Welcome to my free cryptocurrency educational series. Each part builds on the previous ones, so I suggest starting at the beginning and moving through part by part:
Cryptocurrency 101 series (core principles, social justice, blockchain tech, Bitcoin):
- Part 0 Overview of my series, who this is for, why you might consider listening to me, and how easy it is to think you understand crypto when you actually don’t.
- Part 1 Why should I care? What’s in it for me? Why is crypto important (it’s about a lot more than just making money!)?
- Part 2 How crypto actually works, why Bitcoin is valuable (even if it’s just “made up!”), and what you should know about blockchains (the tech behind them and how they could influence the future of our world)
- Part 3 How the blockchain keeps running, where new Bitcoins come from (i.e., how mining works), and concerns about Bitcoin’s environmental impact
- Part 4 How crypto offers autonomy, why it can’t be stopped, and the value of decentralization
- Part 5 How to store and use cryptocurrency, some basic cryptography, how wallets work, identity management, and the future of democracy
- Part 6 Overview of the different types of wallets, which one is best for you, what to be careful of, and why a hardware wallet might be worth the investment
Cryptocurrency 201 series (intermediate principles, Ethereum, NFT’s, DAO’s):
- Part 7 Ethereum (the #2 most popular cryptocurrency, and the one I’m most excited about), smart contracts, dapps, gas (and the high gas fee problem), Proof of Stake (PoS), and Ethereum 2.0
- Part 8 Coins vs. tokens, and some real Ethereum use cases—oracles and DEX’s
- Part 9 Intro to NFT’s (collectibles, research funding & historical significance, and music)
- Part 10 More categories of NFT’s (art, video games, virtual reality)
- Part 11 Wrapping up NFT’s (what you can actually do with them, upsides, downsides, risks)
- Part 12 DAO’s (organizations managed by algorithms, governance tokens, collective ownership, and the “network state”)
Cryptocurrency 301 series (advanced principles, DeFi, reinventing the finance world):
- Part 13 DeFi & CeFi, reinventing banking with peer-to-peer finance, stablecoins, and borrowing & lending
- Part 14 More DeFi (how Uniswap works, plus insurance, payments, derivatives, blockchains, exchanges, liquidity staking, and impermanent loss)
- Part 15 Wrapping up DeFi (why liquidity is important, LP tokens, yield farming, calculating return, yield aggregators, and major risks)
Cryptocurrency 401 series (investing, making money in crypto):
- Part 16 Intro to investing (what could go wrong, where you might fit in, and what kind of investing could be right for you)
- Part 17 Preparing to invest (how much money to put in, how to split it up to mitigate risk, setting up your wallets, buying the coins & tokens you want, and dealing with different blockchains)
- Part 18 More preparing to invest (security, understanding what price targets are realistic, and using “expected return” to choose between opportunities)
- Part 19 Specific investing options (buying and holding, index tokens, leveraged tokens, my list of coins and tokens, mining & staking, and lending)
- Part 20 Higher-risk, higher-reward opportunities (liquidity staking & yield farming, NFT’s, OlympusDAO, and Tomb Finance)
- Part 21 The single investment that’s made me the most money: StrongBlock
- Part 22 Wrapping up my seven categories of investment (including an update on StrongBlock)
- Part 23 How to invest depending on how much money you have (plus, the market dip, where my money is, and how to fit crypto into a larger investing strategy)
- Part 24 Holding coins & tokens vs. yield farming, where I’m putting my money now, big news on StrongBlock, and the future potential of crypto
- Part 25 Staying safe, preparing your taxes, avoiding scams, upgrading your security, and judging new projects
- Part 26 How to decide who to trust in the crypto world, technical analysis & market cycles, and an update on my longish-term portfolio
- Part 27 (in progress) Wrap-up
This is part 2 in my cryptocurrency educational series.
Part 2 Reading Time: 18 minutes
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What even is a currency? And, wait, isn’t Bitcoin just made up? Why is it valuable?
Let’s start with this: Why do you want money? At the foundational level, why is money useful?
Economists would say a currency does three things:
- You can use it to buy and sell things. This attribute is called a “medium of exchange” (it replaces the need to trade one good for another as in a barter system).
- You can trust that it will hold its value over time. This attribute is called a “store of value” (you can trust that if you put your currency in a vault for a year, it won’t be worthless when you come back to get it).
- You know that a lot of people (and companies) use it, so it will be commonly accepted out in the world. This attribute is called a “unit of account” (this gives things a common measure of value, meaning that the buyer and seller can agree on what price is reasonable for a good or service in a given currency).
And what shouldn’t a currency be?
Well, it wouldn’t work so well if people could easily make more of it (that creates inflation), and it wouldn’t make sense if it were hard to carry (e.g., giant heavy bars of gold).
So, a currency needs to be both rare and easily transportable. That’s why, long ago, things like seashells or gems were used as currencies.
Back to crypto.
To put it very simply, you might think of Bitcoin as a kind of digital gold that’s created and governed by software with very strict rules programmed in.
Bitcoin might only exist on computers, but it (roughly) meets all of the above definitions for a viable currency (there’s certainly some healthy debate in the community about the nuances of using Bitcoin as a medium of exchange, but let’s at least agree that—even if it’s not a perfect currency—it’s at least worth taking seriously).
Bitcoin is rare because there are only a limited number of coins that can ever be made—the creator programmed it that way, so it’s literally impossible to make more than a certain number—and Bitcoins are easily transportable because you can send them from computer to computer or smartphone to smartphone.
But isn’t Bitcoin just “made up?” Doesn’t it only have value because people say it does?
Well, yes, and that’s exactly the same as the ancient currency of seashells. They weren’t actually useful for anything on their own. They didn’t have inherent value.
They only became valuable because they were rare, easily transportable, and enough people believed in them.
So what about the belief piece?
Belief in Bitcoin has been dramatically increasing over the past two years. If it were only computer programmers telling everyone that Bitcoin is valuable, it wouldn’t be enough.
But, the more that high-profile, wealthy, powerful, well-established people and groups align with Bitcoin, the more credibility it gains. And that’s exactly what’s been happening:
- In 2020, PayPal and Square allowed users to easily buy Bitcoin right from their apps.
- In 2020, Fidelity Investments—one of the largest and most trusted wealth management companies in the world with nearly $5 trillion under management—started a Bitcoin fund for its wealthy investors.
- In April 2021, Fidelity’s head of digital assets said, “I think we’ve reached a tipping point… you’ve had the accumulated experience of now roughly 12 years of the bitcoin blockchain being operative since the genesis block in early 2009. And the pandemic, quite frankly, was a catalyst for institutional adoption, and specifically bitcoin and the narrative, or use-case, around digital gold.”
- In early 2021, Tesla invested $1.5 billion in Bitcoin and now allows you to buy their cars using Bitcoin.
- In 2021, well-known investors like Mark Cuban and Richard Branson have been publicly investing in cryptocurrency.
- In 2021, Visa is experimenting with allowing transactions to be paid off with cryptocurrency. I’ve even begun seeing their ads for credit cards offering rewards in Bitcoin. Earlier this week (May 2021), their CEO said, “this is space that we are leaning into in a very big way.”
- Update: On June 9, 2021, El Salvador became the first country to adopt Bitcoin as an official currency (legal tender), and citizens will even be allowed to pay their taxes in Bitcoin. Not only that, but to address environmental concerns, El Salvador wants to get into the Bitcoin mining game as well using 100% renewable energy from its volcanoes. (I’ll explain mining in a future post.)
Still not convinced?
100 years ago, people didn’t see diamonds as valuable.
Then, De Beers bought up all the supply and created an amazingly successful advertising campaign that convinced the public that diamonds should be associated with the rich and famous. Next, they convinced everyone that engagement rings should always be topped with diamonds. It worked, and all thanks to the power of belief.
Notice that an asset can be useful as a store of value even if it’s not a great medium of exchange.
Heavy gold bars might work fine as stores of value but be impractical as mediums of exchange. But, that fact doesn’t make them useless.
Some people originally imagined Bitcoin as a future medium of exchange. But the truth is that, over time, it’s evolved to be more of a store of value (more of an “asset” than a “currency”).
Because of its volatility and various technical issues (e.g., transaction processing speed, environmental impact from power consumption, etc.), Bitcoin itself is unlikely to ever be used for regular transactions like buying coffee. However, it’s still very likely useful as a store of value (similar to holding gold bars in a vault and waiting for them to go up in value over time).
In the meantime, other cryptocurrencies have been developed to be used as mediums of exchange (e.g., for buying that cup of coffee). It’s not clear yet which will end up working out the best (Litecoin, for example, is similar to Bitcoin, but its transactions are processed more quickly).
All this to say: Bitcoin is similar to a currency, but it’s more of an asset like gold.
So why do the prices of Bitcoin and other cryptocurrencies keep going up so much?
We’ll get into this more in a future post focusing on investing, but the short answer is this: supply and demand.
- If people believe Bitcoin (or whichever currency) has value (and that it will continue to have even more value), they’ll want to own it.
- As demand for that currency increases, the people who already own it are able to charge more to sell it.
- Therefore, with low supply and high demand, the price goes up.
In some cases—like with Dogecoin—the price is only going up because of either speculation (i.e., calculated risk-taking) or gambling (i.e., guessing that there’s a high probability the price will go up, even if you don’t understand why).
People who already own something like Dogecoin (e.g., Elon Musk) create hype so that the price will shoot up. Then, they can sell their holdings for a higher return.
In other cases—like, in my opinion, with the cryptocurrency Ethereum—it’s very reasonable that the price is rising so quickly. More and more people are understanding its value, and they can see it continuing to be even more valuable in the future. The price is rising so quickly because crypto has been risky and hard to understand; so, it’s taken a while for people to believe in it. Lately, though, the word has been spreading quickly, and big, institutional investors have been getting involved with large amounts of money, which rapidly pushes the price up (or down, if they’re trying to manipulate the market by spreading fear and uncertainty so they can get in at a better price point).
Ok, now we know what a currency is and why its price fluctuates. Let’s move on to the next important concept in crypto.
What’s a ledger?
A ledger is a record of transactions.
Imagine you run a business, and you want to keep track of everything people buy from you and what they paid. It’s important to keep a reliable ledger so you know how much money you’re making, where your money is being spent, etc.
But, paper ledgers can be lost or manipulated.
What if there were a better way?
Enter the blockchain.
A blockchain is a distributed ledger (i.e., a ledger that’s not just stored in one place).
Let’s say you only had one paper copy of your ledger, but your business burned down and you lost it. Say you restart your business in a new location. One day, a customer comes in to return something they say they bought from you a while ago. How do you know if they’re telling the truth?
Worse, what if one of your employees—or a hacker—has been secretly editing your ledger so they can steal expensive items by making it look like a customer purchased them?
A distributed ledger solves both those issues. The basic idea is this: Every single time a transaction is made with Bitcoin, it’s immediately checked and copied across the entire blockchain network.
That’s right, every single transaction for all time is recorded on the distributed ledger.
Say I try to buy a car with Bitcoin:
- The car owner and I each pull out our phones, and I attempt to send them the cost of the car.
- Whichever app I’m using to send my Bitcoin will first check with the blockchain (i.e., the Bitcoin network) to make sure I really have that amount of money available in my account.
- It won’t just check its own copy of the ledger within the app—it will check many other copies of that ledger that live on computers all across the world.
- So, even if I managed to hack the app on my phone and told it I had a billion dollars in Bitcoin, the blockchain wouldn’t be convinced because all the other computers would have an immutable record of the true history of all my transactions.
- Once it’s confirmed that I have enough money for the car, the money is sent to the car owner, and the new transaction is sent out to all the other computers on the network. In fact, literally every computer supporting the Bitcoin blockchain network will be notified that the money has changed hands from me to the car owner.
- By “every computer supporting the network,” I mean computer servers that people and organizations run 24/7 to keep the Bitcoin network running. Computers in that network are called “nodes,” and what they do is called “validating” and “mining.” More on this later.
What’s a cryptocurrency, then?
A cryptocurrency (like Bitcoin) is a digital currency where all transactions are stored in a decentralized way (i.e., public records are copied to many locations rather than being only in the hands of a central bank, government, etc.). Cryptocurrencies typically use blockchain technology or some other kind of security technology based on cryptography.
Cryptography (i.e., the “crypto” in “cryptocurrency”) refers to a series of techniques for ensuring secure communication, just like the secret codes and ciphers that were used during World War 2. It’s based on very complex math that’s incredibly secure.
Bitcoin is based on an encryption protocol called SHA-256. This cryptography is so advanced that it would take 0.65 billion billion years (yes, billion billion) for a supercomputer to crack it.
But what about quantum computers? Amazingly enough, SHA-256 is designed such that even quantum computers would have a hard time defeating it. They would either be no better than traditional computers at cracking the code or, at best, they’d be double as effective (i.e., they’d take 0.325 billion billion years).
Who knows what the future holds for tech advancement. But for now—and for as far as theoretical physicists can see as of now—crypto seems incredibly secure.
Where does all this lead?
Before we wrap up, I want to invite you to extrapolate forward.
As I explained, the Bitcoin blockchain is used to track financial transactions. And it does so in a way that’s incredibly secure and nearly impossible for anyone to change or censor in the future.
But what if the blockchain could be used for more than just financial transactions?
I’ll get into this a lot more when we discuss Ethereum in a future post, but here’s a preview for now:
As our world grows increasingly connected, people are more and more concerned about supporting companies that have an ethical reputation. A lot of people would much rather buy from a company that treats their workers fairly, keeps a green footprint, and can promise that their goods are ethically made (i.e., that the people they buy from down their supply chain have the same values).
What if we didn’t just have to take their word for it?
Imagine a future where all records are kept in the blockchain—not just a company’s sales transactions, but their entire supply chain.
If you’re someone who cares about fair trade and ethical sourcing, you could look back at their public, unforgeable records and confirm that all their promised ethical sourcing was legitimate every step of the way.
Remember the examples from Part 1 around how Bitcoin is being used in countries like Nigeria and Sudan.
Those were real, tangible examples of people using blockchain technology to dramatically improve their lives. To circumvent their governments’ oppressive laws and norms. To connect with like-minded people in other parts of the world and form partnerships and businesses.
Imagine where we could go from here: A future world without borders.
Now add in all the other technologies that have been racing forward:
- Increasingly-sophisticated smartphones
- Fast broadband Internet (and satellite connections to get online from anywhere in the world)
- The normalization in the corporate world of working remotely from anywhere (and thus highly-distributed teams)
- A brand new crypto-based financial system with easy payments and easy loans to buy property or start a business
- Nearly photo-realistic virtual reality (plus continually-improving video conferencing tech)
- And some other crypto-based functionality like “smart contracts” (similar to automated legal contracts) that I’ll get into in a future post
What does the future look like?
Imagine organizations and structures in the cloud (i.e., the Internet) that are similar to countries. People connected not by geographic location but by shared values and ideals. Guaranteed free speech, privacy, and the protection of private property from seizure by corrupt governments.
(P.S. If you’re thinking of the common claim that Bitcoin is mostly used to hide illegal activities, here’s a former CIA director saying he was surprised to discover that there’s “probably less illicit activity in the Bitcoin ecosystem than there is in the traditional banking system.”)
Don’t worry if it’s not at all clear to you yet how blockchain tech could form the foundation of future cloud-based “countries.” It’s a big leap to make, but I wanted to paint a picture for you early on of the potential scope of change we’re talking about here. And as you continue reading this series, hopefully more pieces will fall into place for you—especially once we begin exploring the cryptocurrency Ethereum in Part 7.
Finally, if this kind of exploration of a more utopian future is exciting to you, here’s a very interesting article by the brilliant former CTO of Coinbase (and partner at venture capital firm Andreessen Horowitz), Balaji Srinivasan, on futuristic “network states.” And here’s another one by him on how, as the United States is declining as the dominant world power, something new based on crypto could replace it.
At this point, you might be wondering how all this tech actually works in practice. What keeps the Bitcoin network running? Who’s paying for all this? Find out in Part 3: How the blockchain keeps running, where new Bitcoins come from (i.e., how mining works), and concerns about Bitcoin’s environmental impact.
P.S. Crypto is one of my newest passions, but my overarching focus in life is personal growth and intentional living. Do you want help with challenges like confidence, decision-making, or idea overwhelm? I’m a transformation coach who helps analytical thinkers get unstuck, find consistent motivation to take action, and design their life purpose. Read more about me here or my coaching practice here.
“…you might think of Bitcoin as a kind of digital gold”? People keep saying that, but it’s misleading. Gold has at lest some inherent value. Bitcoin is inherently polluting and has no inherent value. So a better analogy is, bitcoin is digital smog.
Thanks for reading, Anonymous, and I agree that pollution is an important concern.
People say Bitcoin is like gold for several reasons, but the big one is this: Both have a limited supply, which protects against inflation (inflation is a major concern right now, so this is quite important if you want to protect the value of your money over time). Also, both require an expenditure of work to mine, which keeps the supply from growing too quickly and thus reducing the value.
Yes, mining Bitcoin uses a lot of power, and the negative environmental impact is real. I personally am very concerned with climate change in general, so I really do hear your concern.
I hope you’ll read the next post in this series where I devote a whole section to exploring the pollution concern:
Thanks again for reading!
The point is, why would anyone choose Bitcoin in particular as an asset? Limited supply is not a differentiator since many crypto assets have that. Some do have inherent value, like ETH, which can execute code. Bitcoin has no inherent value, so there’s no reason to choose it as an asset or to expect its price not to fall toward zero in the long term once the mania expires and the hodlers realize that what they’re holding is nothing more than a smog machine.
Don’t say that USD also has no inherent value. You need dollars to pay your taxes and dollar-denominated debts. And don’t say people could have BTC-denominated debts in the future. Try asking a bank to lend you 1 BTC and saying you’ll repay 2 BTC in 10 years (a pretty good 7.1% compounded annual interest rate). They wouldn’t even consider it because they know that in 10 years 2 BTC could easily be worth less than 1 BTC is now. They wouldn’t make a gold-denominated loan either!
Am I missing something? Is there anything (setting aside the millions of rubes who are still buying BTC because they’re either hoping to get in on history’s largest economic bubble while it might still be expanding or they’ve been fooled into believing it really is better than USD) that gives BTC any inherent value that ETH, say, doesn’t have?
Now, if the US were to decide someday to switch to requiring tax payments in BTC, that actually would create a legit reason to hold BTC. But they won’t, because even if they decided to switch to a cryptocurrency for tax payments–which I could imagine happening some day–there are other options that are better designed, so they’d have no reason to choose BTC. Note that “accepting” BTC for tax payments at the then-current BTC/USD price would not be equivalent to switching to requiring payments in BTC. If the government merely accepted BTC that it would then immediately sell for dollars to capture their current value, that would not create a reason to hold BTC.
If you don’t know about the critical role of taxes in giving currencies real value–which even many people with degrees in finance and economics don’t–or if you believe the myth that currencies were invented to improve on the barter system–as even many people with degrees in finance and economics do–or if you don’t understand how the invention of currency led directly to slavery, you must read David Graeber’s magnum opus: https://warwick.ac.uk/fac/arts/english/currentstudents/undergraduate/modules/fulllist/special/statesofdamage/syllabus201516/graeber-debt_the_first_5000_years.pdf
Thanks for the detailed comment.
First of all, I absolutely agree with you that ETH is much more interesting and worthwhile than BTC. I’ve never invested in *physical* gold either, so I’m much more excited by the fact that ETH has a whole ecosystem of functioning apps on top of it.
I’m only focusing on Bitcoin at first in this series because it’s the #1 most popular cryptocurrency and it’s the easiest to understand (“digital gold” makes sense, even if it’s a little overly simplistic).
That said, I don’t believe BTC is completely useless. Like I said in these first two posts, it might seem useless to those of us lucky enough to live in a (relatively) well-functioning country, but in other parts of the world that are home to a lot more oppression, weak infrastructure, and censorship, Bitcoin is giving all sorts of opportunities to people in terms of building wealth, starting businesses, and not having to worry that their money will be seized or worth 1,000x less a year from now.
Yes, other newer cryptocurrencies have been developed since Bitcoin that would serve those people even better, but Bitcoin has the first-mover advantage. It’s the one that most people know about, so it makes sense that it’s offering value to a lot of people even if there’s technically something better available now too.
I agree that in the long run, Bitcoin will likely fall in value as these other newer cryptocurrencies get more popular. But I personally see it as a solid investment for at least a few years. Institutional investors have just been getting into Bitcoin recently and it’s taken them a long time to get here, so I imagine that many of them will stick with Bitcoin for a while since it’s seen as the “safest” or at least “most known” bet in the crypto space.
Same for things like cryptorrency ATM’s and acceptance by mainstream payment services—they’re barely accepting Bitcoin now, let alone more obscure cryptocurrencies.
Plus, in past crypto market corrections, Bitcoin has often recovered more quickly than other coins, so that’s another reason I’m keeping some of my money in Bitcoin for a while yet. Personally though, I have a lot more money in ETH than in BTC (again, not investment advice—do your own research).
Bottom line, though: I believe that as Bitcoin gets more popular and rises in value, that will boost the rest of the crypto market (including the newer, better cryptocurrencies) along with it.
Thanks again for reading, and I hope you’ll stick with my series through to the more exciting parts later on about Ethereum 🙂
Oh, I’ve read your series (through #8) and aside from your focus here on bitcoin, it’s a great introduction. It sounds like we mostly agree, except about the potential value of BTC as a medium-term investment. If BTC were still the only crypto asset in existence, yes, it would be far from useless. It’s just that now that there are better options, BTC is no longer worth choosing and therefore likely a poor long-term store of value.
Saying BTC has “first mover” advantage is just a dressed-up way of saying that the only reasons people are buying it are either that they don’t know better or they’re speculating that the BTC bubble will keep growing and hoping they’ll be able to time their exit better than the next guy–even though hedge funds and their algorithms are now among the next guys. But you’re right that institutions are still lumbering their way into BTC so it will probably stay afloat for a few more years.
I think there’s about a 50% chance that BTC will be worth 1000x less in 10 years and about a 95% chance in 30 years, though I agree it very likely wouldn’t fall that far in 1 year. That said, I’d give it a 50% chance of going up 5x again before its final fall. So holding BTC is probably a good way to lose your wealth in the long term, though as with any bubble, you might still make a profit on it in the short to medium term. But there’s no predicting when the bubble will pop.
My guess is that while crypto tech is here to stay and will be incredibly useful in the future, blockchains will have pretty limited importance long-term because the expensive global consensus they orchestrate is rarely necessary.
Have you heard about holochain? (See https://artbrock.medium.com/limits-to-blockchain-scalability-vs-holochain-19685dcb89f9) It’s not a blockchain but it achieves many of the same goals with no need for global consensus. The Holo network will probably go live in the next year or so, and some time a year or three after that some nice apps will start appearing on holochain and people will realize that since something as big and responsive as twitter can run securely and immutably on holochain, that dramatically reduces the scope of applications that something like ETH is really needed for, and at that point bitcoin’s status as a dinosaur will become obvious, BTC’s value will plummet, and even ETH will lose a substantial portion of its value (though I doubt ETH will ever be worth 1000x less like BTC probably will).
Note: if you look into this you’ll hear about the HOT token, which will eventually be swappable 1-for-1 for HoloFuel once the Holo network is up. HoloFuel itself should have a pretty stable value (not just stable compared to USD, but truly stable even if major inflation were to hit the dollar) once its network matures since it will be backed by computing power, so I don’t actually understand what’s driving the price of HOT, which went up quite a bit earlier this year and then came back down some for no apparent reason. So HOT may be a speculative bubble too, and I wouldn’t necessarily recommend buying it.
Awesome, thanks for the kind words and for reading through my whole series 🙂
Yes, it does seem like we’re mostly on the same page. Honestly, I keep going back and forth myself on Bitcoin. If you’d asked me a month ago, I would have said I regretted owning as much as I did, and I wish I’d put all that purely into Ethereum instead (versus the 70/30 split I had with ETH/BTC). But, I feel more ok with my Bitcoin position now for two main reasons:
(1) With all these big institutional investors finally getting into Bitcoin, they’ll be incentivized to do what they can to manipulate the market to prop Bitcoin up for their clients, and (2) A lot of smart people I follow in the crypto community are still holding a lot of BTC, especially due to that historical trend I mentioned of BTC typically recovering more quickly in a bear market compared to other crypto coins/tokens.
It does seem most likely that Bitcoin will be largely replaced in the coming years by more efficient crypto technologies; but, it feels to me like a fine investment for the short-medium term. Again though, I feel out of my depth here to truly understand all the forces at play around this.
Holo looks interesting. No, I hadn’t heard of it, but I’ve been able to look into it just a bit so far after reading your message. Thus far, it certainly seems to tick all the boxes: promising speed, security, decentralization, energy efficiency, etc. It reminds me of parts of Solana (Proof of History for asynchronous consensus), Internet Computer (decentralized web hosting/services), and Chia (anyone can run a node).
What’s tricky here though is that I keep seeing new cryptocurrencies like this pop up that claim to solve all those problems (though certainly not in this exact same way). So, it’s pretty hard to figure out which of these is legit. One thing that makes me a little wary with Holo is how the creator so strongly claims that Ethereum and blockchain tech are so fundamentally flawed that they basically can’t be salvaged.
If you’ve heard people like Vitalik (the creator of Ethereum) speak, it’s clear that he and other leaders in the blockchain space are brilliant people who understand this a lot better than I ever will; so, personally, I try to be careful not to discount their wisdom, especially when I hadn’t heard of Holo before in any of the crypto communities I’m part of.
Like I said in the intro to this series, my approach is to recognize that I’m not nearly as technically smart as the people actually inventing this stuff; so, rather than try to pretend I deeply understand any one of these cryptos, I just try to read perspectives from lots of different people and spot the trends.
Again, I appreciate you sharing!
Yeah, there’s so much to learn about in this space. My main point was just that repeating the “digital gold” trope could be pretty misleading.
The developers of ETH and most of these systems are very smart for sure. It’s just that they’re all starting from the goal of global consensus to establish ownership of coins. There may be a few uses where that’s really required but for most transactions it’s probably not.
Thanks for bringing up those other projects. Internet Computer looks like a really interesting system with Motoko and its persistent variable paradigm. It could vastly simplify the process of writing apps that you’d think should be easy to write but currently aren’t, like if you wanted to make a voting app without having to deal with networking or database calls, Motoko sounds like it could make that super easy.
Still, it’s a “contact the (distributed) server to access your app” model vs. holochain’s peer-to-peer model. So holochain enables a whole new kind of “meta-app”, like a personal dashboard that can connect all your other apps and take data from one and send it to another, because you have (and control) all your data locally. Here’s a thread comparing them: https://forum.dfinity.org/t/holochain-compared-to-icp/3504/8
Solana involves so many fancy new ideas it’s hard to wrap my mind around what they’re doing. Still, they say their network would generate 4 petabytes/yr at full capacity, and while they have a clever way of avoiding the need for every node to store all that, there would still be numerous stored copies of all those petabytes, and for uses where global consensus is unnecessary, that’s a lot of overhead.
Chia sounds intriguing too, but it’s also a variation on the pursuit of global consensus, so I’m still guessing that holochain will be a simpler, more functional system for most common uses. But they’re all watching each other as they evolve so who knows which ones will end up being most useful. It’s just obvious that it won’t be bitcoin.
Makes sense! Thanks again for the back-and-forth, and I hope you continue to share any more thoughts you have as I release future posts (you could subscribe to be notified in the column on the right if you’d like).
Hope you have a great day.
Have you seen the article at https://www.newstatesman.com/business/finance/2021/07/bitcoins-gold-rush-was-always-illusion that says most of the big run-ups in the price of BTC have been due to fraudulent trades, such as someone minting unbacked Tether and using that to buy BTC? Another warning to the hoards of hapless hodlers, I guess. Does this affect your opinion on owning BTC?
The article does make some good points. In my mind, there are a whole lot of positives with Bitcoin and crypto in general; but, the three biggest risks I see are:
So yes, I think #3 is a real concern. Back in April, I believe, I was hearing a lot of concern about Tether, so I did a pretty deep dive into researching it. While I wouldn’t say the evidence was rock solid, it was enough to convince me that it’s probably ok. There are a lot of long threads on Tether’s backing on Reddit and elsewhere (plus articles like these).
If Tether does turn out to not be sufficiently backed, I would think it would severely hurt the whole crypto industry, not just Bitcoin. But, like I said, my research was enough to make me personally feel secure. The Tether doubt has repeatedly surfaced over the past year, and who knows—it’s hard to know what to trust. But I think it’s also important to remember that some very powerful people and institutions are against crypto succeeding since it would mean a major change in the power structure in the United States. So, I think it’s reasonable to not underestimate the possibility that attacks against Tether’s legitimacy could be originating from there.
So one version of risk #3 would be what the article I posted said: someone using fraudulently minted, unbacked Tether to buy BTC and run up its price–and it should be possible to get evidence of this by correlating the BTC and Tether ledgers.
I haven’t tried to read Prof. Griffin’s full paper (https://www.researchgate.net/publication/342185292_Is_Bitcoin_Really_Untethered) but it looks interesting. It may not be proof of a Tether fraud, but when a forensic finance professor gathers a team at his university to analyze the ledgers and they conclude that at least half of BTC’s 2017 price spike was manufactured via unbacked Tether by a single entity, and the NY Attorney General says that at times Tether couldn’t have had any cash reserves at all, and Tether’s own statement shows <3% of its value was backed by actual cash, that seems way more convincing than that self-serving claim by the owner of Tether's bank in the Bahamas.
I guess there was a lot more you found on reddit that somehow made you think that despite all this, Tether is probably fully backed. Do you remember what you saw that gave you confidence in Tether?
To me, fraudulent manipulation, first by MtGox in 2013 and then by Tether starting in 2017, would explain a lot about BTC's absurd valuation (though admittedly garden-variety bubble mania could explain it just as easily).
I'd be more inclined to trust a stablecoin that was pegged to something tangible (like Holo fuel, once it's launched), since not only would that not rely on trust in some random bank's claims about reserves, it would also retain its value even if the dollar lost value.
Agreed, the stablecoin issue is probably my single greatest worry when it comes to crypto.
I did a little searching on Reddit, and I unfortunately couldn’t easily find some of the threads that I remember feeling especially convinced by. But, I did just listen to a podcast episode that I found helpful. It’s a conversation between Bloomberg financial journalists and Sam Bankman-Fried, the CEO of FTX, who’s very well-regarded in the crypto world. You can jump to the final 25 minutes where they talk about this exact issue with Tether.
This is another one of those cases where I don’t feel knowledgeable enough to truly understand what’s going on here, so all I can do is trust experts (which I certainly acknowledge the professor you linked to is as well). But Sam Bankman-Fried sounds pretty brilliant to me too, and he doesn’t seem to think the issues with Tether are as bad as other people are saying. Yes, he obviously has an incentive to not make a big deal out of it, but he also seems like the type of person who works hard to address any vulnerability in what he’s working on.
Also, none of the other big players I follow in the crypto space are talking about Tether either. And it’s not like these people are only ever talking about the positives when it comes to crypto—they often point out issues that need to be improved. But I don’t hear Tether even being on their minds, which makes me think they’ve carefully considered it and decided it’s not a threat.
I absolutely admit that I might just be being naive or overly-optimistic here 🙂 I’ll keep investigating, and I’ll let you know if I come across anything compelling on either side of the debate.
Fair enough. Thanks for looking again.
In that podcast, SBF discusses the concern that Tether might put its backing funds into bad investments, but he doesn’t mention that someone might have fraudulently minted unbacked Tether and used it to buy BTC, and how that could be why BTC’s price ran up so high in 2017.
Maybe people don’t care what made BTC’s price go up 4 years ago and only care what its price is now, but if one hack in an unrelated stablecoin could drastically pump up BTC’s price in 2017, who knows what other manipulations might be distorting it now.
He says futures markets show a 2.5%/yr credit risk in Tether, but futures markets didn’t show significant risk before the 2008 financial crash either. Of course he knows this, so the fact he doesn’t mention it makes him sound like just another smart crypto proponent happy to be on the bandwagon.
People have inflated ideas of how much smarter people they idolize are than others. There are plenty of really smart people, they all have blind spots, they’re all prone to mania when an idea strikes them as brilliant, and they’re all sometimes wrong. Sometimes whole masses of them are wrong in the same way, as most really smart finance people were in 2007.
To be clear, I don’t idolize the guy at all. I’m simply recognizing that my own knowledge of the financial world doesn’t seem sufficient to be able to figure out what’s true with Tether. All I can do is look at people who seem to know a lot more than me and who would have a vested interest in learning the truth. If the worst-case scenario is true for Tether, SBF will lose a whole lot of money, and I imagine much of his business would fall apart. So I have to assume that he’s examined this threat more deeply than I’d be able to.
You’re totally right that he’s a flawed human with blind spots. But given that this anti-Tether argument is one of the most common ones levied against crypto, it seems extremely unlikely that he hasn’t heard it before and carefully considered it. And, I’m assuming that’s the case with the other thought leaders I follow in the crypto space since they’re not talking about it when they discuss the various other negative issues in the crypto space.
Again, I very much admit I could be being naive here. But I suppose it’s currently a risk I’m willing to take. Thanks for inspiring me to put this back on my radar more strongly though. I’m going to keep a closer eye out for any discussions related to Tether.
Makes sense. Maybe some day I’ll try to read Griffin’s paper and see how much their conclusions seem speculative vs. proven.
I’d also be very interested to know about the thought leaders you follow and what you like about them. Maybe make an addendum to your series about that?
Good idea, thanks. Yes, in my final summary post I’ll aim to point out some good people to follow.
(I also just tried to post a comment on part 9 of this series, but I got an error about not filling in a captcha, even though there’s no captcha there to do. Fortunately, that problem doesn’t seem to affect this post.)
Thanks very much for letting me know!
I use Google reCAPTCHA v3 behind the scenes (ideally to be less annoying to users since you don’t have to actually click images to prove you’re human). It uses an algorithm to guess if you’re a bot, so I don’t have much control over it. But, I was able to lower the sensitivity value, so hopefully it’ll be a bit more forgiving now.
Please try commenting again, and if it doesn’t work, the best I can suggest is clearing cookies or trying a different browser.
I just tried commenting on part 9 again, and now it worked. I had tried on different browsers before and it failed the same way: not by giving me a captcha that I couldn’t do, but by responding to my clicking “Submit” with a pop-up saying something like “Error: you need to complete the captcha” even though there was never a captcha there for me to complete. I went back and looked carefully and there wasn’t one anywhere on the page. So something about its attempt to display the captcha was failing (though for now it seems it’s not choosing to give me a captcha, so it’s working).
Awesome, thanks. I’ll reply in a bit.
Hopefully the adjustment I made fixed it, but I’ll look for another solution altogether if I hear of anyone else having this problem.