Vincent A Saulys' Blog
Crypto Thesis
Tags: crypto
April 12, 2021

I've since changed some of my mind on this -- more posts under the crypto tag

note: nothing I'm about to say is investment advice and should not be construed as such.

Price of Bitcoin

Beginning with nerds spending $200 million to buy pizza, the collective cryptocurrency market now stands at roughly $2 trillion (CoinMarketCap).

It's been a wild ride to say the least.

People, from charlatans to real movers & shakers, have promoted every coin on heaven. But what actually makes a coin valuable?

Bitcoin: Digital Gold

Bitcoin has at times been called digital gold. It stems from a belief that the currency is reliable and steady, that anything can be converted back to bitcoin to get at "true value." This seems an pat analogy.

Back in the era of Gold certificates (pre-1933 for the United States), all forms of credit were eventually settled in gold. Banks would trade deposit slips as "IOUs" and settle, daily/weekly/monthly/etc, with gold bullion sitting in vaults.

Bitcoin now serves this exact purpose for other cryptocurrencies.

Most coins can't be traded back into euros or dollars directly. Popular exchanges like Coinbase don't support that many cryptocurrencies after all. When people would tell me of their "100x" gains, I institively didn't believe them because I couldn't see how they traded their altcoin "123abcxyz" into usable fiat.

But while some definitely didn't sell in time, many locked in gains by selling for bitcoin. This is exaclty like how they "settled accounts" like banks did with gold in ye olde tymes.

Bitcoin is probably a safe bet overall. I dollar cost average myself and suggest others do the same to avoid trying to time price changes. It'll continue to be worth something to somebody and is unlikely to ever go to zero even if it declines relative to some other coin. So overall, I'm long bitcoin and own some.

What makes Bitcoin valuable?

Bitcoin is principally a bet on decentralization. If you think that centralized markets (e.g. the US), governments, and currencies (e.g. USD or euro) will decline, then bitcoin is a bet on exactly that.

There's no entity to protect you if things go wrong. There's no laws or regulations to claw back your money. No institution will check to see if "this is what you want to do" or reverse something out of suspicion.

Bitcoin is not betting on inflation. Bitcoin doesn't seem a good hedge for that. If people have to sell in a panic because costs rise on them, they'll probably sell their bitcoin first. You're better off buying real estate or S&P500 ETFs if you're trying to protect yourself.

Bitcoin is valuable because it stands apart from governments. No national entity directly backs it. Nobody can take it, nobody can really regulate it. People who really want that, even if others sneer its not valuable, will buy it.

The same people that bought gold a generation ago now buy bitcoin. Unlike gold, its far more portable and easily usable. Especially over the internet.

All the beautiful math behind bitcoin simply makes this possible.

What makes any other coin valuable?

How do we improve or add to what bitcoin brings to the table?

Some will argue "make it faster and cheaper!" This, roughly, gives us Bitcoin Cash, a currency that increases a block size limit. You can read about what this means on their website but it boils down to lowering transaction fees by making it easier to run a node.

Bitcoin takes a fee whenever you send money. This fee goes to miners who run nodes that support the network and make the transaction possible. These fees can be fairly high at times if you're sending bitcoin "naked."

But bitcoin figured out a solution in segwit and the lightning network. Like the banks of yore that traded deposit slips and settled with gold at timely intervals, your favorite exchange probably uses these networks to get fees down really low. It substitutes a series of transactions into simpler ones and then records those on the network.

So I don't think bitcoin cash really solves an actual problem that bitcoin has.

That pretty much sums up other cryptocurrencies for me too. They don't provide any value beyond what bitcoin does provide.

You see some claiming to support IoT functions or permanent file storage or some other database replacement. But they bely the fact that blockchain's big innovation is trustlessness: I don't need to know anything about the next node in the server to trust it for recording transactions correctly.

Otherwise, it's an awful database! Bitcoin records a megabyte every ~10min for petesake. Anything that uses blockchain as a database is a dead start. I'm not sure what else a blockchain could be used for.

What about Ethereum?

Ethereum took off because of the ERC20 protocol that enabled Initial Coin Offerings (ICOs).

Unlike bitcoin, it was purpose built to do programming for blockchain applications. It principally does this with a language called Solidity that has javascript-like syntax.

Ethereum has a checkered past. Bitcoin's forks have occurred because of philosophical differences. Ethereum's have occurred because they're amateurs.

Take its first split into Ethereum and Ethereum classic. There was a bug in the code that enabled some to siphon off a lot of ethereum. Instead of accepting this mistake, the chief development team behind Ethereum decided to hard code in a reversal of this. People were understandably upset and, while patching the flaw, did not move the ethereum back.

That's a really bad sign. Currencies should not be reversible like this. They should be as close to digital gold as possible.

Ethereum's other forks are more complicated to get into (and aren't as shameless) but they're not great either. Both stem from near-sighted thinking on what "programmable money" should do. Some think the 2.0 move may trigger another fork as its less advantageous for holders.

Solidity is also... not very good. Anybody whose programmed in Javascript will tell you its not very precise (e.g. 0 == [] resolving to true). Like Ethereum's first fork, this looks like serious amateur hour. If you're dealing with money, you'd want extremely and painfully precise types involved.

I don't hold any ethereum.

Litecoin? Dogecoin?

Litecoin uses a different algorithm for mining and wants to be the digital silver to Bitcoin's digital gold. Unlike gold, you can slice bitcoin up into as small a piece as 10^-15. What's the point of a digital silver then? Also, the guy who created it sold most of his stake a while ago.

Dogecoin is useful for tipping or buying pornography because it has low transaction fees. Bitcoin cash is probably a better bet if that's what you're after. However, again, there will be large extra-national "institutions" that will run networks to avail you of super high fees. Thus the lower transaction fees are pointless.

Are any other coins valuable at all?

Well, not really. At least I don't see it. Perhaps I don't hold as much foresight as others.

The only value I can see another crypto holding is anonyminity. It's the gaping hole that bitcoin lacks.

There's a few forms of that. The two most popular coins at the moment for anonyminity are Zcash and Monero. Both work slightly different. Zcash does not default to private while Monero does. Something about needing to sometimes prove to outside parties a transaction actually occurred. Not sure which will win so I own both.

But I know a guy who bought...

Yes, some people make money with shitcoin. If they sell on time to lock in gains.

But those people are playing a crazy game.

It works by buying 20 coins and having one go to 100x while the other 19 die. That would return you ~5x overall. These are venture capital returns.

Those people also never tell you about the failures. They never tell you about the altcoin they bought from a tip on 4chan that lost them thousands. And there's virtually no record of it to be embarassed by.

What about the charts?

Chartists are useless and haven't been a serious Wall Street technique since the 1980s. There isn't enough information in the price alone.

Some may think of George Soros' theory of reflexivity in the price of coins. There is a self-fulfilling phemonenon about the price rising but you won't catch it by strictly watching that price. Instead, you need to know whose buying the coin and where they get their information.

That's my crypto tawk!

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