Critics have suggested that the collapse of FTX demonstrates flaws with Bitcoin, but this is a misunderstanding of its fundamentals.
This is an opinion editorial by Pierre Rochard, the Vice President of Research at Riot.
Ben Sixsmith has published a thoughtful piece in The Spectator entitled “Saying Goodbye To The Crypto Nerd Utopia,” providing an outside perspective on the crisis facing the broader crypto economy.
While there’s a lot I agree and disagree with in his piece, I’ll focus on the primary line of reasoning: Bitcoin is one of many cryptocurrencies, cryptocurrencies have no intrinsic value, and cryptocurrencies are speculatively traded on exchanges like FTX; therefore, the scandalous collapse of FTX reveals that Bitcoin is no better than the status quo.
The first paragraph in Sixsmith’s piece establishes the conflation of Bitcoin and crypto: “The value of Bitcoin, Ethereum and Luna crashed in May.”
At first glance, this assertion may seem uncontroversial, all three of these assets rely on cryptography and varying degrees of decentralization, and all three of these assets experienced sharp declines 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 for minimizing uncertainty with conservative parameters and a constrained 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 an unauditable 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 optimizing for different outcomes. Bitcoin has accomplished long-term network stability — you could have run the same node software continuously for the past decade without any problems. The same cannot be said for Ethereum node software, which completely changed its consensus mechanism in September 2022. This change was only able to occur because the Ethereum Foundation has a unique centralized role in designating the official staking contract. Ethereum has to be more centralized than Bitcoin to push through aggressive “upgrades” to its protocol. Bitcoin has no such centralized operator or authority, and its consensus rules are unofficial: a spontaneous, inter-subjective, network-wide agreement among the users.
To address the second element in Sixsmith’s line of reasoning: the intrinsic value of holding any form of money is that you are minimizing uncertainty by hedging against unpredictable future cash flows. In the fiat system, the least-uncertain assets are physical cash and government-insured bank accounts; however, even those are subject to the fiat power of the governments issuing such currencies and insuring those bank accounts — that is, your money is only as good as the applicable government’s promises.
Setting aside Bitcoin’s exchange rate, on a fundamental 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. That is bitcoin’s intrinsic value. While the spot price/purchasing power of BTC can 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 certain that the smart contracts locking 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 the speculative trading of cryptocurrencies on exchanges. Exchanges operating in the United States are legal entities subject to U.S. laws governing exchanges and are subject to compliance with both state and federal money transmitter, custodian and investor protection regulations. They are regulated federally by the Commodity Futures Trading Commission, the U.S. 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 accountable to the English Common Law. To label these entities as “crypto” exchanges obfuscates their centralized fiat nature.
Sixsmith states, “…we knew that crypto-currencies were not a surefire route to freedom and independence when their value hinged on the good sense and morals of a bunch of weird nerds online.”
While humorous, this statement conflates 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’s nothing inherent about BTC that would necessitate leaving it at a fiat exchange, vulnerable to theft. It is harder and riskier to properly secure and use an exchange account’s password than it is to do so with BTC private 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 revenue for goods and services. The continued development of a circular economy will lessen the need to ever exchange for fiat.
In conclusion, despite adjacent cryptocurrencies and fiat exchanges that are 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 is simply looking at the past decade of successful adoption, noting that Bitcoin’s fundamental properties have only improved, and projecting out continued growth. Perhaps the bottleneck in Bitcoin’s adoption is peoples’ understanding of what differentiates Bitcoin from fiat and crypto.
This is a guest post by Pierre Rochard. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
