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The 2 main arguments for Bitcoin and Crypto

The 2 Main Arguments for why Bitcoin is an innovation and an achievement in cryptography application:
  1. Peer 2 peer trust-less electronic cash system  -> permission-less money
  2. Internet Native Money -> non-sovereign issued

I first heard about Bitcoin back in 2011, but unfortunately didn't buy any.  I still don't have any (I've traded listed options on BITO, but those were short term volatility trades for  maybe a future post to get into).  But I've always been fascinated with it.  Not just because "number go up".  So stripping away the aspect of price going up exponentially, why does it appeal?

The 2 main appeals I can distill down to:

  1. Peer 2 peer trust-less electronic cash system  -> permission-less money

    This is amazing in that it has the potential to replace money transmission/payment systems without a intermediary like Visa, Mastercard, Paypal, etc.
    This why technologist love it, it is the promise of a new system that doesn't pay 3rd party fees.  Building new systems that aren't controlled by any 1 party is appealing to many technologist on top of that providing the functionality to transfer value is extremely appealing.

  2.  Internet Native Money / store of value -> non-sovereign issued

    This is for people that value scarcity.  Generally people afraid of inflation.  This is common to why "gold bugs" like it. Or people that don't agree with the US Dollar going off the gold standard.  This also makes Bitcoin a bearer instrument meaning custody is extremely important as after being issued or transferred, it can not be revoked.  This brings to the popular expression "not your keys, not your crypto".

Update, 2022 - Where are we now?

  1. Permission-less money aspect

    Stablecoins:
    Although the recent blow ups of UST and LUNA wiped out a lot of wealth, stablecoins have gained a lot of transaction as they preserve the ability for p2p transactions without the need for volatility in the underlying asset (like Bitcoin).  Many systems have been built to accommodate transfers of stablecoins as they provided faster means of settlement and in many regards new open infrastructure has been created to empower permission-less money.  Whether it be DEFI yield farming or Decentralized Exchanges, the ability to send tokens has only improved as the adoption of standards may be slow but definitely progressing as more and more people and merchants are willing to accept crypto-currency.  Although the US is potentially looking to heavily regulate the space, what has been built is a system that is only growing in adoption.  By regulating this space, the US is not banning crypto currency, which means many innovations in transfers of value will continue to evolve and with enough adoption, will rival current financial infrastructure.

  2. Store of Value

    Corporate Adoption:
    Since the early days of Bitcoin, there have been a growing number of institutions and even countries that have been adopting it and holding it as an asset.  Here is a pretty good list of treasuries that hold bitcoin coin on their corporate balance sheet.  https://bitcointreasuries.net/

    NFT
    No doubt one of the biggest innovations of Crypto recently has been the adoption of NFT.  I like to describe this as digital art.  All the benefits of owning authentic art, but with the ability to digital share and display it.  The difficult aspect is valuing it, just like art, it is completely subjective.

Challenges:

Crypto has come a long way.  Even with the recent Stablecoin issues, it looks like the area will continue to evolve.  What it is worth is a very difficult question in mind to gain consensus on.  These are the main challenges I see:
  • there is no intrinsic value or cash flow that can easily be ascribed
  • the distribution of crypto ownership is not very diverse with relatively few wallets that hold the majority
  • USDT - Tether foundation has had a history of questionable activity and the are still not being very transparent.  This is a issue because it is the 3rd largest Crypto Currency by market cap
  • no robust options / derivatives market to provide sufficient price liquidity.  Also without liquid accessible derivatives, it makes it difficult to do strategic investing
  • MicroStrategy / Michael Saylor have a very open transparent leveraged position.  The market place is known to make it difficult for large holders of assets when margin calls could be introduced
  • Ability for new cheaper blockchains to displace current or future incumbents.

Takeaway:

I still find crypto very interesting, and with the recent price drop, getting more curious to dabble my toe in the water.  In some ways, if MicroStrategy's position was further tested and if USDT / Tether had more transparency I would be more inclined to allocate.  The other main issue is that even if the ideas of crypto survive, I'm not sure if any of the current tokens would be the winner.  Since these are technology driven creations, it may be that there will always be a new cheaper blockchain that will be able to provide more value making older chains obsolete and not ever capture the adoption of crypto currency.  For example, if Ethereum gets too expensive to transact on, eventually the users may pick a cheaper alternative for well defined solutions.

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