Bitcoin skeptics: here’s the bigger story you’re missing
Another way of looking at the controversial cryptocurrency
Skeptics compare Bitcoin to fiat currency, often pointing to price and volatility. The real story is that cryptocurrencies are not a replacement for the dollar, but a part of an alternative financial system.
In 2016, I bought $1000 worth of Bitcoin after my roommate introduced me to the world of cryptocurrencies. He dropped the words blockchain, permissionless and distributed ledger like it was French class. I didn’t get it, but I wanted in on the action.
To be honest, I didn’t understand the hype around cryptocurrencies. Normal U.S. dollars stored at my brick-and-mortar bank worked just fine for me. It wasn’t easy to take fractions of Bitcoin and spend it on a pizza. What was the real use case for cryptocurrencies?
If you’re a Bitcoin skeptic, then you might be nodding along to my beautiful prose that fits your existing biases.
It took me 5 years to really see past Bitcoin’s price and hype. It comes down to one central idea:
Bitcoin represents an alternative financial system outside of traditional, centralized systems.
In 2018, Venezuela’s economy went into hyperinflation mode. Due to government mismanagement and corruption, the Bolivar became so devalued that nearly all Venezuelans live in poverty. Since then, Venezuelans have been using cryptocurrency to bypass corruption and inflation.
This was the important idea that took a while to sink in*.
When a government is not working for the people, people will find ways outside — or against — the government to solve their problems. Like moving out of a country and applying for political asylum. Like bum-rushing Capitol Hill. Like cryptocurrencies.
While hyperinflation is not likely to happen in the U.S. soon, this points to the exact raison d’etre for Bitcoin. It serves as a hedge against the government not working.
New cash on the block
The 2008 crisis was largely caused by the unregulated financial industry. While the lives of normal people got financially destroyed, the very perpetrators of the crisis — big banks — got bailed out.
This context aligns with Satoshi Nakamoto’s motivation to create Bitcoin.
The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.
In 2009, a mysterious figure named Satoshi Nakamoto drafted a whitepaper called Bitcoin: A Peer-to-Peer Electronic Cash System. Satoshi proposed “a purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution….”
Imagine Satoshi’s surprise with price of Bitcoin hovering near $40,000 USD as of this writing.
I imagine he didn’t think people would use Bitcoin now largely as a store of value — akin to digital gold — versus a replacement for conventional currency.
However, his purpose behind Bitcoin still stands. Bitcoin has always been an alternative financial network that allows people to transfer money outside of the central banks.
The technology that Bitcoin is built on, blockchain, powers this alternative financial network. Bitcoin is simply the largest product using blockchain technology.
When skeptics point to Bitcoin’s volatile price, they’re distracted from the blockchain story.
Obsessing over Bitcoin’s price is like obsessing about Tesla’s stock price. Both are dominant players in their respective spaces, but their financial performance is often a distraction for what they’re fundamentally about.
Bitcoin is to alternative finance as Tesla is to alternative energy.
Tesla is not just a car company; it’s an energy company. Bitcoin is not just a digital currency; it’s a part of an alternative monetary ecosystem.
The dollar, disrupted
Americans compare Bitcoin to what they know best: the dollar. The U.S. dollar has enjoyed immense goodwill and trust from the people who use it. It is the world’s reserve currency.
But….consider the ongoing disruption to currency. In 1971, Nixon took the U.S. dollar off the gold standard. It’s been decades that our dollar has not been backed by anything tangible except by collective faith in the U.S. government.
We have what is now called fiat money, which makes sense when fiat is defined as an authoritative or arbitrary order.
The next disruption is the move from physical to digital money. Every bank is now essentially an online bank, and we relate to our money in terms of numbers on a screen. We’re considering getting rid of the penny. Who needs that when you’ve got credit cards or apps like Venmo?
Mental shift: look at Bitcoin as part of the long chain of disruption to money.
Never mind that Bitcoin and blockchain solve monetary problems like double-spending, Byzantine General’s problem and transparency. These technical solutions aren’t convincing enough to the general public, for whom the dollar serves just fine.
But skeptics will see something new once they drop comparisons between Bitcoin and traditional currencies (which I’ll cover in another post). They’ll see that investing in cryptocurrencies is investing in:
- The bleeding edge of financial technology
- Interesting monetary experiments
- A hedge against the existing financial infrastructure
It’s a brave new world that’s worth exploring.
And the price of entry isn’t high; you just have to buy a little, not a lot, of Bitcoin.
I’m just a guy on the internet with an opinion, so please just treat my content as entertainment. My content is may contain referral links to products I use or love. My content is for informational purposes only, and you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
This was first posted on Oz’s blog: https://ozchen.com/bitcoin-skeptics. You can subscribe to get weekly insights about psychology + money by visiting the newsletter page below: