Bitcoin, Crypto and a Slippery Slope

Unless you’ve been living under a rock you have probably heard of Bitcoin before. It is a decentralized currency that is maintained over blockchain and is a highly sought-after asset right now. It is currently trading at north of $60,000 and has the support of a lot of people including Elon Musk.

Unlike most assets: stocks, real estate, and gold Bitcoin has no intrinsic value of its own and people do agree, even the ones who have invested and are raking in insane profits from the “asset”. But it does give rise to a deeper question: What even is value?

In its essence Value is highly subjective – a football from a FIFA World Cup final may be worth millions to a fan but maybe worth nothing to someone who doesn’t view the relic with any importance.

But Bitcoin doesn’t have any historical event associated with it, it’s not a tangible asset that creates job or innovation that makes anyone’s life easier. Definitely not $1 trillion worth easier.

At its very core even, its transactional value is not very “out-of-the-world”, transacting with Bitcoin is like shopping with an Amazon Gift Card worth $100 which might get you product worth $98 to $102 by the time you fill your checkout details depending on which day you’re choosing to carry out your transaction. 

Although there are a few benefits of transacting with Bitcoin online, most of the benefits revolve around the privacy surrounding the transactions. There are also lower banking fees (account maintenance fee etc.) and very low fees for wire transactions.

Although this could be accounted to the fact that users are low and prices are volatile thus the wire transfer intermediaries are incentivized to keep the transfer charges low to increase transaction volume until they reach a market leader position at which stage the transaction fee would eventually be set at par with other currencies.  

Some people are of the view that Bitcoin may replace Gold as the centralized and universal benchmark. The intrinsic value of gold is also debatable with experts having called it a “6000-year-old bubble yet to burst”. While the industrial use of gold has declined over the years, it’s still consumer durable in the form of jewelry and more importantly – it's tangible and truly a limited resource (unless alchemy is invented). While Bitcoin has been capped at 21 million coins, there is no one stopping from someone else to create a Bitcoin 2, or Bitcoin 3 and keep going. 

Bitcoin fans also say “But…even dollar is just a currency and people invest in that”, the only problem with that is the value of the dollar is associated with macro-economic factors. On the contrary Bitcoin’s value is based on … nothing?

And yet Bitcoin and crypto in general has been held in high regard majorly because it solves a complex computational problem.

Byzantine General's Problem

Suppose you are a general for an army that has multiple battalions spread out surrounding a city that you are about to invade. To ensure that you succeed it's necessary that all battalions attack at the exact same time or else everything would collapse. You use multiple messengers for facilitating the transfer of information to the battalions. Except there is a catch – The defending city knows about your messengers and may replace them with false information to sabotage the attack.

The Byzantine Generals’ Problem can be summarised as a question: How do you make sure that multiple entities, which are separated by distance, are in absolute full agreement before an action is taken? In other words, how can individual parties find a way to guarantee full consensus?

Bitcoin has worked around this problem by making sure that as long as more than 50% of the systems are in agreement, the plan remains intact. Centralized currencies like the USD don’t even have to face this issue as the centralized system governs the transfer of information and regulates it.

Bitcoin is highly unregulated and tracing it is fairly difficult than normal wire transactions. This is a slippery slope. Some people might retort by saying “We don’t trust the government”, but give no reason why Bitcoin as a currency should be trusted with no regulations. For all we know it can be used for illicit transactions as we speak.

The biggest problem I have with Bitcoin sympathizers is their constant need to tweet and write articles about yielding terrific returns and “Bitcoin is the future”. It’s further inflating the bubble with each new Bitcoin investor urging people to purchase the asset who would eventually do so at a higher price. At some point, this has to burst.

People who outrightly do not understand crypto stop right there, declare the asset as a “ponzi scheme” and do not go further. I disagree. It’s like any other appreciating asset, except there is no real reason for it to rise other than pure speculation and, let’s face it, optimism that one day everyone would adopt crypto. It seems unlikely to me that this would ever happen. We’d have to reach 100% internet penetration to even THINK about completely giving up on centralized currencies. Not to forget the thousand new competitors. At best we’d move from USD-EUR-INR system to BTC-ETH-DOGE system. And with no government to regulate the currency I don't know if we'll be better off.

I have an immense amount of respect for people who invest in crypto, wait for a higher exit and don’t constantly ramble about crypto being the future. They are here to make a quick buck and not try to revolutionize a “flawed” economic model by replacing it with a decentralized digital version of the same model. They aim for money and are not fanatics driven by an internet sentiment.

Another defense for Bitcoin is “You don’t understand it yet, thousands of Internet maximalists can’t be wrong, Elon Musk supports it”. Bitcoin has made fortunes for a lot of people for sure but a lot of it has been buying frenzies and a correction is long due.

If pushed enough we might eventually trigger a network effect that would force everyone to switch to crypto-currencies over time. But I really hope it never comes to that.