FTX Collapse Didn’t Kill Bitcoin – Bitcoin Magazine
This is an opinion piece by Pierre Rochard, Vice President of Research at Riot.
Ben Sixsmith has published a thoughtful piece in The Spectator titled “Saying Goodbye To The Crypto Nerd Utopia,” which provides an outside perspective on the crisis facing the broader crypto-economy.
Although there is much I agree and disagree with in his piece, I will focus on the main reasoning: Bitcoin is one of many cryptocurrencies, cryptocurrencies have no intrinsic value, and cryptocurrencies are traded speculatively on exchanges like FTX; therefore, the scandalous collapse of FTX reveals that Bitcoin is no better than the status quo.
The first paragraph of Sixsmith’s piece establishes the conflation of Bitcoin and crypto: “The value of Bitcoin, Ethereum and Luna crashed in May.”
At first glance this claim may seem uncontroversial, all three of these assets rely on cryptography and varying degrees of decentralization, and all three of these assets experienced sharp drops in trading prices on exchanges. On the other hand, if we look at their underlying open source software, we see radical differences:
- Bitcoin’s protocol is specifically configured to minimize uncertainty with conservative parameters and a limited feature set, and its simple ledger architecture results in supply auditability of BTC.
- Ethereum is optimized for cutting-edge experimentation and a wide range of programmable features, but its complex ledger architecture results in a unrevisable supply of ETH.
- Luna was programmed to automatically hyperinflate to try to prop up the value of a stablecoin, Terra, and that’s exactly what it did.
Putting all three of these assets into a single “crypto” bucket is reductive – they are different technologies that optimize for different outcomes. Bitcoin has achieved long-term network stability – you could have run the same node software continuously for the past decade with no problems. The same cannot be said for Ethereum node software, which completely changed its consensus mechanism in September 2022. This change could only happen because the Ethereum Foundation has a unique centralized role in designating the official betting contract. Ethereum needs to be more centralized than Bitcoin to push through aggressive “upgrades” to the protocol. Bitcoin has no such centralized operator or authority, and its consensus rules are unofficial: a spontaneous, intersubjective, network-wide agreement among its users.
To address the second element of Sixsmith’s reasoning: the intrinsic value of holding any form of money is that you minimize uncertainty by hedging against unpredictable future cash flows. In the fiat system, the least uncertain assets are physical cash and government-insured bank accounts; But even they are subject to the power of the government that issues such currencies and insures those bank accounts – meaning your money is only as good as the current government’s promises.
Setting aside Bitcoin’s exchange rate, at a basic engineering level, holding BTC with your own private keys and verifying the ledger with your own node results in less uncertainty than holding even physical cash or an insured bank account. It is bitcoin’s intrinsic value. While the spot price/purchasing power of BTC may be subject to the whims of market forces, the uncertainty-minimizing principles of how to receive, hold and send BTC have not changed since its inception. Thus you can be secure that the smart contracts that lock your BTC will execute as written, so that only a signature from your private keys can move your money.
The third element addressed in Sixsmith’s piece relates to speculative trading of cryptocurrencies on exchanges. Exchanges operating in the United States are legal entities subject to US laws governing exchanges and are subject to compliance with both state and federal money transmitter, fiduciary and investor protection regulations. They are federally regulated by the Commodity Futures Trading Commission, the US Securities and Exchange Commission, and/or the Financial Crimes Enforcement Network, and they have clear terms of service and user agreements. Even an “offshore” exchange in the Bahamas is liable to English common law. Labeling these entities as “crypto” exchanges obscures their centralized fiat nature.
Sixsmith states, “…we knew that cryptocurrencies were not a sure path to freedom and independence when their value depended on the common sense and morality of a bunch of weird nerds online.”
Although humorous, this statement confuses Bitcoin’s value with the (mis)management of fiat/crypto exchanges; akin to questioning the value of tomatoes because a supermarket went bankrupt. Furthermore, there is nothing inherent about BTC that would necessitate leaving it on a fiat exchange, vulnerable to theft. It is more difficult and risky to secure and use the password of an exchange account than it is to do so with private BTC keys. Furthermore, there are bitcoin-only brokerages that encourage or require the delivery of BTC directly to the client’s keys. Countless individuals and businesses receive BTC not as a trade for fiat, but as income for goods and services. The continued development of a circular economy will reduce the need to always exchange for fiat.
In conclusion, despite neighboring cryptocurrencies and fiat exchanges being centralized and unreliable, Bitcoin is a decentralized and reliable alternative monetary system. Bitcoin’s vision for the future is not utopian or idealistic, rather it looks only at the last decade of successful adoption, noting that Bitcoin’s fundamental characteristics have only improved, and projects continued growth. Perhaps the bottleneck in Bitcoin’s adoption is people’s understanding of what separates Bitcoin from fiat and crypto.
This is a guest post by Pierre Rochard. Opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
