly by requesting transactions to be made, which are done by the miners for a fee.
In this sense, it is similar to the US dollar's "intrinsic value". The dollar represents federal debt and debt itself is related to economic action or the debt remains unpaid. Taxes can only be paid if the rest of the economy is performing some useful action. Bitcoin represents the desire for the network to execute transactions and reason to do so is to participate in this larger transnational community that accepts bitcoin to ultimately perform economic actions. The Bitcoin community to this point is small but it is similar to other communities and having a neutral means to exchange value that is native to it seems a natural recourse for such a transnational community.
Thus Bitcoin's value, like that of the US dollar, represents the value of the Bitcoin community. This is a community that has been building bridges to other blockchains, services like fiat on/off-ramps, optimized payment networks like the Lightning Network. People in Venezuela, Cuba and Argentina where inflation, corruption and capital controls make holding conventional assets to be definite losers see access to this network as a valuable alternative.
I don't disagree that Bitcoin does face an uncertain future against other cryptos but one thing that is so important on the Internet, known for its wide array of hostile threats, is trust. Bitcoin has built that through its relative simplicity, virtually uninterrupted uptime and immutability of its transactions. That is key for any financial network and so long as Bitcoin can maintain the high level of trust enjoyed by the community, then its continued presence as a standard should remain. Of course, one should watch the space carefully for any change as things may change rapidly.
I'm more heavily invested in alternatives like Cardano and Hedera as of now, but I am planning to hold profits made there in part in Bitcoin and other investments. The former have stronger tech stacks that will make them more useful over the next few years, but they will still interoperate with Bitcoin as that trust and thus value, will likely remain, and will not necessarily dominate the total space.
I just saw your tweet (I’m a locked account there) that you lost followers for this amazing work. I’m so disappointed. I would think those that follow you here wouldn’t leave because they didn’t like the analysis. I respect your opinions after two years of following you and have adjusted my thinking on Bitcoin from this column. Thank you for taking the time. Please don’t stop doing honest work like this.
"The closest thing I can compare it to is Gold which is a non-productive asset whose value is solely derived from what someone else is willing to pay for it".
Both Gold and Bitcoin has intrinsic value. Let's try a thought experiment. Let us say tomorrow, all Gold miraculously switches colour to an off-putting ugly brownish colour. Would you agree that the value of Gold would drop? After all, you cannot use it for jewellery anymore as the colour is too hideous so there is now less demand for it. You can continue this thought experiment by making it stinky, liquid, poisonous, remove ability to conduct electrons, etc. until you get to the point where "Gold" is now a near worthless element replaced by other metals like Silver that does have these wanted properties. Those properties are useful and which creates value. The combination of scarcity and utility creates value. Yes people can value Gold more than it should be driving its price but the fact remains Gold is highly valued only because of its useful properties and scarcity. Same applies to Bitcoin/crypto.
Bitcoin's value comes from the blockchain as a "service" which people can use for example to do peer-to-peer transacting for which the users of this service is willing to pay a transaction fee. Peer-to-peer transacting is a very useful property. That is also for that reason why I believe BTC is - in its current roadmap & implementation with small blocks - a failed long term proposition to be superseded by another crypto/blockchain. There is only so much value you can offer by keeping blocks small and only being able to process ~400,000 transactions a day. I believe in block sizes that are dynamically decided by miners based on the current market forces at play. Its when you get to scale where you process millions of transactions per second each with a tiny fee where you get a valuable blockchain. There are many contenders and I am not excluding the possibility that BTC community might on day wake up and realise the block size should not be artificially controlled by the developers and indeed become the true future Bitcoin but for now I won't hedge my bets on it.
"There are thousands of other cryptocurrencies out there so there’s nothing special about Bitcoin".
Once again a flawed argument in my opinion. I can create thousands of copies of the code running Facebook.com with some feature like the name, colour, functionality or whatever. All those modified copies will function almost be exactly like Facebook however none of them will have any value because no one will use it. Facebook's market cap would be unaffected. Its about things like network effect and brand recognition.
Why, and how could, global political power groups allow bitcoin to threaten the foundation of their authority and control (being creation of money) ?
Why have they allowed it to progress this far? Do they plan to adopt it once they have acquired their own holdings? Or will they intervene suddenly to collapse it? Does it not simply amount to a massive wealth transfer from late arrivals to early adopters?
If it is not money, and not an asset (no intrinsic value), what is it?
Governments will never allow cryptocurrencies sop up their ability to spend by printing money and bonds. Eventually, and I don't think this all that far off in the future now, it will become crime to convert Bitcoin into dollars or Euros without the government getting a huge cut of the dough. The historical comparison you should be looking at is what happened to the gold dollar system in 1933-1975. If at any point the dollar starts to collapse because people are hoarding gold and/or crypto, the governments will simply ban the ownership of those stores of value- it has happened before and it will happen again.
Nice dive Gummi, sad to see your conclusion though.
A few comments:
1. "- Bitcoin mining is necessary to maintain the ledger of transactions upon which Bitcoin is based"
While miners are the ones who sign transactions, the energy they expend is also what secures the network from attacks. (Rather than having the US army do it)
2. Regarding HODLing - this is mostly a first-world phenomena. It makes much more sense to use Bitcoin as your savings account rather than checking account, since it doesn't depreciate like your national fiat currency (just ignore short term volatility). There is a lot more usage of Bitcoin as a medium of exchange in countries like Venezuela, Argentina, Turkey, Lebanon & Nigeria where the currency is collapsing, or in dollarized countries like El Salvador
https://bitcoinmagazine.com/culture/salvadoran-construction-worker-inspired-bitcoin-world
3. Whales
"Whales are the 2,334 wallets that hold over 1000 bitcoins → In fact, just 4 accounts have 8% of all Bitcoins"
Wallet addresses are not users. Exchange wallets hold bitcoin for tens of millions of different users.
4. Blockchain technology - the purpose here is a secure decentralized sequential ordering of events (transactions) -
https://dergigi.com/2021/01/14/bitcoin-is-time/
For centralized cases, a database is much more efficient.
4. Volatility and final thoughts -
Bitcoiners usually point to the history of money from the Austrian perspective because it describes adoption of a new money in stages:
a. Store of wealth - from being a new collectible only a few people value, to a recognized tool for storing wealth with proven transferrable value over time.
b. Medium of exhange - After value is proven, people are willing to exchange their products for the money so that they can spend it later on what they want.
c. Unit of account - The money becomes the standard of how we measure value (As USD does today as the global reserve currency).
Gold went through these phases, and fiat built on its credibility and abstracted away its disadvantages, and once decoupled it just maintainted the facade of having value.
We're now witnessing Bitcoin's adoption from a mysterious cyberphunk project to possibly the world's next reserve currency/asset. That adoption has to include extreme volatility in price terms, otherwise the asset can't prove its value.
But the beauty of it all is that thanks to it being digital, it's happening simultaniously worldwide, with varying forms of adoption. (El Salvador for eg)
Investing/saving is the act of deferring consumption, not stopping it. The early holders will spend their coins when they want to buy something they want more than just holding, like a house for themselves or their children.
You come for the speculation and price appreciation, you stay for the revolution..
@gummibear or anyone: So are there cryptocurrencies that exist now that solve some, most, or all of the problems gummi identifies with BTC? BTW many thanks for this deep dive because I’ve very recently become interested in this topic and mostly heard the optimistic side of the topic.
China has really, and I mean REALLY cheap electricity and wages. I saw this video maybe 5 years ago and knew / intuited the whole thing was on the level of a scam: https://www.youtube.com/watch?v=K8kua5B5K3I
Your arguments are good, though they mix/substitute exchangeable currency with store of value at times. Bitcoin is like gold or water or real estate with no intrinsic value. But it does store, divide and move a lot easier. You’re welcome to your preferences - just like the old wealthy people hoarding dollars. You stack your common green pieces of paper, I’ll accumulate a mathematically-enforced, scarce store of value.
Gummy I'm not able to subscribe it says you cannot process live transactions? Help
I think your best point is the risk of government killing it, although it would have to be a pandemic ie: kill it everywhere at once. Your blind spot is that you have not looked at the network effect which is how to really measure value of Cryptos. Also, you need to look beyond Bitcoin as everything in the future will be tokenized. As an easy example, every stock in the future will be tokenized. No more 2 days to settle a stock trade. Whatever token is used for that will see its value increase. Most people didn't think a search engine could be that valuable in the early days of dot com boom. Best to think of these as internet stocks that will grow in value with their associated network effect.
Thank you, Gummi. While I didn't know that much about Bitcoin, your conclusions match with my suspicions.
With that out of the way, I seriously considered buying a several thousand BTCs when the price dipped down to the 1-2 dollar range in 2011. I wish I had followed through, but I also know I would have sold to claim any profit long before now. I doubt I would have made more than $20-40K even if I had the foresight and conviction to buy in 2011.
Hi Gummi. You can’t get stuck on bitcoin, you really need to understand the entire crypto market including proof of work and proof of stake, Ethereum, Cardano etc. Your look into bitcoin is just baby steps into the entire ecosystem. Then start delving into nvidia and their Omniverse platform which melds reality with the artificial. Zuckerberg (who I think is a sick human being personally) has attempted to latch onto this. It’s so much bigger than bitcoin. And yes tether is a scam.
Gave you a reason to chew on. You did not replied. https://twitter.com/Nikolaj2172/status/1457666543249199110?s=20
Excellent writeup Gummi and I enjoyed the read. I haven't had any real temptation to jump into bitcoin, but I see and hear about it all the time. I enjoyed the bitcoin overview.
Hi @gummibear, I love all of your stuff even if I don't agree with them sometimes. In this case, I think the notion that Bitcoin has no intrinsic value is a bit superficial. Bitcoin as a currency incentivizes the miners to continue to operate the decentralized Bitcoin network which requires quite a bit of resources to maintain 24/7/365. Bitcoin is required to participate in the Bitcoin network and reach its transnational community directly by requesting transactions to be made, which are done by the miners for a fee.
In this sense, it is similar to the US dollar's "intrinsic value". The dollar represents federal debt and debt itself is related to economic action or the debt remains unpaid. Taxes can only be paid if the rest of the economy is performing some useful action. Bitcoin represents the desire for the network to execute transactions and reason to do so is to participate in this larger transnational community that accepts bitcoin to ultimately perform economic actions. The Bitcoin community to this point is small but it is similar to other communities and having a neutral means to exchange value that is native to it seems a natural recourse for such a transnational community.
Thus Bitcoin's value, like that of the US dollar, represents the value of the Bitcoin community. This is a community that has been building bridges to other blockchains, services like fiat on/off-ramps, optimized payment networks like the Lightning Network. People in Venezuela, Cuba and Argentina where inflation, corruption and capital controls make holding conventional assets to be definite losers see access to this network as a valuable alternative.
I don't disagree that Bitcoin does face an uncertain future against other cryptos but one thing that is so important on the Internet, known for its wide array of hostile threats, is trust. Bitcoin has built that through its relative simplicity, virtually uninterrupted uptime and immutability of its transactions. That is key for any financial network and so long as Bitcoin can maintain the high level of trust enjoyed by the community, then its continued presence as a standard should remain. Of course, one should watch the space carefully for any change as things may change rapidly.
I'm more heavily invested in alternatives like Cardano and Hedera as of now, but I am planning to hold profits made there in part in Bitcoin and other investments. The former have stronger tech stacks that will make them more useful over the next few years, but they will still interoperate with Bitcoin as that trust and thus value, will likely remain, and will not necessarily dominate the total space.
I just saw your tweet (I’m a locked account there) that you lost followers for this amazing work. I’m so disappointed. I would think those that follow you here wouldn’t leave because they didn’t like the analysis. I respect your opinions after two years of following you and have adjusted my thinking on Bitcoin from this column. Thank you for taking the time. Please don’t stop doing honest work like this.
"The closest thing I can compare it to is Gold which is a non-productive asset whose value is solely derived from what someone else is willing to pay for it".
Both Gold and Bitcoin has intrinsic value. Let's try a thought experiment. Let us say tomorrow, all Gold miraculously switches colour to an off-putting ugly brownish colour. Would you agree that the value of Gold would drop? After all, you cannot use it for jewellery anymore as the colour is too hideous so there is now less demand for it. You can continue this thought experiment by making it stinky, liquid, poisonous, remove ability to conduct electrons, etc. until you get to the point where "Gold" is now a near worthless element replaced by other metals like Silver that does have these wanted properties. Those properties are useful and which creates value. The combination of scarcity and utility creates value. Yes people can value Gold more than it should be driving its price but the fact remains Gold is highly valued only because of its useful properties and scarcity. Same applies to Bitcoin/crypto.
Bitcoin's value comes from the blockchain as a "service" which people can use for example to do peer-to-peer transacting for which the users of this service is willing to pay a transaction fee. Peer-to-peer transacting is a very useful property. That is also for that reason why I believe BTC is - in its current roadmap & implementation with small blocks - a failed long term proposition to be superseded by another crypto/blockchain. There is only so much value you can offer by keeping blocks small and only being able to process ~400,000 transactions a day. I believe in block sizes that are dynamically decided by miners based on the current market forces at play. Its when you get to scale where you process millions of transactions per second each with a tiny fee where you get a valuable blockchain. There are many contenders and I am not excluding the possibility that BTC community might on day wake up and realise the block size should not be artificially controlled by the developers and indeed become the true future Bitcoin but for now I won't hedge my bets on it.
"There are thousands of other cryptocurrencies out there so there’s nothing special about Bitcoin".
Once again a flawed argument in my opinion. I can create thousands of copies of the code running Facebook.com with some feature like the name, colour, functionality or whatever. All those modified copies will function almost be exactly like Facebook however none of them will have any value because no one will use it. Facebook's market cap would be unaffected. Its about things like network effect and brand recognition.
Why, and how could, global political power groups allow bitcoin to threaten the foundation of their authority and control (being creation of money) ?
Why have they allowed it to progress this far? Do they plan to adopt it once they have acquired their own holdings? Or will they intervene suddenly to collapse it? Does it not simply amount to a massive wealth transfer from late arrivals to early adopters?
If it is not money, and not an asset (no intrinsic value), what is it?