This is the second part of the article about Bitcoin and cryptocurrencies. You can find the first one here.
Last week we spoke about Bitcoin’s history, blockchain technology, and some characteristics that made Bitcoin unique. We also wondered what happened to the fascinating and mysterious Satoshi Nakamoto, who, after creating one of the most impactful technologies in the 21st century and mining 1 million coins now worth around 50 billion USD, disappeared without any claim to fame for the former, nor spending a penny of the latter.
Some people believe Satoshi Nakamoto should get both the Nobel prize in economics and the Turing award for computing for creating Bitcoin. That would be a first, certainly a remarkable achievement, but we don’t even know whether Satoshi acted alone or was a team of specialists in computing, cryptography, and economics. We will never know.
Anyway, it is time for us to part ways with Satoshi, fascinating and intriguing as he is, and focus again on the history of his creation, Bitcoin, and the broader world of cryptocurrencies.
Ethereum, altcoins, shitcoins
We left the history of Bitcoin in the first crypto winter after the collapse of Mt Gox and Silk Road in 2014. The price of Bitcoin plummeted from around $1,200 to $200, and it languished there for months. Many people thought that Bitcoin had been an interesting experiment while it lasted, but that was it.
The price went up and down too much to become any meaningful medium of exchange, authorities didn’t like it as it was linked to Silk Road and other illicit activities, banks didn’t want anything to do with it, and therefore there was no easy way to exchange it for fiat currency. It seemed it was over.
While Bitcoin’s price was getting dormant and not much was happening around it, blockchain technology had awakened many people’s curiosity, and other exciting projects were starting in the cryptocurrency field.
Vitalik Buterin, a Russian-Canadian teenager who was 19 at the time and had been writing for Bitcoin Magazine for a while, proposed a new project in a whitepaper in 2013. He brought together a bunch of programmers and engineers, they got some crowdfunding in 2014, and in 2015 they launched Ethereum. This new blockchain ecosystem would allow other blockchain projects to be built on top of it.
Ethereum was a new protocol that created the foundation for smart contracts and decentralised applications (also known as dapps). A smart contract is a program that automatically executes the conditions of a predetermined contract when certain conditions happen. They avoid intermediaries and human interpretation, the often expensive middleman, and computer code becomes law.
Decentralised apps, as the name indicates, are apps built on top of the Ethereum protocol that work like Android or iOS apps, but are decentralised and based on blockchain technology.
The arrival of Ethereum opened the floodgates for other myriad projects in 2016 and 2017. Suddenly there were thousands of new protocols with their respective coins and tokens, with picturesque names such as Trumpcoin, Pizzacoin, Selfiecoin, Fonziecoin, or Potcoin. All of them purported to solve a problem in the market for which they needed a coin people would pay for.
Thus were created the altcoins, or alternative coins, which is the name given to all crypto coins that aren’t Bitcoin. Ethereum is the biggest altcoin there is today, but there are thousands of them. Bitcoin maximalists (an adjective coined by Vitalik to define the fanatics that could only support Bitcoin and hated and rubbished all the other coins) also call altcoins shitcoins.
For Bitcoin maxis only Bitcoin works; all the other coins are useless. If anybody tries to argue with them, they will shoot back the Bitcoiner’s preferred phrase: Have Fun Staying Poor (if you read HFSP, this is what it means). They are funny like that.
There is a lot of tribalism in the crypto world, and it can get a bit nasty sometimes. There is not much love left between supporters of different crypto projects.
The ICO Fever
In 2017 the crypto space was ebullient, with new projects coming out every week. There were literally thousands of blockchain projects and coins. Most of them were useless, many of them were outright scams, but a few projects were interesting and are still alive.
All these projects needed financing, so they created what was named ICOs: Initial Coin Offerings. ICOs were supposed to be what IPOs are for the traditional stock markets: a means to obtain financing for a project. A project would launch a token that people would buy, as if they were shares of a company, and hold them hoping their price would go up.
And prices up they went. There was a real fever, in all areas, from the beginning of 2017 to early 2018. Bitcoin shot up to an all-time high of almost $20,000 in December 2017, Ethereum reached its ATH of $1,400 the following month (these highs were never reached again until very recently, last December for Bitcoin and January for Ethereum). Even coins like Dogecoin, which was created as a joke and abandoned by its founders right after its launch, went up to crazy heights. Dogecoin is still around and went again through the roof recently as it was pumped by the Wall Street Bets crowd and Elon Musk.
Those were crazy and febrile times. Many people became filthy rich overnight, but many others lost their shirts when everything inevitably and spectacularly crashed in 2018, tumbling prices down by 80% or even more in many cases.
Thus started the second crypto winter.
Covid-19 and the macroeconomic case for Bitcoin
The price of Bitcoin went slowly down throughout 2018, until it reached the bottom in February 2019, at around $3,500. It started climbing again to around $10,000 in the summer of 2019, to then start going down again. On the 12th of March of 2020, on what is now known as the “Black Thursday,” Bitcoin touched a new low of $3,800.
That day all markets panicked due to the covid-19 pandemic. It was a general sell-off of epic proportions, one of the biggest stock market crashes in history, and it was one of the biggest crashes in the nascent crypto market as well.
After that, most governments started printing money, signing the biggest stimulus cheques ever seen, and injecting enormous amounts of money into the economy.
The economy was awash with newly printed money, but with interest rates close to zero and many industries ravaged by the virus, there weren’t many investment options, so mainstreams investors piled into tech stocks, which rose steeply. Many other investors also started investing in Bitcoin, Ethereum, and other cryptocurrencies, so the crypto market started to get buoyant again.
Enter Michael Saylor, the bold and maverick CEO of Microstrategy, a publicly traded American company, in the picture. Saylor had a problem. He was staring at the $500 million of cash his company had in its reserves, and he didn’t know what to do with it. With the amount of money the Fed was printing and the size of the stimulus, he knew the dollar would devaluate, so all that amount of cash would lose its value over time. “It’s like staring at a half billion-dollar ice cube, melting slowly away”, he thought, “what can I do to avoid this?”
He had ignored Bitcoin until then, as he didn’t understand it, but it had been the best performing asset the last ten years, so he thought it could be an option, and he started doing some research. He went deep into the rabbit-hole, as everybody who wants to understand well this particular asset must do, and he made up his mind after that.
He would start putting some of that cash into Bitcoin and have Bitcoin as an asset in Microstrategy’s balance sheet. Since then, Microstrategy has spent more than $2 billion to purchase Bitcoin. And this is not the only company. More and more companies, including investment funds, are piling into it.
In the first eleven years of Bitcoin, the price was pushed higher and higher by retail investors mainly, but 2020 was the year when institutions entered into the fray and started buying it in large quantities. In 2021 this trend is intensifying, Tesla being the largest company to date to announce that they are adding $1.5 billion of Bitcoin into their balance sheet.
The covid-19 pandemic has created the perfect macroeconomic conditions for the revaluation of Bitcoin as a store of value against inflationary fiat currencies, so many institutions have finally noticed it and are now entering the race. As the number of Bitcoins that will ever exist is limited, the price of a single unit should go up as more people and institutions want to own their piece of the cake.
Bitcoin, currency or commodity?
“I cannot buy a coffee with Bitcoin” or “you cannot buy anything with Bitcoin, as the value can go up or down 20% in a few hours, it’s too volatile”, are two of the main complaints people throw at Bitcoin as money. I think they are right. Bitcoin is not an appropriate medium of exchange right now.
On the one hand, it is too volatile. The price swings are too big, so it does not provide a reliably consistent or fixed value to satisfy both parties in a transaction. On the other hand, all transactions made with Bitcoin are recorded in the blockchain, and if we were to register all everyday small money transactions, we would congest the network and it would be useless. Also, although the Bitcoin transaction fees are low compared to banks, especially if you are to move significant amounts of money, there is still a minimum fee, which makes paying for a coffee or a loaf of bread to0 expensive.
Some Bitcoin maximalists like this volatility. They see everything from a positive side. A Bitcoiner can never lose, not even when owning a very volatile asset. If the price goes up, they are getting richer, so they are happy; if it goes down, it’s cheap, so it is the perfect opportunity to buy more and keep stacking sats*. A Bitcoiner always wins. They are “a glass half-full” bunch.
So, Bitcoin cannot be used as money. Does that mean it is useless and has no value, as many argue? Bitcoin will have the value people are ready to give it, which currently seems to be a lot, but this value is not linked to being effective as money. Bitcoin is currently more akin to a commodity, like a metal or another material, and its primary value is as a store of value.
It is a store of value for the digital times, a digital gold. It is the safest digital commodity there is. It is the only purely decentralised cryptocurrency out there, nobody controls it, and nobody will be able to because of its incentives system and the way it is organised. It allows you to store value that is appreciating every year, transport it in a USB in your pocket, and transfer whatever amount you want from one side of the world to another in minutes, with minimum fees. This is why people value it.
Some Bitcoin proponents believe that as its adoption increases and it replaces gold as the main store of value, its volatility will be reduced and then it will become the perfect currency to conduct transactions. They believe first it has to be a commodity before it can be a currency. Some think it will even replace the dollar and other currencies as the main currency of the world.
I think that is a bit far-fetched at the moment and that all countries will defend their fiat currencies with all their power, so it is unlikely we’ll ever get there. I don’t think the collapse of the dollar would be a desirable outcome for most people.
For the time being, Bitcoin is a commodity, and that’s enough. It has been the best performing asset for the last decade. I believe it will continue to perform well for the foreseeable future, so it should have a place in anybody’s investment portfolio. How big or small that place should be will depend on the investor’s risk appetite.
The crypto ecosphere
Since the ICO fever of 2017, there is a vibrant and dynamic crypto ecosystem beyond Bitcoin, with nearly 1 trillion USD total value (excluding Bitcoin, which itself briefly reached the one trillion mark last week before going down below again). Many crypto projects are useless, silly, or money-grabbing scams, but many others are innovative blockchain protocols solving real-life problems.
Many of these protocols are built on the Ethereum ecosystem and are based on the smart contract concept. Still, other ecosystems are competing with it, such as Cardano or Polkadot, growing strongly. There have been many “Ethereum killers” in the past, but none has been able to dethrone the king of smart contracts yet.
Ethereum and other ecosystems are enabling one of the hottest areas in crypto right now: defi (decentralised finance). As its name indicates, defi is all about fulfilling finance functions like lending, borrowing, and exchanging money in a decentralized manner, with no intermediaries and no third parties. For example, you can lend your Bitcoin, Ether coins or stable coins (these are cryptocurrencies pegged to the dollar or other fiat currencies to avoid volatility) and earn interest, or you can exchange different coins in one of the many DEX (decentralised exchange) apps.
Defi is still small and nascent, but as it grows in popularity and maturity, it has the potential to disrupt the world of banking and finance.
Then there is the concept of NFT, or Non-Fungible Token, which is also getting a lot of attention. I must admit I still don’t understand this very well, but some think it is the hottest thing in the space and can grow exponentially from here.
NFT are non-fungible tokens, which means they are not interchangeable. They are unique. An NFT is a token in a blockchain linked to something unique, usually a work of art, a digital painting, video, song, or writing. When you buy this token, you can access this work of art, which belongs only to you. As it is a digital work of art, you could make copies, so this is why I don’t get the value of it. I guess it’s like people who collect real autographs when you can get copies: you know it is the real thing, and there is only one copy that belongs to you, so this makes it valuable for you. It is digital scarcity applied to art. Believe it or not, people are spending small fortunes on these digital tokens.
Defi and NFTs are some of the main applications we see today in the crypto world, but they are not the only ones. Crypto isn’t only about Bitcoin or Ethereum, there are thousands of projects, and it is where many of the most innovative things are happening. Some people compare crypto to the internet in the 90s. It’s the place to be for programmers and developers, and a lot of economic growth will come from it in the future.
Bitcoin is the reserve currency of this crypto world, Ethereum the oil that ensures the machinery works.
Crypto and the Future of Work
The crypto industry is still in its early days, and there will probably be uses of it that we cannot even imagine today, but its impact on companies and how they are organised in the future will be huge.
For example, there are already many uses of blockchain to ensure the traceability of products and their provenance from trusted sources.
Smart contracts will allow many functions that today are done by legal and finance personnel at a large expense to be automated. Programming code will become law and will be applied automatically.
We have seen already how the world of crypto is disrupting the world of finance through defi. Companies will be able to finance themselves and trade in different markets with less friction and without the intervention of middlemen getting a cut.
The possibilities are endless. From more effective identity management for employees to decentralised loyalty and rewards programs or faster and safer payment and settlement methods, there are many applications of blockchain and crypto technology that can have a considerable impact on organisations.
These are things that are about to be possible or will be available within the next two years. With the speed of change we see in this field, who knows what will be possible in five or ten years? What is clear is that crypto will revolutionise the world.
It is already happening, but it’s too early to notice it fully.
Watch the crypto space. Plenty of innovation and new developments will be coming from there.
*Stacking sats or stacking satoshis: a sat or satoshi is 0.00000001 of a Bitcoin, which is the smallest available fraction of it. One Bitcoin has 100 million satoshis. Stacking sats is the art of buying fractions of Bitcoin periodically and regularly.
DISCLAIMER: This is an opinion piece on Bitcoin, cryptocurrencies, and blockchain technology. It does not constitute financial advice. I own Bitcoin and other cryptocurrencies as a personal investment. All investments carry their risks, so you should do your own research before embarking in any.