This series of blog posts aims to debunk popular myths and provide logical counterarguments to some of the most common misconceptions about cryptocurrencies that fuelled mainstream investors' aversion to this nascent asset class.
Popular Belief #1: “Bitcoin is a bubble. The bubble will eventually deflate leading to a reversion back to a mean, steady state.”
That Bitcoin is a 21st century version of the Dutch Tulip bubble of the 1630’s is a view expressed in some quarters and appears to be particularly favored by professional economists looking to history to undergird and explain their skepticism. According to this view, Bitcoin is a speculative asset that is going through multiple pump cycles caused by successive waves of user adoption, but is eventually destined to plummet to zero as it has no underlying utility or function. Bitcoin therefore has no intrinsic value. All its value derives from its function as a speculative asset for investors.
This view is very easily countered when one applies several different perspectives and frameworks for understanding Bitcoin rather than a mere commodity bubble lens. Bitcoin has intrinsic value because it provides read/write access to a decentralized, censorship-
proof data ledger that is protected by a veil of computational power that is a whole order of magnitude (or two) greater than that at the disposal of Google. There are two elements here that are clearly valuable. The first is the ability to access and interact with data that is immutably and irreversibly recorded in a publicly accessible data structure lodged within a virtually unhackable distributed supercomputer. The second is that the computational protection of the mining network essentially solves the double spending problem at a fraction of the cost incurred by national governments to achieve the same function for fiat currency. This is clearly a non-trivial,extremely valuable solution to a hard, previously intractable technical problem. Lastly, once you extend the perspective of Bitcoin to that of a foundational technology protocol akin to TCP-IP, but one that is designed to be securitized and liquid from the outset, it is easy to understand why its potential to reshape the internet application stack itself is tremendously valuable.
Clearly, therefore, the “Bitcoin is a bubble” perspective is rooted in a flawed, limited understanding of Bitcoin as a “Ponzi” intangible digital asset rather than an open, extensible, censorship-resistant, technology protocol whose applicability as an asset class or currency is but a small fraction of the possible scope and scale of the value it offers.
Popular Belief #2: “There are so many blockchains. Anybody can create a new Crypto. No barriers to entry. Infinite supply at zero marginal cost implies none of these tokens have any value. In fact, the mere fact that there are now so many Bitcoin forks means that the 21mn cap for BTC is a
Yes, it is easy to create a new token. Yes, there are limited to no barriers to entry. Yes, there is likely to be a Cambrian explosion of token generation events over the next few years as tech teams take advantage of the superior (and cheaper), unifying architecture of a crypto token.
However, we now have a framework for determining whether or not a token has value. We know that in the long-run in order for a token to have value, the blockchain network to which it exclusively provides access must have value as evidenced by solving a valuable technical problem that users/people care about. The values of most crypto tokens may well converge to zero if their underlying networks are deemed by users not to create value. Some networks like Bitcoin that perform a certain function extraordinarily well over a prolonged period of time may well achieve gigantic network values as expressed by the value of their underlying native tokens.
As regards the relatively frequent incidence of hard forks within the BTC ecosystem, we would argue that rather than experience discomfort, observers should be comforted by the peaceful way in which seemingly intractable, diametrically opposing stances are resolved. If issues cannot be resolved through compromise, then the communities behind crypto protocols can agree to disagree by going through with a hard fork of the underlying blockchain protocol. This allows divergent voices within a community to follow their own separate paths before antagonistic positions on the future of the protocol become entrenched and counter-productive for the whole community. Value destruction can be averted through a hard fork. Miners, users and investors can decide independently which of the competing paradigms they believe in and
support the chain fork for the protocol that best captures their beliefs. If Uber had been built as a decentralized ride-sharing protocol on the blockchain, it is worth musing whether the investors of Uber unhappy with Travis Kalanick might not have opted to “fork” the “Uber blockchain” rather than terminate his employment and kick off a protracted, distracting legal battle.
Clearly, while there are several Bitcoin forks out there (and there may well be more in the future), so long as the BTC Core chain is supported by billions of cycles of computational power from the mining network and continues to perform well as an unseizable, immutable store of value, its utility (as well as its 21mn hard cap) will continue to be viewed favorably by market participants who want access to that particular feature.
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