‘Crypto’: Just another burst bubble, but good for the original Bitcoin system
The basic notion of capitalism is that everyone is free to go to the market and buy and sell not only consumer goods but also capital. Unlike consumer goods, the valuation of capital (whether physical capital goods, tokenized claims on capital goods, or indeed debt instruments) inevitably involves looking into the future: speculation– a word derived from Latin roots meaning both to look and to hope.
This weighing process of capital’s future potential is both the driver of capitalism’s innovative entrepreneurship, but also a source of inherent risk and instability. For as long as capitalism has existed, speculative asset bubbles have inflated and burst with alarming regularity. Is “crypto” just another burst bubble? The answer is yes, it is, but it is actually good news for the original Bitcoin system and the innovations it brings.
The two bubble ingredients: new technology and “new” money
Asset bubbles generally need two key ingredients: innovations in both technology and the monetary system. New technologies provide new narratives, promising to generate wealth and create great wealth. But people tend to over-extrapolate short-term gains and are prepared to risk everything for that lottery ticket of a dream lifestyle. The second ingredient, monetary innovation (or at least a newly rediscovered way of squeezing extra growth out of the credit or monetary system), facilitates the rapid expansion of these newfound capital wealth.
The so-called ‘crypto’ bubble of recent years has followed an archetypal pattern. There is little new or surprising about this one, even if it is living through a bubble always surprising with regard to both the heights and the extent to which the bubble can go before it bursts.
The Bitcoin system was the most important technological innovation: Bitcoin is a system which combines multiple existing technologies into an entirely new system of technological capabilities, crucially including the financial incentive required to maintain and exploit the underlying technologies. The basic principles of the Bitcoin system have now been taken and applied to various interpretations of technological innovation.
Scarcity for scarcity’s sake is not an innovation
It is natural in this dog-eat-dog world of entrepreneurial capitalism to discover a new thing and try to exploit it in every conceivable way. Unfortunately, the technological innovation of the Bitcoin system is still widely misunderstood. Speculators have instead focused on making interpretations of what they the idea was the key innovation: a kind of generic digital scarcity. This is really why we have this bubble called the ‘crypto’ industry and why commentators continue to misunderstand the technology.
The earliest reinterpretation of the Bitcoin system was to adopt it purely for monetary use: this led to the development of Core‘s protocol (BTC): effectively Nick Szabos A little gold idea, to use an ever-evolving derivative of the original Bitcoin system to try to make the theory operational (unfortunately breaking system in the process).
Thousands of ICOs (Initial Coin Offerings) also supported the idea, with slight variations on a theme, trying to raise money, often (but not always!) trying to develop use cases for these new scarce ‘money’ tokens.
The synergistic bubble of bringing technology and money together
In this particular bubble, the two key components of technology and money were combined into one. This was actually the key innovation: the synergistic elements of the Bitcoin system relied on weaving together a public, time-stamped transaction database technology with self-contained financial incentives to maintain it, all in a self-contained package.
Unfortunately, it was impractical for many venture capitalists funding the new ‘crypto’ bubble that the Bitcoin system—correctly understood— were already able to do everything their wannabe competitor blockchains/coins sought to do.
In his groundbreaking work Mania, panic and crashthe economic historian Charles Kindleberger coined the term ‘Minsky model,’ which describes the work of Hyman Minsky, who captured the key principles of mania cycles dating back hundreds of years. It seems pretty clear that we have now fully gone through Minsky model cycle where initial ‘hedge funding’ has gone through ‘speculative funding’, and today we are clearly at (and past) the ‘Ponzi funding’ stage where the whole industry is trying to stay afloat by its own bootstraps, with many cross-holdings becomes clearer with each passing day. Few real use cases emerge for the thousands of speculative tokens.
The manic episode is now returning, largely as a natural function of time (‘Minsky Moment’), but most importantly as a direct result of the wider macroeconomic environment. The majority of the crypto industry has been driven by ultra-low capital costs as a result of cheap, plentiful lending and aggressively speculative (blind?) risk taking. In an environment of near-zero interest rates, it seemed as if it all looked a bit Ponzi-esque to provide spectacular gains and facilitate speculation and trading of such tokens (for some people). But this ends.
The death knell of bubbles
The COVID crisis and the response by governments created the perfect environment to further nurture another bubble, but broader inflation risks have prompted governments and central banks to reset policy: raising interest rates, draining liquidity and tightening economic conditions more generally. Capital costs have risen sharply, and investment has been drained away.
Regardless of issues of technological innovation, these moves are the classic death knell for speculative bubbles. In addition to these factors, “crypto” represented nothing more than a Ponzi financial economy, using a technological innovation to perform a regulatory arbitrage. That arbitration has, belatedly, now ended. The Ponzi episode is dead.
Even the die-hard BTCers who were the first to adopt the Bitcoin system to develop their own version of a sterile, Ponzi asset are increasingly having trouble convincing non-believers that their version of the Bitcoin protocol is the version.
Capitalism’s Cycles of “Creative Destruction”
We can say good receipt to ‘crypto’ and Ponzi schemes. Bad investments is the product of both bad monetary policy and speculative hubris, but all is not lost. Economic theory recognizes that asset bubbles can be a boon to long-term economic well-being by improving innovation and infrastructure. These cycles of “creative destruction” (sometimes referred to as Kindleberger bikes) is an important component of capitalism. The major Western economies today still benefit from investments made during various bubble episodes dating back more than 200 years. Each bubble brings with it new techniques, new capital and new ideas, not all of which are lost in the destruction of speculative hubris.
While Web 3.0 has become a term of derision, there is truth in this perspective. When Vitalik Buterin developed Ethereum, essentially as a smart contract platform, Vitalik Buterin was not alone in misunderstanding that the original Bitcoin system was already capable of doing everything Ethereum was designed to do.
As the limitations of Ethereum became apparent and several developers tried to fix the shortcomings by issuing new protocols and new “coins”, few realized that the original Bitcoin system was already more scalable and efficient than Ethereum. But at least these developers had a vision that went beyond just “crypto” and Ponzi funding schemes.
In a way it has been a very unique bubble
Where this bubble is truly unique is that the technological innovation emerged complete and essentially perfected through the efforts of one person. There was no need for more “innovation” of the technology itself: only of the applications it enabled. What is even stranger is that this person – Satoshi Nakamoto – chose to remain both unidentified and, as far as possible, unidentifiable.
Satoshi’s desire to remain unidentified was entirely understandable because the system effectively enabled a form of hard-to-trace (in the original environment) cash. Anyone who innovates in this area, if they are not careful, opens themselves up to potential criminal charges of money laundering and prison terms.
It is bizarre, but logical then, that it was the innovator who should be the one smallest likely to fuel the technology’s narrative development. It is the unique circumstances of this historic bubble episode that have meant that the true nature of innovation has been hidden from casual observers and, unfortunately, many “experts” who should know better.
While Tim Berners-Lee was able to nurture his baby, allow an early consensus on the protocol and allow a focus on developing the killer apps on the World Wide Web (Amazon, eBay, Google, etc.), Satoshi was not able to nurture Bitcoin to explain it well: his narrative was usurped, to focus on someone else’s idea, convenient for a small rent-seeking minority, but hardly worldwide.
Like the Internet Protocol (TCP/IP), the Bitcoin system is a protocol—a base layer—that enables innovators to build new applications and new use cases. The Bitcoin system completed the long-term native micropayment mechanism (including financial incentives) for the WWW. More than this, it solved the problem of an efficient and permissionless, transactional, distributed database. Combined with the potential for algorithmic contracts on this public database, this opens up the world of countless new use cases that the true innovators are still discovering and implementing. Like the WWW, most value creation will be in the applications and businesses built on the base layer protocol. Like the internet package, the Bitcoin system was (and arguably remains) the only protocol needed to build a public/permissionless blockchain infrastructure.
The original Bitcoin system: the technological tortoise to the Ponzi hare
A decade has been lost to the nonsense of “crypto” and Ponzi schemes: new entrants trying to “improve” a software protocol that they failed to understand in the first place, or simply promoting their own “coin” as the scarce digital assets that everyone needed to own, just because.
Ironically, one of the few ‘coin’ ecosystems that has largely sailed through the last few years without ever experiencing a bubble. original Bitcoin System (the original protocol, now referred to as Bitcoin SV). This is because it has been attacked and suppressed by people who wanted to develop alternative systems and alternative narratives: the fundamental technological innovation was denied it is bubble because it would have risked denying others their bubble.
While forward-thinking developers and entrepreneurs see the opportunities the completion of the WWW protocol presents, they have not been rewarded through speculative gains in the Bitcoin SV ‘coin’. Undoubtedly, this has created a more robust ecosystem of real-world applications without the leveraged profits of the crypto industry: real-world use cases developed in a real-world environment.
A normalization of macroeconomic factors, including a sensible regulatory framework, suggests that this technological turtle is finally catching the Ponzi hare.
See: The presentation of the BSV Global Blockchain Convention, New Technologies, New Futures for Nations
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