When it comes to things that I’m certain, I tend to be relentlessly assertive. My belief in BTC is one of those things. Even though there are legitimate concerns and challenges, perhaps even some inconsistencies, it’s something I will defend until its bitter last end.
In this piece I defend the importance of BTC, albeit in a somewhat scattered format but nevertheless holistically. To do so I approach the subject in different frameworks, because context is very important.
The following list is chronological, meaning I try to also highlight how Bitcoin’s narrative and general sentiment changed over its lifetime. This list of course also implies that Bitcoin’s narrative will continue to be fluid and change, perhaps in ways the industry has not thought of before.
Full disclosure — while these arguments are my own belief, I did not necessarily come up with them. At this point I don’t even remember which of these I developed on my own and which I borrow, but safe to say it’s an amalgamation of podcasts (Pomp, Laura Shin, Baselayer etc) , various reports (Blockchain Capital, Messari, Meltem, etc) and presentations (Tom Lee, Tetras Capital, etc.) over the past two years.
1. Digital ‘Cash’
Doesn’t need much more explanation. This was the thesis outlined in Satoshi Nakamoto’s white paper which gave birth to Bitcoin. It describes a digitally native form of currency, one that can be used to transfer value without any intermediaries. Critics however immediately missed the significance of this by saying credit cards are digital too and easy to use.
While daily commerce could be the end game of Bitcoin, today it’s my least favorite way to think about Bitcoin’s importance. The narrative of ‘paying for your Starbucks coffee with BTC” has often distracted newcomers from the real genius discovery. My current checkout experience at Starbucks is not bad enough for me to find BTC compelling. What is compelling is the incentive-based, permissionless, censorship-resistant and decentralized architecture that both solves the double-spending problem and is tamperproof (cryptographically secured). It is this combination of math, cryptography, economics, computer science, game theory, etc. that successfully bootstrapped the BTC network at a scale that none of the thousands of other blockchains have been able to replicate to this date. It introduced a new protocol, a new accounting system and technology to transfer value. That brings us to #2…..
2. Censorship Resistant, Permissionless, Decentralization
This idea is championed by the likes of Andreas Antonopoulus and Ari Paul, and is a more philosophical approach to understanding Bitcoin’s importance. To boil it down simply, the argument is that in todays’ society ‘money’ is an integral part of being human and access to it should be a birth given right. As such, individuals should have full authority and ownership. There should be no institution, whether it’s a bank, government or surveillance state that dictates how you can store, spend, transfer or receive money. It should also not cost hundreds of billions of dollars to use these mandatory services. This is not to say there can’t be ANY services to help you manage your money, but there should be a foundation that doesn’t require those services — that gives people the choice to utilize those services or not. Today, we don’t have that choice. We must use a currency manipulated by governments and controlled by institutions.
It may not feel like it but today our existence is so closely surveilled and controlled that governments and institutions could freeze and seize assets at massive scale. While you may say this is such an unrealistic doomsday scenario, this is happening in small pockets of the world already. Whether it’s China preventing people from taking the subway for speaking out against the regime, Hong Kong protestors avoiding digital traces of their spending and activity, Argentinian government freezing banks when monetary policy puts their nation in a debt crisis, etc we see it happening at non-insignifacnt scale. Bitcoin is not a perfect solution but a level of protection against these types of events spiraling out of control.
3. Bank the Un-banked
My evidence-lacking guess is that this narrative came as a response to critics (mostly in western, developed countries) saying transacting in BTC is not easier or more efficient than using a credit card or paypal/venmo like service. While that’s true, it’s also true that most of the world does not have the same reliable credit card system that most people reading this are used to. In fact, there are some stats showing that almost half the world is unbanked, and many that are banked but with very limited capability/reliability. Because banks don’t make much business from people that lack money, there’s not much incentive to service that population. But to exclude these groups financially is to condemn them to poverty forever.
We also know that global smartphone penetration is reaching 50%, and in some cases access to a mobile phone is more readily available than clean water (which is a whole ‘nother issue). It’s the same reason why cell phone minutes are popularly used as currency in parts of Africa, due to ease of transfer and perhaps even because cell phone minutes are protected against inflation and general unreliability of their government’s currency. It’s also the reason Libra (Facebook) is experimenting with the concept of a ‘global reserve’ currency that can be accessed through a digital platform.
Utilizing bitcoin and decentralized finance only requires a device and access to the network. It’s far from true that a new form of currency will solve all the problems in these unbanked areas, but it’s also for us to find out what advancements will emerge when a population is economically empowered with a reliable form of value transfer and preservation.
Ah, the last rhetoric that pervade before the crash of 2017–2018. At some point bitcoin proponents decided to target high-fee charging banks and money transfer services. Western Union and similar remittance businesses became the poster child of evil corporations taking huge chunks out of what little their immigrant laborers made. And they may have a good point.
On top of expensive transfer fees, banks make disgusting amounts of money from people who overdraft or make late payments. If you deposit a lot of money most of the services are free but if you don’t have money then it’s very expensive. Tom Lee from Fundstrat pointed out that despite interest rates dropping from 16% to >2% from 1970–2019, banks globally doubled their profits in the same time period. Technology advancements is supposed to make services cheaper, yet instead we’ve seen the fees charged by banks actually increase. The average person today has to spend almost one month of their annual paycheck just to use and store their money. This equates to ~$900 per customer annually. Facebook only makes $7/user. No wonder Apple, Google, FB and tech giants are all trying to get into payments.
There’s still some work to be done on the scaling issue of the BTC network, whether it’s protocol level upgrades or more likely side chains and state channels like Lightning Network before we can bring fees down to levels so far better than banks charge today. But as they say, if you want to disrupt an old model, you have to come up with a better model that will make the old obsolete.
5. Digital Gold / Store of Value
In some ways, the insane explosion of BTC’s price in 2017 did more damage to its brand than good. As price outpaced development/adoption/capabilities it also exposed some of its weaknesses in daily commerce. Its volatility and high transaction costs due to network congestion quickly became its kryptonite (no pun intended).
And so came a new way to think about BTC’s use, a more refined identity as a new asset class that most similarly mimics commodities like gold. Thanks to the likes of Mike Novogratz’s Galaxy Digital, VanEck, Grayscale, etc. it marked the beginning of institutions thinking about bitcoin. We don’t need to be able to buy everyday goods or even large corporate transactions for gold to be considered useful or valuable. People love gold just… for being gold (shiny, lasts forever). So it’s a compelling argument when you think about it. A technology that is thousands of years ahead of gold, with much better properties than gold: more divisible, easier to transfer, easier to store, safer, doesn’t weigh anything, can carry it with you everywhere that has internet or cellular, more liquid…. you get my point?
If history is any indication, you know that betting against change is usually a bad call. I don’t think BTC will necessarily replace gold anytime soon, nor is it the case that they can’t coexist… but in 5–10 years the cohort making the most money, running corporations and nations, and controlling wealth will be people that don’t remember what life was like before the internet. In fact, there is about to be a $30trillion wealth transfer from baby boomers to millennials over the next decade. Who’s to say that population will continue to prefer gold over digital gold?
6. International Transfer
Not so different from #4 remittance, except the target audience isn’t 1st generation immigrant laborers but rather businesses or wealthy individuals. At my company, for example, we actually prefer to accept BTC as payment because it means our sales people will get their commission check faster. Because a lot of our clients are international it takes on average 2–3 days for a wire transfer to hit our corporate account. BTC takes 15< minutes. And there’s more than enough liquidity today to reliably accept BTC and immediately sell it to avoid price risk.
The best example, though, is the largest transaction to ever occur on the BTC network. 500,000 BTC was transferred in 10 minutes and it cost $0.20. In today’s rate that’s $3.75bn of value transferred in one computational entry. WOW. I don’t know how many banks in the world even have that much in their cash reserves to accomplish a transaction of that size, let alone in 10 minutes.
7. Separation of State and Money
My hunch is that although this was always the predominant ethos of the Bitcoin movement, early adopters were too busy targeting Wall Street and financial institutions to realize that bitcoin goes beyond just displacing intermediaries. Personally the first time I heard this phrase was on Pomp’s podcast, and it immediately made a lot of sense. There used to be a time when churches served as the primary pillar for maintaining law, order, stability and power dynamics in society. Eventually the advent of democracy, police, enforcement mechanisms, legal systems, etc became the better option to serve those purposes.
In the same way, the modern financial system, the invention of ‘banks’, even Modern Money Theory, federal reserve banking, etc were all once genius discoveries. In the absence of internet and programmable money there’s no question that they contributed immensely to social advancements. But we now live in a time where technology can accomplish a lot of the functions that we relied on governments and institutions for. Mainly, that trust layer which while it does facilitate a lot of good, can also be very controlling, exclusive, restrictive, inefficient and corrupt.
If churches were once separated from state, it’s not impossible to imagine a future where money is decoupled from government mandate. Again, this is not to say that governments CAN’T play a role in regulating or facilitating digital currencies, but its role could evolve from its current one which is total manipulation. Much like TCP/IP, the internet, email etc is not the property of any government, ‘money’ should also be a universally shared tool, with rules, market structures and regulations built around a protocol, not an authority.
Another angle to think of Bitcoin is as a way of opening up participation. After generations of dictatorship and tyranny, why did the world finally settle on democracy as the dominant political system? It’s because people decided that it was a more equitable/just/prosperous way to organize society. The decentralization of decisions, contributions, participation, etc benefited the greater good. In the same way, conceptually there can be a lot of good from opening up the creation, distribution, governance, and participation of money instead of monopolizing it under a government.
8. Schmuck Insurance
8 years after the ’08 financial crisis and $60trillion of additional global debt later, more and more prominent investors are speaking up against one of the largest monetary experiments in history, which has fueled an unprecedented bull run that is now 3 years past its expected lifespan. These are the likes of Ray Dalio, Mark Yusko and Peter Schiff. Let’s see why.
Since ’08 the U.S. has been addicted to Quantitative Easing, ultra low interest rates, and confidence that the USD will always have global demand, no matter how much is printed and how much the U.S. government borrows.
This chart that seemingly looks like BTC’s price is actually the the dollar, showing how quickly its purchasing power changes after 1980. Now compare this to the average household income over the past 40 years.
You can see the effect of increased money supply only benefiting the top quintile, and a little bit for the second quintile but not as fast as the rate that purchasing power is decreasing. This makes sense, because inflating the dollar supply artificially increases asset prices, so those with assets (the rich) grow wealth faster. Meanwhile, cost of goods are rising for everyone equally.
Globally, interest rates are at an all time low, and in some pockets of Europe and Japan, even negative.
The top 15 countries with the exception of Korea and Australia have debt that is more than half of GDP. Highest since World War II. And this is WITHOUT taking into account promises to baby boomers (healthcare entitlements, social security entitlements, etc.) which are the fastest growing retiring cohort in history. Today debt interest payment is the 4th largest category in U.S. fiscal spending, with roughly 10% of all tax collected going towards paying just the interest. Despite this, we know that federal deficit will continue to accelerate, aided by further tax cuts and rising healthcare and retirement costs. The Fed even tried to scale back by raising interest rates in 2018, but the slightest shift caused global instability, and exposed the house of cards that is complex derivatives, which depend on these low interest rate environment. Deutsche bank is the poster child of this mess, but certainly not the only bank.
And so what has this amount of borrowing brought us? You’d think unlimited spending would trickle down to prosper everyone like it’s a party, right? Instead we have growing socialist sentiment, a soaring wealth gap, graduates drowning in student loans, declining home ownership and more than 60% of Americans lacking $1,000 in their savings for emergencies. Sure, the private sector is flushed with cash and markets are at an all time high, but that’s because inflation raises the price of assets. For the 50% of Americans or cash savers that don’t own any investments, this is equivalent to an added tax on their earnings. It’s one reason why presidential candidate Andrew Yang’s Universal Basic Income platform has propelled him from complete obscurity to ~4th or 5th in the democratic polls. These are all — in my opinion — a natural response to the same issue: people’s purchasing power is declining and living is becoming unaffordable. It punishes savers, and only benefits the rich who own assets.
We also know that boomers are all soon going to retire and create the largest retired population ever. Meanwhile our pensions and social securities are off track on their delivery promises. In fact, trustees of the U.S. Social Security have reported that it will become financially insolvent by 2034 in its current rate.
By the way, this is happening at a country with the most wealth, most power, and most wanted currency in history. A country in charge of the ‘global reserve currency’ that other countries still somehow have so much confidence in that their local currency is plummeting against it. Imagine what would happen if this oversupply starts to outpace demand….
To be clear, this is not a prediction that all hell will break loose immediately. It could be years of kicking the can down the road before the debt bubble bursts or the U.S. is deemed insolvent, but how long that is is anyone’s guess. It’s incomprehensible what would happen if confidence in the dollar and U.S. economy falters — but we do know this time around that QE, which saved us in 08’, will only add fuel to the fire. So if you’re a skeptic like Ray Dalio, where can you turn to as a safe haven to hedge against this risk? The answer is safe-haven assets that can preserve wealth, are uncorrelated to stocks & bonds and are scarce without risk of inflation. That can be commodities like gold…. Or as mentioned earlier the better version of gold… Bitcoin!
This is the crux of Mark Yusko’s famous ‘get off zero’ advice if you’re anyone with some doubt. You certainly don’t need to put all your money in bitcoin, but why not 1%? Why not just get off zero as ‘schmuck insurance’? No one ever gets fired over losing 100% of 1%. But you do have a lot to explain if BTC does reach its potential and you neglected to take a look at it when you had a chance.
9. Global Reserve Currency
Let’s imagine a world where fiat currencies as we know (USD, JPY, EUR, etc) lose its value and require a global setback to fix some structural damage. Let’s also imagine a world where different governments around the world are embracing crypto technology and coming out with Central Bank Digital Currencies (CBDC). Not to mention non-government currencies like Libra and Uber coin and such. What role will BTC play in this scenario?
First, my guess is until there is direct liquidity between different CBDC pairs, BTC will serve as the base pair, acting as the intermediary base, much like it was for many alt-coins that you could only buy with bitcoin but not directly with USD.
Second, it will force a lot of governments to think more carefully about how their currency will compete against BTC. They would have to maintain confidence with sound monetary policies, anti-corruption, and think twice before inflating the hell out of it. Otherwise, citizens of that country will choose to store their value in BTC rather than the CBDC, which will its price against BTC down. More importantly, it gives people the freedom and choice to protect their wealth against bad monetary behavior.
Lastly, it will act as the global reserve currency when fiat digital currencies are unstable. It will serve as a fall-back option, so that citizens don’t suffer for the mistakes made by the country’s financial system if there is another debt crisis, liquidity crisis, hyperinflation, etc.
10. Un-bank the banked
Also known as, decentralized finance (DeFi). The front runner on this end is Ethereum, and within Ethereum’s ecosystem MakerDAO is probably the most successful first mover in this arena. The idea is to perform many of the functions that banks provide, just not at a bank.
While Bitcoin doesn’t have as sophisticated on-chain lending, derivatives, trading, etc as Ethereum, it does have the largest liquidity by a large margin. Therefore there’s already a slew of centralized crypto lending platforms like BlockFi/Nexo/Celsius that are primarily BTC forward. These platforms allow you to access financial services like loans with crypto as collateral and interest on crypto deposits. In theory, exchanges like Coinbase that hold immense amounts of BTC will be in position to institutionalize and perform many of the activities that banks perform today. It will be interesting to see how the industry grapples with this dichotomy — we want financial products around crypto but don’t necessarily want the Coinbase’s of the world becoming the next ‘big brother’ bank.
Truth be told, I have no idea which of these 10 will be the most important, nor do I know how BTC will evolve. I don’t even know how significant bitcoin will even be in 10 years.
But I’m not willing to bet against ALL of its properties, use cases and potential. Its infancy will have skeptics questioning its volatility…its maturing product/market fit will have skeptics doubting its identity…its uncertain regulatory environment will have skeptics fearing its risk. But one thing that I always keep in mind is this: there’s nothing else quite like bitcoin, and that makes it irreplaceable.
Spencer Bogart famously compared Bitcoin to a platypus. He notes that when scientists first discovered the animal, they dismissed it as a joke, because it combined features seen across so many animal classes/orders that the inconsistency seemed impossible for one animal. Even after studying the platypus, scientists struggled to classify it using existing categories… so they created a new category. The platypus became a category creator.
Bitcoin is very similar. It exhibits characteristics that cross asset classes: Bitcoin is used for payments like a currency, it’s scarce like a commodity, distributes “special dividends” (hard forks) like a stock, and derives additional value from developer contributions like a technology platform. -Spencer Bogart
And so, if there’s one thing to take away, it’s that Bitcoin is good at being Bitcoin. It is a category creator, and our appreciation of it shouldn’t come from what it resembles, but from its potential to change the status quo!
A Stubborn Man’s Defense of Bitcoin in 2020 was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.