Bitcoin: What Is It? And What Should We Do With It?
Before you invest in BTC, you need to consider what it is
One of the most common questions people ask is ‘how do I buy Bitcoin?’ aka which exchange is best, but I never hear anyone discuss a plan for what they are going to do once they acquire some coins (or a fraction of a coin). People don’t know because many don’t know the mechanics behind BTC, nor have they thought about what it could become in the future. They also haven’t considered that a lot of the crypto world hasn’t been defined or created yet. We are just at the start of the journey. To put it in perspective, the Ethereum whitepaper appeared 5 years after Bitcoin, in 2013, around the same time as the first hardware wallet Trezor. Proof of Stake has been hovering around since 2013 in the form of Peercoin, but 2019 was the first year it got any serious traction, along with the growth of DeFi and Dapps. DeFi currently has less than 1.5 million users worldwide. But with the hype and such a focus on crypto today, new products will appear and innovations will continue to grow and benefit the market in the near future. But what should we build? Well, it depends on what the community or governments decide Bitcoin actually is, and who comes first with their ideas. So far, with regulators still reluctant to open up fully to crypto and define a rulebook, the community gets to build, and regulation has to keep up.
But what should we build? That depends on what we think Bitcoin is.
Money
While Bitcoin has forced the world to redefine what money actually is, Bitcoin has none of the traditional properties of money — it has no intrinsic value, it’s too volatile to be a unit of account, and it is not widely used so can’t be a medium of exchange. It tried, but it didn’t end well.
However, Bitcoin is one of the first realisations of a digital currency and it offers a technology to create other secure digital currencies, but Bitcoin itself has struggled to be the world’s deregulated currency. The grand idea that it will become the global (non-political) standard to measure all other fiat against can only happen if the price stabilizes, or if all governments agree to it — but why should they? With Visa coordinating with banks to create a payment system for Central Bank Digital Currencies (CBDC’s), digital Yuan and Facebook’s Libra/Diem coming soon, it is unlikely that Bitcoin will be ‘the one’. Paypal was a digital currency long before Bitcoin even existed. Many other alt coins have sprung up over the years to offer faster, smaller, or more private payments than Bitcoin, and have paved the way for other/better versions of digital currency.
Commodity
Bitcoin has a similarity to commodities such as oil, gold and silver, with high volatility and a limited supply. In America, the Commodities Futures Trading Commission designated Bitcoin as a commodity in 2015, and in 2017 Bitcoin Futures became a product. This helped boost institutional interest, as they could trade Bitcoin without ever having to buy it. The fact that Bitcoin originated from the idea of Bit Gold also makes it easy to compare BTC to gold, but we could never have currencies backed by Bitcoin due to its extreme volatility and the reality that the majority of BTC is held by anonymous individuals, not governments.
Collectable
The mania aspect surrounding Bitcoin of late looks more similar to collectables (most notably Pokemon cards) than to a commodity. With its limited supply, use as a hedge against inflation, holding (or HODLing) nature for a perceived future increase in value, and commanding premiums higher than the actual underlying asset, crypto coins could be classed as collectables. However, collectables don’t drop in value as quickly as crypto can.
So how then can we classify Bitcoin?
Nick Szabo the creator of Bit Gold sees it as a store of value, while Bitcoins creator, Satoshi Nakamoto, envisages it as a means of exchange whose value will be decided by the market. It is similar to things we already have, but the difficulty in exactly classifying it has proven more difficult for regulators than for developers. Perhaps this is a good thing. From the confusion of what Bitcoin is comes creation, and from the mania and price increases comes adoption.
What Bitcoin ultimately is, is a first use case of blockchain and smart contracts. And it has proven successful. The area of blockchain development and decentralized finance products has been growing immensely, as have novel and creative use cases for crypto currencies. We now have crypto cards, crypto staking, crypto backed loans, and tradable crypto futures contracts. Crypto ETFs and indexes are likely to come soon, and more transactions relying on smart contracts. Blockchain technology is just as hot a topic as Bitcoin, as the world is finally starting to understand what it means, though real examples of its use. Crypto kitties showed the art and gaming world what was possible in terms of tracking ownership. De Beers’ has created software to 3D scan diamonds and upload the scan to a blockchain, so buyers can see where diamonds were mined, cut, polished and sold before they purchase. Regen Network is working on forest protection and tracking ecological change via a proof of stake blockchain. Aura blockchain platform is already being used by Louis Vuitton to track its products to avoid counterfeiting. Blockchain’s tracking capacity brings transparency to the source of products and can address the environmental impact of production along many of the world’s supply chains. Healthcare, energy, transportation and logistics are likely to be the next industries to see blockchain possibilities realised.
What Bitcoin becomes is up to us, but speculation and greed will fuel how we ultimately class it. Most likely it will continue to be a hedge against inflation and market uncertainty. However, along the way it has fuelled adoption of new products and blockchain projects, and is solving real world problems. It has also pushed forward the use of digital currencies, and helped pave the way for finance and fintech to think differently and offer new and incredible products, providing utility and value to many. Other industries are now starting to play catch up, but really we are just at the start of blockchain adoption, with much more to come.
As for Bitcoin Mania the questions to ask are — how much are you willing to pay for one? And how much would you sell one for?
Originally published at https://www.linkedin.com.
