Bitcoin through $30,000

Craig Wright is probably scratching his head, wondering why bitcoin (BTC) has soared past $30,000 while his Bitcoin Satoshi Vision (BSV) languishes around its average price for the past year.  BTC has left BSV behind despite BSV’s leaps in blockchain and cryptocurrency technology.  BSV has unlimited block sizes (BSV’s block sizes remain below 1MByte), low transaction fees, and simplified payment verification (SPV), the foundation necessary for BSV to supposedly compete as a viable alternative to central bank fiat currency.  Bitcoin doesn’t have anything going for it in terms of a functional currency other than its recognizable name.  Bitcoin’s second-layer Lightning network payment channel has yet to make any real-use progress and likely never will.  Yet, despite all of BSV’s revolutionary proprietary blockchain technology that supports its use as a potential functional currency, BSV’s real-use adoption remains as elusive as Satoshi’s proven identity.

Under Satoshi’s decentralized fixed supply design template, cryptocurrency prices have nothing to do with the value of a functional currency and everything to do with the value of a limited utility speculative asset.  There is no need for thousands of limited utility speculative assets—cryptocurrencies.  Bitcoin fills the first-mover role with its defining, recognizable name and a market capitalization well above all other decentralized cryptocurrencies.  It acts as a proxy for all decentralized cryptocurrencies in its role as a speculative asset.  Bitcoin maintains its speculative value despite having no realistic functionality for the transaction of goods and services—even on the most primitive scale.  The rest of the decentralized fixed supply cryptocurrencies act as marketing ploys for their own little niche.  To the extent they can create some plausible story for their existence and fill the role as a speculative asset, they can maintain some value.  At least in the short term.

Bitcoin currency functionality hasn’t arrived because Satoshi’s adopted fixed supply template instead unleashed a speculative crypto playground.  This is contrary to the introductory white paper’s implied intention, Bitcoin: A Peer-to-Peer Electronic Cash System.  Satoshi states in the white paper:

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.

 

Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments.

 

Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party.

The White Paper makes clear that Bitcoin was meant to act as a competitive currency for the transaction of goods and services.  A functional currency requires a stable value.  Bitcoin’s price is anything but stable.

Cryptocurrencies remain far from ready for prime time.  In The State of Crypto, I looked into fraudulent exchange trading volume and the history of scams that define the crypto space.  With fixed supply, demand determines the price.  A few large bitcoin owners, known as whales, can drive the price on largely unregulated exchanges.  Volatility will remain a defining feature of cryptocurrency. Through unregulated exchanges, whales can manipulate demand at whim. 

Another function of bitcoin price is the halving of miner reward every four years.  The last halving was in May 2020 that changed the mining reward from $12.50 to $6.25.  With each halving, the cost of mining doubles, and profitability requires more efficient mining and a higher bitcoin price.  Satoshi’s theoretical world use case envisioned bitcoin exploding in growth as it competes with fiat currency for the purchase of goods and services.  The transaction fees from that exploding growth were supposed to offset the perpetual decline in mining rewards, which eventually go to zero. Of the total supply of 21 million bitcoin, 88.5% have already been mined.  Each halving requires either an increase in transaction fees or a higher bitcoin price to support the system.  An exploding number of transactions—indicated by the purchase of everyday goods and services—will never happen due to fixed supply price volatility.  In the future, with each additional halving, the declining reward will no longer support mining—unless as the scale of declining mining reward trends toward zero, the price of bitcoin correspondingly moves toward infinity.

Bitcoin remains mostly unregulated.  The SEC and the IRS are belatedly getting their government hands into the crypto space.  Crypto scams, hacking, and extortion are common to the industry.  The idea remains elusive to many that bitcoin is pseudonymous.  While your private key that denotes your bitcoin ownership is private, your public key is associated with an IP address.  Your public key doesn’t contain your name and information, but authorities can trace any transaction to an IP address that identifies the bitcoin owner.  The blockchain ledger maintains all bitcoin transactions for perpetuity.  The blockchain promises to revolutionize our world by disintermediation of middlemen in banking, contracts, law, and finance.  Yet, the blockchain revolution requires bitcoin to act as a traditional currency.

There is no greater middleman than government, so decentralized cryptocurrency is the ultimate threat to big government.  Government is always slow to catch on to new trends, but when they do, they catch on with a vengeance.  For now, government mainly has a hands-off approach to the crypto space for various reasons.

  1. Cryptocurrency and blockchain technology is still new and evolving.
  2. Cryptocurrency is not a threat to national currencies.  No one uses cryptocurrency to buy goods or services.
  3. Cryptocurrency speculation provides government a capital gains revenue source.
  4. The private advance of cryptocurrency and blockchain creates the technology required for planned central bank digital currency and blockchains.  Central banks will adopt this technology to advance their goal for a digital cashless society.   

As noted, central banks are increasingly interested in adopting crypto technology into their own centrally controlled digital currency.  Satoshi’s vision and central bank adoption are diametrically opposed in their ideals.  Satoshi created Bitcoin to usurp government and central banks’ control of fiat currency and its historical negative economic implications.  In its place, he envisioned a democratic encrypted system of cryptocurrency and blockchain free of central control.  Satoshi cemented a crucial monetary design flaw in his system.  The opposite of his desired goal is likely the end result. Instead of challenging the central bank fiat system, Bitcoin and the blockchain are now empowering it.  While bitcoin remains useless as a currency, its technology moves us toward a digital cashless society controlled by central banks. 

When you purchase bitcoin, you are, in reality, buying ether that requires Satoshi’s flawed monetary model to support its long-term use case.  That use case will never occur under Bitcoin’s current design.  What you are getting instead is speculation in a proxy monetary system useful as a means of protection against our 50-year-old global fiat monetary system that is morphing into MMT.  It’s impossible to make a judgment on how long the speculation remains viable.  However, it doesn’t hurt to understand what you’re getting into with a bitcoin purchase.

Next: I’ll look into central banks’ foray into digital currency and blockchains and the goals for a digital cashless society.  

The Bitcoin Halving   

1 Comment

  1. Jonathan

    Thanks Mike, this is another excellent piece. I was convinced a long time ago that central banks were never going to let bitcoin dominate their operating modalities. You make a good point that governments are happy to sit back and let decentralised ledger technology improve via private enterprise before they deploy it for their own purposes.

    Reply

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