Sorry Financial Times, Bitcoin is not crypto – Bitcoin Magazine
This is an opinion editorial by Federico Rivi, an independent journalist and author of the Bitcoin Train newsletter.
Would you say that football and baseball are part of the same industry because both fields are covered with grass and in both games a ball is involved? Would you say that Bitcoin and cryptocurrencies are part of the same industry just because they are both in the digital realm and cryptography is involved in both?
The analogy is obvious, but too many equate Bitcoin with cryptocurrencies, refusing to see the essential differences. The latest example comes from the Financial Times, whose columnist, Jemima Kelly, wrote that “Bitcoin is indistinguishable from crypto.” Kelly is no stranger to criticism of Bitcoin – back in 2015, she highlighted the fall in the price of bitcoin from $500 to $300 — but this does not mean that her articles are not worth analyzing in detail, even more so when they are published in major newspapers such as the Financial Times.
So, “Bitcoin is indistinguishable from crypto,” but why? Kelly provides a list of poorly argued causes worth dismantling.
Ponzi schemes and the criteria for money
“It doesn’t matter what bitcoin’s origins were – the people pushing it now have the same financial incentives as those pushing other crypto tokens. Satoshi Nakamoto, the creator of bitcoin, may have intended it to be used as money, but that doesn’t make it so – it meets none of the necessary criteria, and instead operates in a pyramidal structure that relies on constantly recruiting new members.”
Pyramid schemes are by definition structures that can only stand as long as new investors keep coming in to pay interest to the first, i.e. those higher up the pyramid. The moment no new funds come in, the structure collapses. Kelly fails to explain how Bitcoin would collapse without new investors. In fact, we are in the middle of a bear market that started 10 months ago with lots of money flowing out of bitcoin. In such a scenario, the pyramid scheme should have collapsed by now. As I write, however, Bitcoin remains the most distributed network on the planet, and its hash rate is at an all-time high.
If Bitcoin is a pyramid scheme, why would this bear market be accompanied by hash-rate all-time highs?
Bitcoin works with and without new funds coming in every day, and this is a key difference with the “crypto” world, where carpet pulling happens regularly, as the website rekt.news reports.
As for the criteria for money, Kelly forgets to specify what these are and how Bitcoin does not meet any of them. Although there is no universal consensus on how many key functions money has, we can limit ourselves to highlighting the five most important: store of value, medium of exchange, transportable, divisible, unit of account.
- Store of value: As inflation can be defined as devaluation due to monetary expansion, Bitcoin is technically and precisely a hedge against inflation due to its fixed supply. It is even better than gold — the world’s most important store of value — in terms of stock-to-flow ratio, and is therefore undoubtedly an excellent store of value.
- Medium of exchange: Although scalability in Bitcoin’s history has created quite a few scars, today we are fortunate to have a protocol at our disposal that makes Bitcoin the best way to send money from one part of the world to another instantly and with almost non-existent fees . The Lightning Network is exactly what Bitcoin needed to become a medium of exchange.
- Portability: Bitcoin is digital, anything to add?
- Divisibility: A bitcoin is divisible into 100 million rations. The Lightning Network also supports millirates, so one bitcoin can be divided into 100 billion units. Try that with dollars.
- Unit of Account: This is the only feature that has not yet been achieved in Western economies due to bitcoin’s volatility, due to the ongoing price discovery phase that is likely to last for a few more decades. However, this does not mean that bitcoin is not already a much more reliable unit of account in many developing countries, where local currencies have fallen into hyperinflationary spirals.
Decentralization R&D
“Bitcoin is not actually decentralized – not only do miners group together to form ‘mining pools’, but the wealth is also hugely concentrated. On Tuesday, MicroStrategy announced that it had bought an additional 301 bitcoins, meaning that this company alone now has nearly 0.7 percent of the entire supply.
Mining pools are not football teams, and there are three considerations that Kelly left out:
- Individual miners can break out of one pool and join another at any time if they feel one is gaining too much power.
- If until now there was a risk of transactions being censored by a pool — since it is the pool that writes the candidate block and therefore can theoretically choose which transactions to include and which to exclude — this problem is solved with Stratum V2 because each individual miner will be able to write their own candidate block. Ultimately, pools are groups of individuals acting for their individual interests.
- However undesirable it may be, a large hash rate controlled by a single miner does not give any power over the rules of the protocol, which are enforced by the individual nodes in the network, as demonstrated in the Blocksize War and in the beauty of proof of work.
In the case of MicroStrategy, Kelly probably made a false analogy with the world of fiat, where power and money go hand in hand. There, wealth and the ability to influence the system’s rules are directly proportional, a bit like in the proof-of-stake system, which is nothing more than crypto transposition of today’s world. In Bitcoin, things work differently: as long as a person runs a full Bitcoin node in a remote village in Kenya, even without having any bitcoin, they have exactly the same amount of power that MicroStrategy has over Bitcoin (only if the company runs a full node, obviously – otherwise the individual has more power).
Innovation and energy R&D
“…a ‘first-mover advantage’ does not always last. Other crypto-tokens already have various functions that bitcoin does not have, and there has been renewed talk of a ‘flipping’, where Ethereum’s value overtakes bitcoin’s value due to the former’s transition to a less carbon-intensive form of mining.”
What these functions might be is not specified. Maybe smart contracts? It would be enough to study what is happening with the layers after Bitcoin’s blockchain: Lightning Network, RGB, Taro, Fedimint, Liquid, OmniBolt, Sphinx and tbDEX, just to name the most famous ones.
As for “carbon intensive” mining, many pages could be filled disproving this idea. For the sake of this article, I will only show the data from the latest Bitcoin Mining Council report, which in July found that 59.5% of the energy used by the Bitcoin network comes from renewable sources, and that although Bitcoin consumes 0.15% of the energy produced globally, it is responsible for only 0.086% of CO2 emissions, and is therefore much greener than the average global production of goods and services. This trend will continue, given the miners’ incentive to use affordable energy sources. As Nic Carter put it: “Bitcoin mining is converging with the energy sector with astonishing speed, providing an explosion of innovation that will both decarbonize Bitcoin in the medium term and drastically benefit from increasingly renewable grids.”
Bitcoin mining will benefit dramatically from renewable energy grids.
The idea that the first-mover advantage does not last forever is also wrong. There is an important fundamental feature that allows Bitcoin to enjoy this constant advantage: scarcity or, to be more precise, finiteness. Bitcoin is limited, cryptocurrencies are not. And even if one were to use Bitcoin’s code by making an identical copy, the first Bitcoin would be the original: scarcity cannot be replicated once discovered.
How many Bitcoins? (Spoiler: Only one)
“In the end, there is not even a consensus on what bitcoin is. For the vast majority, it is the digital coin also known as ‘BTC’, which currently changes hands at around $19,000. But there are other versions that have split, for for example the one promoted by Craig Wright, the man who claims to be Satoshi and who says that BTC is a scam”.
This is a very contradictory statement. If the “vast majority” agrees that Bitcoin is one thing, then it’s a deal, even if a megalomaniac with almost no followers calls himself Satoshi Nakamoto and wants his token to be considered the real bitcoin. And in any case, in the case of Bitcoin, where there is no single authority to provide proof of authenticity, there is always one final arbiter: the market. In fact, BTC is agreed upon by the free market, although many western countries have now forgotten what it is.
This is a guest post by Federico Rivi. Opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
