“Religion is the opium of the people”
– Karl Marx
Today I will address three separate, but not wholly unrelated points about crypto. First point concerns the term “crypto” in itself. Second point concerns whether or not Bitcoin is suited as a “store of value”. As for the third point, I tie the knots together and explain why I think Bitcoin and a few other renowned digital currencies are future-proof investments, while the crypto market as a whole may fail. I am not giving out advice, but simply sharing my opinions based on the research I have done.
The Term “Crypto”
Two months ago, I wrote half-jokingly that young people should ditch the term “cryptocurrency” when they discuss Bitcoin with their parents. On a more serious note, I do think that the term “crypto” is suboptimal, if not directly harmful to the mainstream adoption of Bitcoin, Ethereum, and similar assets.
“Crypto” is an empty, undefinable concept. It covers:
- Smart contracts platforms like Ethereum, Solana, and Avalanche
- Meme coins like Shiba Inu and CumRocket
- NFT arts
- Collectibles like CryptoPunks and Bored Ape Yacht Club
- Games like Axie Infinity
- Web 3.0 initiatives
- Decentralized exchanges (DeFi) like UniSwap and PancakeSwap
- Centralized exchanges (CeFi) like Coinbase and Celsius
- Blockchain streaming services like Audius and Rocki
- Clear pump and dumb schemes like SQUID
The list could go on and on. Most of the concepts, projects, and digital currencies mentioned above have clear utility for users and the potential to aggregate long-term value for investors. However, the vast, VAST majority of projects in the crypto space will fail miserably when times get hard. If they are not designed to scam people from the outset. Contrarily, Bitcoin is a good example of a digital currency that has already “made it”.
I am singling out Bitcoin as it is the first proven use-case of blockchain technology that has stood the test of time, and it has by far the largest market cap of any asset in the crypto industry. For these reasons, Bitcoin is typically a safe bet and a first choice when institutional investors and retail investors are looking to pour billions of dollars into “crypto”. When people use the term “crypto”, however, Bitcoin is unintentionally juxtaposed with meme coins and the abundance of crypto scams and scammers.
My personal belief is that Bitcoin, and some other big names that I am cautious to call out, will be more widely adopted and increase in value over the coming years. But the rally to mainstream adoption – and more public acceptance – is long and bumpy with sharp turns and pitfalls. The “shitcoins” and the meme coins will miss turns along the way, not be able to follow the pace, break their engines, and eventually, they will be left behind for good.
Bitcoin as a Store of Value
Ever since Bitcoin came around, commentators from all sectors and paths of life have been skeptical about the asset and its abrupt price movements. The skepticism is understandable and unsurprising when considering that chunks of Bitcoin’s value are tied to its potential of disrupting traditional finance.
Kevin Roose, who is a technology columnist for NY Times, recently wrote an article where he questioned Bitcoin’s reputation as a hedge against inflation, or as a “doomsday insurance” in times of crisis. He pointed out that the price of Bitcoin had fallen steadily in the period leading up to Russia’s invasion of Ukraine.
“Crypto bros” typically use the phrase “just wait”, whenever they are faced with doubts from people about Bitcoin’s future potential. Kevin Roose paraphrases their common response in this way:
“Wait until inflation hits, and people look to park their savings in a stable digital asset that won’t lose its value. Wait until war breaks out, and authoritarians start seizing assets and imposing capital controls on their citizens. Wait until big banks and tech companies start censoring dissidents for their political views. Then you’ll see why we need a stateless, decentralized, anonymous digital currency (..) Well this is a crisis (..) In other words, this is a perfect storm of economic and geopolitical events that should, theoretically, be great for Bitcoin. But Bitcoin hasn’t boomed.”
Despite Roose’s criticism, I note that the price of Bitcoin has steadily recovered since the invasion started on the 24th of February (20th of March today). Overall, Bitcoin’s price has performed better and been markedly more stable compared to gold and crude oil during the crisis so far.
Mainstream journalists and casual writers (myself included) tend to make wrong assumptions when writing about new technologies that could be based on personal bias, gut instincts, or sometimes pure sensationalism.
Kevin Roose makes the grave mistake of interviewing Jimmy Nguyen, the president of the Bitcoin Association, as the first key witness to take the stand against Bitcoin’s failure as a store of value in his article.
“The Bitcoin Association” is a highly misleading name, since the association promotes Bitcoin SV (Satoshi’s Vision), which is not Bitcoin, but a fork of Bitcoin Cash which is itself a fork of Bitcoin. The two Bitcoin spin-offs attempted to solve the scalability problem by increasing block sizes from 1 MB to 32 MB (Bitcoin Cash) and 128 MB (Bitcoin SV) with the aim of turning Bitcoin into a new visa. However, these protocol changes were never widely adopted.
The increased scalability comes with compromises in network security. Bitcoin SV suffered a series of 51 % attacks in July 2020 that overpowered the network and made double-spending possible. As a result, major crypto exchanges such as Coinbase and Binance have ceased all trading of Bitcoin SV. Besides, the founder of Bitcoin SV, Craig Wright, is a controversial figure who has made some bizarre claims that he is Bitcoin’s pseudonymous inventor Satoshi Nakamoto. The claims are widely regarded as fraudulent.  Even the real Satoshi Nakamoto has appeared to come out of his perpetual silence to leave a message on the Bitcoin Developers mailing list in December 2015:
“I am not Craig Wright. We are all Satoshi.”
To make a long story short, Jim Nguyen is not a credible spokesperson on Bitcoin’s potential as a store of value. As the president of The Bitcoin Association – which in fact has nothing to do with Bitcoin – he is a key representative of a rare movement that sees Bitcoin as an everyday means of payment. However, there are other digital currencies, or FinTech solutions for that matter, that are much more suited for microtransactions.
Another frequent argument advertised in mainstream journalism against using Bitcoin as an inflation hedge is its volatility. According to crypto engineer, Daniel Krawisz, that is a silly argument:
“This argument is superficial and short sighted. Volatility is not a property that is inherent in Bitcoin. It is caused by the way people currently treat Bitcoin in the market. It is a function of people’s attitudes and behaviors. Bitcoin’s rapid adoption rate almost completely explains its volatility today; I see no need, at any rate, that any additional explanation is required. Bitcoin’s enormous manias and crashes are simply a reflection of the difficulty of negotiating a reasonable price, even in the short term, in an environment that changes so quickly. Something that regularly grows in both popularity and usefulness will necessarily be volatile.
To complain that no one will use Bitcoin because it is too volatile is therefore like saying, “Bitcoin’s adoption rate is so astonishingly fast that it will never be popular!” It’s like saying, “This oven is heating up so fast that I’ll never be able to cook with it!” It’s like saying, “This novel is so exciting that no one will ever read it!”
Crypto is the Hopium of the People
I predict that Bitcoin along with a number of other large, technically advanced digital assets – some known today, others perhaps not – will eventually gobble up the entire crypto market. The boom of innovation we see in the space today will not continue forever. Sooner or later the tables at the crypto casino will close. Exceptional gains from random speculations and community-backed pyramid schemes will be rarer and less profitable.
I can explain this thesis based on concepts from a recent article published in Research Affiliates by financial analyst Alex Pickard. I disagree with some of Pickard’s viewpoints, but the concepts he proposes are useful:
“In our simple crypto pricing model, the price of cryptocurrency is viewed as a function of “fair value” plus an avant-garde premium, a speculation premium, and a byzantine premium:
Price = Fair Value + Avant-Garde Premium + Speculation Premium + Byzantine Premium
Fair value is derived from the actual transactional utility that cryptocurrencies provide as mediums of exchange (..)
The Avant-Garde Premium arises from the social utility associated with being a member of the experimental and innovative (i.e., avant-garde) crypto community (..)
The Speculation Premium can be thought of as a lottery ticket that provides the chance for a massive upside return, which is the main attraction for many cryptocurrency purchasers. (..)
The Byzantine Premium arises because of confusion around the apparent complexities of blockchain. Investors read confusing, jargon-laden articles and become convinced that smarter people than themselves are investing, so they should too. “
According to Alex Pickard, the crypto bubble could last for years, and it is sustained in part by some real utility, and also by community-backed “social value”, speculation, and confusion from investors. I personally believe that many cryptocurrencies are in fact strongly supported by the three premiums as laid out by Alex Pickard. However, as the present-day crypto market matures, the quasi-religious following that some projects have, along with speculation and confusion will be less and less determinant for prices.
The reputation that Bitcoin shares with other cryptocurrencies as a speculative, overhyped asset will eventually be surmounted by strong fundamentals. In 2011-2013 Bitcoin was popularly known as a shady currency used by criminals to whitewash and purchase illegal items on the dark web, namely on Silk Road. Barely anyone thinks of Bitcoin in these terms anymore. Bitcoin’s strong fundamentals eventually overcame its bad reputation.
To use Pickard’s framework, I believe from a long-term holding perspective that the value of any crypto asset is determined by its Fair Value. But right now, the three premiums are inflating price actions with hopium.
Hopium causes an interesting paradox that Alex Pickard dubs “the Profitability Problem”:
“The crux of the matter is that although blockchain technology is solid and disruption is possible, it is not profitable. Disruption is not profitable for traditional financial organizations or for governments, and paradoxically, and most importantly, it is not profitable for cryptocurrency holders themselves.
Great sums of money can be made from speculation if cryptos perpetually have the potential for disruption, but never actually disrupt anything. As a result, more time, money, and energy has been focused on the proliferation and strengthening of disruption memes versus actual work toward real disruption.”
A similar idea was expressed by sociology professor Nigel Dodd in a paper from 2018. From the abstract:
“This paper challenges the notion that Bitcoin is ‘trust-free’ money by highlighting the social practices, organizational structures and utopian ambitions that sustain it. At the paper’s heart is the paradox that if Bitcoin succeeds in its own terms as an ideology, it will fail in practical terms as a form of money”
Alex Pickard and Nigel Dodd seem to agree that the value of Bitcoin to a large degree is determined by its social value or by hype in “avant-garde communities” which inflate Bitcoin’s price. The ideology behind Bitcoin is also “anti-establishment, anti-system, and anti-state”. When Bitcoin finally disrupts traditional finance, the speculation, confusion, and social value it brought to communities of “Bitcoin believers” are gone, and so the price will drop.
I do not think that is the case. I think that Bitcoin and a limited number of other digital currencies will be more widely adopted in the long-term future. Mainstream adoption will come with an upswing in valuation, but also separate the sheep from the goats. Projects that are supported by a strong community, but offer little to no unique value will evaporate as the hopium takes off.
 Kevin Roose (March 2022), Bitcoin Was Made for This Moment. So Why Isn’t It Booming? -> https://www.nytimes.com/2022/03/11/technology/bitcoin-ukraine-russia-roose.html (18-03-2022).
 Daniel Krawisz (January 2014). I Love Bitcoin’s Volatility –> https://nakamotoinstitute.org/mempool/i-love-bitcoins-volatility/ (21-03-2022).
 Alex Pickard (March 2022) Cryptocurrencies: The Power of Memes -> https://www.researchaffiliates.com/publications/articles/913-cryptocurrencies-the-power-of-memes (18-03-2022).
 Nigel Dodd (2018), The Social Life of Bitcoin, Theory, Culture & Society 2018, Vol. 35(3) 35–56.