Claudio Grass (CG): During the 2017 hype, when most people became aware of Bitcoin, it was mainly sold as the payment vehicle of the future, as a great investment for the “little guy” who has no access to equity markets and even as a store of value that would replace precious metals. In your opinion, what are the main misconceptions that the average “crypto layman” may still hold today?
Konrad S. Graf (KG): Some critics argue that Bitcoin as a whole can just be copied to make other coins and that this represents the potential for infinite inflation. It is certainly the case that the software and its chain can be copied and varied. There have already been thousands of knockoffs and variants, as well as quite distinct projects grouped under the increasingly vague category of “cryptocurrency.” But what then actually happens with all this copying?
The top five cryptocurrencies by market cap as of 8 December 2019 constituted 85% of the estimated value of all 4,904 cryptocurrencies listed on Coinmarketcap.com. Using the 80/20 principle, or in this case the near-enough 85/15 principle, let us begin by leaving aside the 4,899 collective contributors of the other 15% of market cap as a large pack of minor competitors. Note that there are concerns about the realism of these market cap figures, especially for minor coins without liquidity adjustment, so this may well be closer to a 90/10 analysis in adjusted terms. Nevertheless, this data still provides an accessible way to get a general sense of scale.
Of this 85% that the top five contribute to Coinmarketcap’s total, Bitcoin (BTC) contributes 80% (not percentage points of the grand total, but 80% of the 85% amount), Ethereum 10%, and Ripple 6%, with about 2% each for Bitcoin Cash (BCH) and Tether. Now among these five, only BTC and BCH have serving as decentralized digital cash as their main design goal, though the respective communities have differing ideas about what “digital cash” means and what this implies in practice.
Ethereum and Ripple, in contrast, each seek to operate as facilitation networks for smart contracts, issuance of other units, and transfers of other monies and goods. As such, their unit supplies are variable in service of these ends. Tether, meanwhile, simply seeks to operate as a reserve-backed US dollar token.
We can therefore compare BTC and BCH as the only two strictly digital cash competitors among the current top five. BCH emerged on 1 August 2017 as a copy & vary chain split that shares many attributes of BTC with a few key differences. But after more than two years, a unit of BCH has come to trade at a fairly stable level around 2%–3% of a BTC unit. Its market cap estimate now stands at 2.8% of BTC’s.
This is not just about price. The amount of computing power dedicated to each network also varies at a similar scale. A unit of a competing cryptocurrency on its chain is not actually that close of a substitute good in security terms for a unit of Bitcoin on its chain.
BTC currently has 97 exahashes protecting its network to BCH’s 2.5 exahashes, giving BTC a hash rate 39 times higher than that of even its next closest digital-cash competitor.
Due to real resource issues such as hash rate distribution, as well as other factors such as differences in development teams and processes, other cryptocurrency units, even apparently very similar ones, are in fact a quite well-differentiated products from the market’s point of view.
The argument that the free proliferation of other cryptocurrency units implies an infinite potential for inflation is thus far too vague and impressionistic. The experiment has already been running for a long time and some rather striking results are out. Copy & vary as one will—and thousands have been pouring time and venture capital into this for years – the market in no way deems the add-on units to be new units of Bitcoin. There are just over 18mn BTC units at present (each divisible into 100mn satoshis) and less than three million more can ever be minted. The height and progress of this number is independent on other projects and units and none of them are in fact viewed or treated on the market as remotely comparable in value to BTC.
CG: One of Bitcoin’s biggest advantages is the fact that it “cuts out the middleman” in settlement processes. Assuming its popularity and user base would continue to increase, what would this potential for non-governmental settlement mean for the centralization of power in this domain and for systems like SWIFT?
KG: This was also a key topic in The Bitcoin Standard. Ammous argues that it is in the – for most people quite arcane – field of settlements that Bitcoin could find some of its most competitive applications. It could become not only an in-common non-political money unit, but also a direct competitor to the SWIFT system and any other existing or emerging rivals to it.
Any node on the Bitcoin network anywhere in the world could potentially take on this role, offering final transfers of any amount in a fraction of the time and cost of existing systems. Bitcoin can be used to transfer, for example, either $50 or $50mn anywhere for the same price (say, less than $1) and on the same timeframe – – less than an hour, 24/7/365. This is not just for a “pending” transfer, but for a final, completed transfer.
In a world where conventional systems are also politicized, Bitcoin has an advantage of being “neutral” in the sense that it is controlled by none of the competing power blocks, which means that any and all could potentially participate. It could become the single “common language” that anyone, anywhere could use with anyone anywhere else, as opposed to the different overpriced, slow, and closed proprietary political and corporate networks now in use.
Some central banks and large commercial banks have been – partially – catching on, developing proprietary private blockchain systems that will take on the role of interbank transfers, such as for example, within France or among JP Morgan units. This may well bring some efficiency improvement, but the systems will still be political or corporate/political in nature and as such are likely to have difficulty extending or interoperating universally. Bitcoin, in contrast, has from day one already had a natively global, non-political, non-corporate, and geographically neutral capability in this regard.
CG: What are your expectations for the future of money over the next years? Do you believe the decentralization trend will continue, with more people embracing new alternative currencies in their everyday lives?
KG: One of the shifts within the Bitcoin intellectual scene and in my own thinking over the past several years has been a clearer distinction between the function of payment making and the nature of the money unit in which payments are denominated. Many had promoted Bitcoin as a payments competitor to PayPal, credit cards, and banks, emphasizing freedom and disintermediation. The problem is that on-chain Bitcoin is not actually that good at smaller consumer payments due to its technical structure, cost tradeoffs, poor privacy, total irreversibility, and other factors (and all of this is true to a degree even separately from the block size limit issue). Payment-industry incumbents, particularly at the consumer level, could easily just speed up or improve their existing systems over time and they have in fact been doing so.
Next to the “payments” paradigm is something that turns out to be quite distinct. My research on Bitcoin began from the standpoint of Austrian-school monetary theory. As such, I was naturally focused on implications for and from the theory of monetary value and tended to take the payments side for granted as something that would work itself out. But when payments are better distinguished as a competitive service next to the money unit, bitcoin can be seen even more clearly as primarily a competitor against other money units. In other words, bitcoin (the unit) is far more usefully characterized as a dollar and euro competitor than Bitcoin (the system) is as a Visa and PayPal competitor.
Indeed, if the time ever came when bitcoin began to take on a significant role as a unit in which payments are denominated, Visa, PayPal, and the like could easily help people transfer bitcoin the money unit instead of dollars or euros the money units using most of their existing infrastructure and systems with some crypto-specific modifications on the back end. All of this is, of course, the opposite of a popular line of discourse that tries to make “blockchain” sound more palatable to authorities as merely a new kind of technical wizardry for improved payment convenience—rather than a completely new epoch in the history of technologies for monetary soundness.
Even when viewed as a payment system though, Bitcoin’s capabilities might still be enduringly competitive at levels such as interbank clearing and larger final settlements. Here too, incumbents are already trying to step up their game with politically constructed proprietary central bank “blockchain” systems. They want to play Bitcoin cargo cult and make “digital euros,” digital dollars,” and “digital yuan.” This happens to play very nicely into mass-surveillance, mass-control, and inflation-financing agendas. However, none of these institutions want to look at fixing the monetary nature of the euro, the dollar, or the yuan. Inflationary monetary units are used to steadily and surreptitiously drain general populations of their wealth, but these systems are displaying increasingly shaky foundations for all to see, even including outright absurdities, such as negative interest rates and unimaginable quantities of per capita debt.
Bitcoin’s top competitive advantage, then, is its ability restrict new issuance, the relative reliability of its methods for controlling unit production. As for payments, several conventional intermediated methods for transferring control of fiat money could simply be repurposed to transfer control of bitcoin instead, if it does ever come to function as money in this way. These methods could freely compete with more bitcoin-specific methods, such as on-chain transfers or, for example, off-chain but cryptographically linked Lightning-Network transfers. It is most important today that Bitcoin has its own independent infrastructure for transferring bitcoin, otherwise it would have to rely on conventional systems supporting it from the beginning on, which obviously they do not. Having independent payment infrastructure gives it a way to survive as it grows up. If it eventually becomes a popular money unit, conventional systems could also easily join in by adding support for it as a supported currency option. Taking this perspective requires distinguishing the factors that support a sound money unit from those that make for a competitive payments service, which turn out to be quite distinct.
CG: What of the regulatory threat? After the fierce opposition that Facebook’s Libra received, do you think that a wider, coordinated governmental response could threaten to nip this industry in the bud?
KG: Libra is a great example of why Bitcoin has been able to survive and thrive for nearly 11 years so far. It has no business address and no political domicile. In the ideological symbolism battle of governmental versus corporate, it is neither governmental nor corporate. There is no CEO to summon to Washington for interrogation. Even if some people were picked out and summoned, none of them would be in a position to shut down or alter Bitcoin.
Critically, this is not the case with many other cryptocurrencies, many of which do have identifiable founding groups or operating foundations, often with large pre-mined coin holdings and substantial ability to influence and alter the details and directions of their associated projects. Bitcoin operates in most countries of the world and in another sense in none. This is what it means to be “decentralized”, literally, not to have a center. It is everywhere and nowhere.
As a context for Bitcoin’s ongoing operation, it is important to keep in mind that we still live in a competing “international anarchy” of distinct political entities and blocks. Onto this complex and shifting tapestry, Bitcoin can adapt over time as politicians and policies vary and come and go in different places. It can find the niches that at any given time and place are best for mining, best for development, best for its different types of end uses. If mining is banned in one place, it keeps running elsewhere. If tax or regulatory treatment is hostile in one place, it is better elsewhere. If software developers are harassed in one place, they are left to code in peace elsewhere.
There is no vault from which “Bitcoin” can be seized. Particular units can be seized. Particular mining equipment can be seized. Particular people can be unjustly persecuted in particular places. Meanwhile, the system just keeps running and can live to fight another day. “Bitcoin” does not care. It is in a sense an emergent organism of a new kind. It is bigger than all of these passing people, particular places, and peripheral services. While everyone talks, it just keeps running.
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