The True Underlying Value of Bitcoin
Originally published by Team Blockchain in the 10th of March 2021 copy of Digital Bytes
Although Bitcoin was created in 2009, it seems that over a decade later an understanding of cryptocurrency and blockchain still eludes many. I confess, my first true understanding of crypto and blockchain, along with the insider lingo that pervades them, was when my younger brother and I built a bitcoin mining rig on a lark while he was still in university.
Since then the blockchain and crypto market has exploded. We became involved in the runup to the first bitcoin price-spike, and then subsequently ditched our hardware when it all came crashing down. In my work at Lyall Ventures, and through my freelancing at NOTWICS I have seen quite a lot of UK based blockchain businesses.
So, first let me summarise my understanding of the first real use cases of bitcoin, blockchain, and then we can look at the present and future. I will speak in more depth about crypto as an asset rather than blockchain as an extremely useful technology (perhaps for another time!).
I first heard of bitcoin and the silk road at the same time. They seemed synonymous at one point, a convergence of anonymity with cutting edge tech that was baffling law enforcement, allowing an illicit marketplace to hide in plain sight. Fortunately, Silk Road has come and gone, but bitcoin was here to stay and needed a new purpose.
*An update on silk road I found while researching this article: Because of immutable ledgers and public wallet addresses, $1 Billion has been linked to former silk road activity and the IRS is hunting it down.*
Bitcoin gave way to other cryptocurrencies, some of the larger names I’m sure you’ll all be familiar with such as Ether(eum), Ripple, Litecoin, and the infamous Dogecoin. In our professional opinion, at Lyall Ventures, the coin with the most underlying value is Ether via Ethereum. We like the approach of the founder, the organisation that works on its behalf, the functionality of smart contracts, and the vibrant ecosystem that is springing up around (and on top of) the network.
Cryptocurrency at large has found new uses since bitcoin’s origin story, some of which are still just getting underway today, for instance, Initial-Coin-Offerings. These became popular at one point; however, they didn’t get the buy-in from institutional investors. In my opinion, the ICO was a much less painful process than listing, but due to its simplicity, absence of track-record and lack of regulations, many investors did not seem to buy in, ourselves included. I think this could swing the other way as geographies like the UK and EU look to compete with the SPAC trend in the US. The Khalifa review highlighted the need for a change in regulations to allow fintech startups to compete, perhaps anointing ICOs with an air of credibility (and more regulations) could help.
Another interesting use case of crypto, which has very recently seen a landmark event arising from an unlikely source, could very likely lead to a new portfolio approach to both physical and digital assets. I am of course talking about Non-fungible Tokens (NFTs), which have experienced headlines the last few weeks with the artist Beeple’s recent sold artwork.
NFTs, in our view, are a great combination of the token aspect of crypto, with the immutable ledger aspect of blockchain. You can have an exact record of the ownership of an asset over time and through multiple hands. This, in our opinion, will lead to a tech-forward approach to curating IP-rich portfolios and physical collectables, keeping them safe from counterfeit and other risks.
So, going back to bitcoin — what is the underlying value? Bitcoin has recently been rising rapidly in price (again), so there must be something behind all of this…, right? However, when we look at the stability of bitcoin from a currency point of view, the wild daily fluctuations (beta of 2 compared to MSCI Global) means that it is unreliable. From a payments point of view, although often cheaper than traditional methods, the time frame (combined with price volatility) is not very attractive, especially with more stable alternatives.
From what I can see, the biggest value-add that bitcoin has going for it at the moment is that its supply is fixed (written in stone, much like an immutable ledger) and now almost stagnant as it edges closer to 21M coins. With many institutions, such as JP Morgan now recommending their clients to devote up to 1% of their portfolio to cryptocurrencies, we will see an increasing demand with an almost fixed supply. This simply means the price can only go up from here if nothing changes.
This is all against a backdrop of massive Quantitative Easing with Fiscal Stimulus into the M2 money supply of major FIAT currencies finding its way into individuals bank accounts rather than capitalising the banking system, a significant difference from 2008. This relates to my earlier point — after 21 million bitcoins are released (for example), that’s it. No more printing bitcoins, unlike other currencies (cryptos included).
The biggest risk to this price trend for bitcoin specifically is actually the same thing giving it value — “the halvening”. As mining fees keep reducing to a fraction of their former glory, miners (independent server providers on the decentralised network) could attack the network and prevent transactions from going through. My gut feeling for bitcoin — the underlying value, currently, is fear of missing out. This plus a stagnant supply will keep driving price up until miners revolt (in a worst-case scenario).
Let’s then turn to Ethereum, and an interesting development that is underway, which is the network moving from proof-of-work (the same method bitcoin works on) to proof-of-stake. This mitigates the miner revolt risk as not just anyone can be a server-provider. Anecdotally as well, the majority of startups that I meet in the London ecosystem all seem to be building on the ethereum network due to functionality. This should affect the price of Ether even though you can run your own tokens on their network — an important distinction between coin and token.
All of these startups operating on Ethereum, using Ether (even via their own tokens) has created a vibrant DeFi (Decentralised Finance) movement. However, if proper practices are not taken on for KYC (know your customer) and especially creditworthiness, DeFi will end up like peer-to-peer lending.
Two other things on my radar for crypto couldn’t be more opposite of each other. First is the ghost at the feast, Libra — now Diem which is looking to make a comeback in a scaled-down version. An outsiders view of the Libra saga was that it was just too big a risk to give facebook the keys to the monetary kingdom in an unregulated way, especially given their ability to influence individuals through media; however, facebook is not going down without a fight.
How could I write about crypto without highlighting Dogecoin, the digital embodiment of crypto-hype. There is literally no purpose to it and it is the meme-stock of cryptocurrency. The current pump and dump efforts to get investors to sink their funds highlights the bubble-esque elements of the current crypto-cycle when viewing these currencies as “asset classes”.
On a final note with Coinbase announcing their intent to IPO, the fees are shocking and kind of flies in the face of what blockchain is supposed to deliver. Unfortunately, it looks like they are going to be completely raking it in until something changes, so good for them I guess.
Radio Interview with Team Blockchain in response to this article:
https://www.mixcloud.com/BlockchainRadio/digibytesguest210312/
