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The Paradoxes of Bitcoin

This post is a thought experiment to explore how opposing beliefs can co-exist in a single narrative:

  • BTC could hit $1 million
  • BTC could be worth $0 long-term

  • BTC could have a face-melting pattern-breaking rise
  • BTC could have a boring and steady decline

  • BTC could be remembered as a breakthrough in applied mathematics
  • BTC could be remembered as the prototype mistaken for a new financial operating system

When Moon Math Becomes Real

Bitcoin has had a crazy run since it's glorious March crash at the start of the pandemic. It's gone from $3,800 to $34,000 in a span of 9 months. The "moon math" based on the last 90 days is absurd. If you extrapolate the latest trend forward (since October 2020), it puts us at $1 million per Bitcoin by October of 2021, which is an 18 trillion dollar market cap (roughly 2x of gold, or 14x less than all of the world's real estate).

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Even if you are a long-term believer in Bitcoin and don't vomit at the idea of magic internet money becoming the next world currency, the idea of it happening THIS YEAR, is hard to swallow. It's hard to grapple with the idea that John McAfee's bath salt hallucinations could have be interpreted as sound financial advice.

$1m Bitcoin this year isn't completely unfeasible. It's unlikely, but weirdly possible. Many were already expecting 2021 to be another bull run that falls within our 4-year bubble and bust pattern. This trend can't go on forever (there is only so much money), but there are a few reasons why a bull market could extend past where our rational minds can imagine.

First, the world is in a weird and fragile state. Aside from pandemic-related general-purpose "collapse," there is specific uncertainty about the US dollar, inflation, and unprecedented stimulus. Pair that with another trend in the collective psyche - the fracturing of objective reality. Social media is aiding in a new world of "electronic tribalism," where instead of a shared mainstream consensus, there are multiple ways to interpret an event.

So, huge institutions, which historically have laughed and scolded Bitcoin, are all of a sudden hoarding it. Instead of whales, crypto cowboys, and that guy from Bitconnect, Bitcoin is being bought by investment firms, world governments, and PayPal. These large institutions are open-minded to the idea that the pandemic could have triggered a slow moving economic reset, and they're building up Bitcoin reserves just in case it plays out. New regulation at the start of 2021 from the US Treasury stated that US banks can issue payments through public blockchains and stable coins. The US government was thought to be an inevitable hammer that would kill the movement, but they weirdly just gave a greenlight for chaos.

A rise to $1 million wouldn't be based on adoption, but on a speculative view on both 1) the intrinsic value of the technology, and 2) the way the world is moving. This kind of rise would be shocking, but I think something funny could happen at the top. Bitcoin is paving the way, and creating an opportunity for a whole ecosystem of decentralization. But only when there are a series of competing digital currencies operating at scale will the world understand that Bitcoin is a "mindless snake."

The metaphor of the Bitcoin blockchain as a snake without a brain is a useful metaphor to understand how Bitcoin works in comparison with some of it's modern competitors. We can appreciate the snake itself as a historical breakthrough in applied mathematics, but it's a prototype. It's the first proof of concept, but it wasn't designed with all of the challenges a digital world currency will face.

A nuanced take:

  • Bitcoin has value both inherently and through network effects (it's not just vaporware with reckless speculation).
  • Only when Bitcoin rises to the scale of a world currency will many understand that it is a prototype (a mindless snake) and experience it's significant design flaws.
  • It's possible for Bitcoin to rise to $1 million dollars per coin and become the first digital currency for a decentralized economy. But it might be a sacrificial first child, and become valueless as more modern and adaptable digital currencies gain adoption.
  • Bitcoin doesn't have to go from $1 million to zero in a dramatic dumpster fire. Maybe it takes three decades to decline. Maybe the 4 year cycle we've been stuck in is just a pattern on route to complete world penetration, but then beyond that is a slow and gradual bleed out.

UPCOMING WRITING

1. Why is Bitcoin a Snake?

What is the inherent value of a blockchain?

(add point on the UX of moeny)

There are dozens of posts giving you detailed arguments of why Bitcoin has value. Google it. Many of the points explain how it's comparable (or better) to other types of money we're familiar with. I'd say the unique value of Bitcoin (or any decentralized currency) is the "design" of it's protocol. The value of design is something we typically attribute to the field of subjective aesthetics (buildings, cars). But there are many design decisions that go into a cryptocurrency. Probably over 50% of the altcoins are clones of Bitcoin and don't iterate on the design. There are few other ones that have design innovations that improve on or diverge from Bitcoin. But Bitcoin is the first coin to use a "proof-of-work consensus algorithm," which is historically significant.

So the inherent value in Bitcoin lies in the network of computers that work together to agree upon a correct version of the ledger (the history of ALL transactions that have ever occurred on the Bitcoin network). Every 10 minutes, all of the pending transactions on the Bitcoin network are grouped into a "block." Each block has a unique message, which is then put through a hash function. This hash function outputs a unique and encrypted 256-character binary string that is associated with that block. It could look something like this:

XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

The odds of anyone guessing this number on their first try is 1 in 115 quattuorvigintillion (a number we've never even heard of). But whoever can guess that number first wins Bitcoin that is newly minted. There are over millions of people around the world using high-end graphics cards to rapidly guess what this number is. When someone finds it, they broadcast it to the network. Everyone else on the network runs these "winning lotto numbers" through the current hash function. Once others confirm that the original miner found the "winner," then the original miner who found it is rewarded.

So the inherent value behind Bitcoin is an arbitrary game of mathematics that financially incentivizes a diverse set of people from around the world to continuously play.

A "51% attack" on the Bitcoin network would require more corrupt people to play the game than honest people. This would require the coordination of so much computation power, that it would be more expensive than the actual value within the network.

How will the network effects play out?
Applied theory

The applied value of Bitcoin

WORKING

So the above section talks about why Bitcoin has value in a vacuum, but then the next layer on why Bitcoin has value relates to "network effects." This type of decentralized algorithm occurs on a world stage where currencies are minted by governments, which more often than not leads to runaway inflation.

Security

A) security

over-estimate trust - in US, trusting chase

inflation-resistance

BTC appealing to countries with runaway inflation

magnet - cyclical nature of currencies failing, BTC emerging as a bet

some anticipate problems with USD - inflation from simtulus printi

declining trust in institutions

Blind gree

B) blind greed

greater fool theory - get in early - ponzi

capitalism and greed - financial incentive

primal motivation - powers BTC to begin with

If miners weren't financially motivated, the network wouldn't be safe.

asymmetric upside

money people can afford to lose

C) asymmetric upside

rebalance of power confidence that others will play the game, part of this dance is "fluffing up" others, shilling, turns into a self-fulfilling prophecy, monolithic reserve currency - theoretically possible for all wealth to shift into a decentralized system where no one controls. If you are that monopoly (unlikely), then I would assume you would do everything your power to prevent the rise of decentralized currencies. For everyone else, there is asymmetric upside to transition your wealth - could see a transition where individuals, families, companies, and smaller countries increase their proportion of relative wealth. The Winklevoss Twins will be worth more than Jeff Bezos when Bitcoin hits a million dollars. Silicon Valley

2. Why is Bitcoin a Mindless Snake?

Fixable flaws

Flaws that can be overcome:

  • Interoperable, BTC as savings, ETH and other coins for functions
  • Can't spend it, but not about spending, digital scarcity, savings
  • UX started crazy difficult, custodianship, improving over time
  • Reaches eventual stability
  • Slow and expensive - but if not for Starbucks OK + lightning
Significant flaws

Significant flaws:

  • Energy consumption, inherent to proof of work
  • Non-dynamic - forks, etc.
  • Mining difficulty, more and more centralized over time

?

  • Currency where the supply can't be manipulated isn't inherently good - you want the ability to adjust as needed, but you need a democratic (non-authoritarian) way of doing so

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7 companies control 75%

3. A Jungle of Snakes

Hyperbitconization

Bitcoin has always had a cyclical nature. Every four years there is a relatively consistent pattern of bull and bear markets. This pattern is seemingly non-random, anpattern of somewhat consistent

Hyperbitcoinization (+$1m coin, flight from USD)

when is it used for spending?

The Flippening
  • BTC maintains itself - prototype accidentally scaled to a world system because nobody knew better - centralized, trusting cartels, even fractionali reserve Bitcoin - a digital version of the same thing we were trying to escape - whole digital ecosystem built meant to interact with the coin, Eth as Gas for processing, Link for Data, Filecoin
  • BTC was a prototype that the world mistook for the real-thing?

  • It's design flaws become apparent, China threats, quantum computer, regulation makes BTC unfavorable, but other currencies still feasible - Flippening
  • The Flippening (Ethereum, or another coin, passing BTC in value)

    Interoperability - value staying in digital currencies - but amorphous within the system - certain signal, with a clear highway - massive moves from currency to currency

4. Design Qualities of a Good Snake

Outline

OUTLINE

Ethereum vs. Cardano

  • proof of stake - true peer to peer
  • interoperable side chains
  • decentralized treasury & voting system
  • meta-data at the base layer

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