While the title says bitcoin, I’m really using that as a catchall, and I intend to address cryptocurrencies and fungible tokens in general. I will not be looking at DAOs, smart contracts, or NFTs here.
I’m fully aware that in the literal sense all cryptocurrencies and fungible tokens are not the same, but the mental scaffolding that underpins the whole of that space very much IS the same, and that’s what I want to dig into.
Cryptocurrencies are the method of compensation for those who host and run their representative decentralized ledgers (blockchains, peer-to-peer). If you host the Bitcoin ledger and process the cryptographic hashes that run the network, you get paid in bitcoin. Same goes for other cryptocurrencies.
Tokens are a bit different, in that they are compensation for supporting projects built on top of existing blockchains (often secured via an ICO, or initial coin offering), but for the purposes of this post I’ll refer primarily to cryptocurrencies to represent both.
A ledger of course is a record of transactions intended to prevent double-spending or skimming, but since a single ledger is subject to tampering and requires a high degree of trust, the double-entry ledger system was created.
By having 2+ copies of your ledger, kept in different locations, and managed by different people, you create a system without a single point of failure, and thus create a system where less trust is necessary AND where risk is reduced. This is a good thing (and a 700+ year old idea).
Blockchains do this, but they have many copies of the ledger, and because of the decentralization are very difficult to tamper with. This is even better.
But, because of the costs of hosting a copy of the respective blockchain/ledger (hardware + energy), and also the “mining” that actually runs the network (solving cryptographic hashes to show ‘proof of work’, and to record transactions to the blockchain, which requires expensive hardware, causes extreme wear and tear on that hardware, and uses a LOT of energy), a system of compensation is needed to “reward” these folks for keeping the network running.
Cryptocurrencies are those rewards, but since the hosting and mining costs are incurred in fiat, there has to be a way of turning these “coins” into actual currency to cover expenses. Without compensation, nobody would be able to bear the burden of hosting and running the network for long.
No hosts, no miners, no blockchain. The blockchain is an engine that must be kept running in perpetuity to continue functioning (at least as long as proof of work is the standard).
With me so far?
The idea of course is that blockchains allow high trust transactions (payments, escrow, title transfers, etc.) to occur safely between anonymous or pseudonymous low/no trust parties, without needing a trusted intermediary to arbitrate.
The hope is that cryptocurrencies can take control away from greedy and/or corrupt middlemen, governments and central banks, and put that control (plus privacy and the cost savings of eliminating the middle-men) back in the hands and pockets of the people.
This sounds nice, especially to many in the libertarian and anarchist crowds, but there are a few pesky points to consider:
- Criminal activity needs anonymity to thrive, and one of the biggest functional uses of cryptocurrency at present is still illegal transactions (dark web, money laundering, drugs, prostitution, arms dealing, etc.). One major way governments fight organized crime globally is by accessing, restricting access to, and otherwise controlling the financial system. This is of course a double-edged sword, and it does not work perfectly…but it is a hurdle.
- Speaking of crime, crypto has enabled ransomware attacks to be MUCH more prevalent, which is a HUGE and rapidly growing problem globally. These would be *vastly* more difficult to monetize without crypto.
- Converting crypto to fiat requires an exchange, and most exchanges are being highly regulated, subject to KYC (know your customer) requirements, and tax reporting requirements…not so anonymous or even pseudonymous. Sure, you could use only crypto ATMs, but that drastically reduces the usability of the whole system.
- Money is a medium of exchange, a unit of account, a standard of deferred payment, and (at least short-term) a store of value. To work, this requires easy fungibility, and relative stability. Transactions with crypto are still comparatively slow, complicated, expensive (gas fees FML), and the exchange rates of crypto to fiat fluctuate WILDLY (to say the least; other than stable coins of course), making it generally a very, very poor substitute for fiat (except as a unit of account). Proof of Stake will fix some of this, but not all.
- A lot of cryptocurrencies, of various denominations, are held by a fairly small minority (>80% of ETH for example is held by <1% of wallets), which gives them greater leverage and control over the system and the prices…not so decentralized after all. And of course, when these whales need to cash out, the system and price tanks. Oops.
- A lot of the mining is done by a relatively small number of entities…again, not so decentralized, and opens some cryptocurrencies up to 51% attacks. Proof of Stake will bring a whole new set of risks.
- For crypto with a fixed asset pool (like bitcoin), you create incentives to HODL, which makes the network less useful and more volatile overall. This is why bitcoin is now being referred to as “digital gold”, despite lacking any of the intrinsic material value that gold actually has.
- The industry is still poorly regulated (as desired by those in the space, though this will change), but this has resulted in massive amounts of fraud, manipulation, and other shenanigans. Restrictive regulation is now incoming on multiple fronts.
- Non-reversible transactions are both a feature, and a bug. Accidental payments and overpayments occur all the time in the financial space, and are mediated and fixed by the financial institutions (and there are laws providing protection in such cases).
- Cryptocurrency is backed by a network and some infrastructure, but has almost zero intrinsic value other than as a transaction recording tool.
- Blockchains uses a fuck ton of energy, more than some countries, and in a world where global warming appears to be a serious issue, and with impending energy shortages in many places, this is a pretty stupid use of resources (though to be fair, a large chunk of energy usage in the crypto space comes from renewables, and Ethereum is working to change this with proof of stake).
- Because crypto poses a massive risk TO governments, there is then a massive risk FROM governments, such as China’s recent ban on financial institutions touching crypto transactions (and a potential impending ban on mining as well *since put in place*). If other major governments follow suit (the US is trying), thereby preventing easy conversion of crypto to fiat and fiat to crypto (and I expect they will), it becomes an even less useful system than it already is.
- Quantum computing represents a massive risk to many if not all existing blockchains. Maybe QRLs (quantum-resistant ledgers) will be possible, and then again maybe not…TBD.
Whether you like it or not, cryptocurrencies are still a poor substitute for fiat and existing financial systems on almost all counts, are VERY risky investments (and not really investments in the value investor sense), and are frankly not all that useful right now.
Maybe that changes if they serve as a sort of in-game currency in some future Metaverse, but that day is not today.
Rather, today they are largely the functional equivalent of casino chips at a highly unstable casino. Buy $10 in chips, and in an hour they could be worth $100, or $1, or $0, or maybe all of those within the same day.
But wait, there’s more…
And this folks is the answer to the question that is the title of this article: What is Bitcoin REALLY? What is the Crypto space?
A belief system.
Perhaps even a religion…or a cult, if there’s even a difference 😂 Mimetic Desire + Hope + Greed + FOMO is one potent fucking cocktail.
Of course, a common rejoinder to that is that fiat currency is no different…nope, not even close, and this is probably one of the least cogent arguments I’ve heard come out of the crypto space.
There is an element of belief in fiat, of course, but fiat is also (generally) backed by:
- a country full of people who use it daily (sometimes many countries using the same currency, such as the Euro)
- paychecks paid in it
- an infrastructure set-up to accept it
- goods denominated and sold in it
- a government who oversees it
- a central bank that controls it
- a military that protects it
- income (taxes)
- assets (land, equipment, IP, etc.)
- debts denominated in it
- and in the case of the USD many times many countries that use it as a reserve currency
To compare crypto to fiat, in almost any fashion, is just fucking absurd.
Crypto is, at the core (at least right now), a blended game of musical chairs and hot potato.
The accounts I’ve read comparing it both to the Tulip mania of the 1630s, and to Ponzi or Pyramid schemes in general, hit very, very close to the mark.
It’s not ALL a scam (I think Ethereum may have real long-term potential, and Vitalik seems quite brilliant…Solana is also pretty cool), but an awful lot in the crypto space is bullshit, or is close enough that the distinction doesn’t much matter.
Crypto seems to be an imagination-fueled playground built by very smart but disenfranchised people (betting against the existing system regardless of the consequences to others), backed by highly biased incentives, and it is being spread like a virus via copious schilling, social bot accounts promoting it like crazy, outright scams, FOMO, and a LOT more dirty tactics besides.
The wild fucking west.
Despite how all of this may sound, I actually love the idea of the blockchain. That concept, executed properly, could be truly transformative in many times many ways. Zero-knowledge proofs are brilliant.
And of all the blockchains and accompanying cryptocurrencies out there, the one that I think may have genuine staying potential (someday, maybe) is Ethereum.
And I really do love some of the non-currency concepts like DAOs, smart contracts, non-PFP NFTs, etc.
But so much of the crypto space as presently executed is a swamp full of idiots, mimetic horse shit, and greed, and is a FAR cry from something useful and worthwhile to humanity. It’s not a space I personally want to play in, and at present I believe it’s net-negative overall, but perhaps that will change in the future.
Cryptocurrency is largely a game of mimetics, convincing others to buy in through persuasion or fear, which directly benefits those who bought in earlier…this is exactly the way multi-level marketing or pyramid schemes works.
Too much of the space is not focused on providing real value, but on providing value to themselves at the expense of others. Those who get in early shill like crazy and get rich off those who come in later, kicking the can down the road.
The ones selling the picks and shovels are making the real money 😂
It is, perhaps, a modern form of alchemy, but instead of turning lead into gold, it turns belief into cash.
I never would have thought I’d see an actual money tree, but things that seem too good to be true usually are…
The true believers seem to NEED to believe, and are directly financially INCENTIVIZED to believe and to proselytize that belief. But their thinking is likely impacted by loss aversion, sunk costs, confirmation bias, cognitive dissonance, the bandwagon effect, the frequency illusion, and numerous other cognitive biases besides.
As it exists today, I believe crypto is a really risky game to play, and as Naval has so eloquently stated, “Play stupid games, win stupid prizes.” (Ironic in that Naval is a major crypto supporter.)
But hey, your life is your life, your money is your money, and what risks you take and what games you play are up to you.
What actually needs to be solved though, and what clearly nobody has yet solved, is this: How do you engineer a system (of any sort) that can’t be corrupted by stupidity and greed?
If you figure out how to build THAT system, we all win, and that’s something I can get behind.