Part 4: Without leaders
I was well aware that we were in the final phase of a mania and the crash was near. Still, in December 2017 I made the bet that bitcoin would outperform gold on a five-year horizon. In this article series, I describe what I based my opinion on.
In Part 1, I presented the background of my bet. In Part 2, I argued that there is a need for digital gold. The previous part explored why bitcoin stands the best chance to fulfill this purpose. I will now give further arguments in support of that.
A diamond is forever
The network effect heated up mainly around the first cryptocurrency, bitcoin — this was the central message of the previous part. There is a global consensus in the making on accepting bitcoin as digital gold. This is an organic process, though not without some artificial assistance. To understand the power of the latter, let us revive a key episode from the history of diamonds.
The company De Beers dominated diamond trading during all of the 20th century, essentially gaining a monopoly. They owned a massive amount of mines and, bought practically all of the rough diamond production from competing ones. They had total control over the supply side, which they manipulated immensely. Contrary to the myth, diamond is a far too common mineral. If they sold the produced quantity right after manufacturing, the price would have dropped significantly. So they stockpiled the diamonds that went to them, sometimes for decades, and only released a fraction on the market. They did not try to sell the produced quantity at market prices. They were thinking the other way around,adjusting the sold quantity such that they could dump it at the desired price. They did what a monopoly usually does: they abused their dominance.
However, after the Great Depression, diamonds did not really sell at the desired price. From that point on, De Beers launched a series of marketing campaigns to prop up demand. One of the most successful campaigns was aimed at creating a strong mental association between diamonds and love or eternal faithfulness. They wanted women to expect diamonds from their partners as the expression of their commitment. Likewise, they wanted to see men live up to this expectation. This was not usual before at all. With that, in 1947 the slogan “A Diamond is Forever” was also born, chosen as the best advertising slogan of the 20th century in 2000. The marketing campaign was a resounding success. The image associated with diamonds was permanently and irrevocably altered.
Unlike with diamonds, no single entity can control the supply of bitcoin. But, obviously, crypto markets have their own powerful players. And it is very much in their interest to associate bitcoin with the concept of digital gold in the public eye. They became quite well-funded after the crypto price boom, so now they have a chance to get this message to a wide audience. After all, if people associated diamonds with eternal love and commitment, why couldn’t bitcoin become digital gold?
The crypto-specialist Grayscale Investments has recently launched a campaign with exactly this message. Although their commercial is quite goofy, and “Drop gold” will certainly not be the best slogan of the 21st century, their message made it even to Fed chairman Jerome Powell, who compared gold to bitcoin during a Senate testimony.
Pyramid or gold mine?
Many find it conflicting that those who already have bitcoin are encouraging others to invest. They see some kind of pyramid scheme, since the sooner one bought into the biggest cryptocurrency, the cheaper it was, and they can sell at higher prices to the latecomer herd. But the herd could also win if they can attract an even greater herd. Ultimately, the profit of those joining the scheme early is paid by those who join later.
The comparison to pyramid schemes is, however, flawed. First of all, the director of a real pyramid scheme has perfect control over deposits, and can also arrange payouts as they wish. They typically pay as long as deposits exceed payouts. This is obviously not the case in bitcoin, as it operates according to predefined rules, in an automatic and tamper-proof fashion. Secondly, pyramid schemes are inherently unsustainable and necessarily collapse in the end. We can see that gold and diamonds barely have any “real” use cases — we mainly just collect, stock and store them. They are “pyramid schemes,” just like bitcoin. Yet these markets have not broken down for centuries or millennia. This is because the associated images (safe haven, romantic commitment) give them value. If bitcoin becomes established in the public awareness as digital gold, it is unlikely that it would ever collapse as a pyramid scheme.
It is rather like when gold was found on someone’s land in the past. Obviously, they became interested in making others see gold as a valuable asset, and in making them represent and spread this view. However, gold became a global safe haven asset due to its own merits and not because gold mine owners were spreading this story. The most they could do was speeding up the process.
Over the top
If we ignore the differences above and insist on the completely unfounded pyramid scheme narrative, we should still note another key distinction. And this brings us to the most important message of this article. Satoshi Nakamoto, the inventor, first miner and biggest holder of bitcoin to date disappeared from the face of the earth. Left, vanished, gone with the wind.
Satoshi has been concealing his real identity since the beginning of the project. He kept in touch with his colleagues and the world through the internet. He published bitcoin’s white paper and the first version of the mining software online. Email and other virtual channels were used to communicate with the handful of enthusiastic cryptographers and programmers who joined later. Further development proceeded with their help, but following Satoshi’s lead. However, two years after bitcoin’s launch, Satoshi decided to pass the torch to one of his colleagues. Not long after this, he stopped communicating. Maybe he felt that his creation was now unstoppable without him — that the leader had less and less significance in the project. Also, he may have feared that bitcoin’s growing popularity was threatening his anonymity.
The approximately 1 million bitcoins he mined in the early days are visible on the blockchain, but they have stayed there ever since. Satoshi never touched them. And, quite likely, he never will. Maybe he had died long ago. So if bitcoin is a pyramid scheme, it is a pyramid with no one at the top. This is an extremely important and unique characteristic of bitcoin. Without this, its future as digital gold is doubtful.
Libra and the authorities
To understand why this is so important for bitcoin, we should look at the events surrounding the Libra project. The news exploded in June about a consortium, led by Facebook, that aims to create the global internet money. Bypassing traditional financial channels, Libra would build a completely new blockchain-based infrastructure operated by the consortium. This would finally enable instant, cheap and global transfers, sorely missing from the internet-dominated world of the 21st century.
However, state authorities are not on board with the plan. They fear Libra would decrease their control over the financial system. And they are quite vocal about their opinion. They take it to numerous outlets to argue against Libra, with varying validity. Project-leader Facebook is not spared either: they threaten and talk of sanctions to pull the company back from executing the vision. It would not be surprising if Libra would eventually fail due to regulatory resistance.
The issue is far more complex and ridden with too many unknowns to make a judgment, and neither do I want to. Yet it is insightful for us, as it highlights that state authorities are ready to take serious action in their own interest — even if it means nagging innovators until projects come to a halt. And their threats are backed by powerful means.
State authorities are not happy about bitcoin either. But Satoshi remained anonymous, and he disappeared anyway, so there is no one to harass in the case of bitcoin. Threats of massive fines or even imprisonment are useless, for there is no one to punish. There is no one to make an example of. Satoshi planned and prepared well in advance, so that his project cannot be derailed by poking the inventor.
The captain of Ethereum
The captain of bitcoin is anonymous, but with the second largest cryptocurrency — ether and its network, Ethereum —, that is not the case. This captain is called Vitalik Buterin, and he is so lucky that he has received relatively little harassment from authorities. Unfortunately, if your project aims to build a decentralized system free of single points of control, then the mere presence of an influential character is a threat to it. Due to how the system operates, Vitalik cannot directly control it. But he can use his influence to shape the project according to his interests, which may not align with those of the community. Another risk is that he could hijack the project due to threats or blackmail (which may come straight from the authorities).
A good example of Buterin’s influential role is when a website reported him dead in June 2017. Of course, the cited fatal car crash never really happened. He dispelled the hoax by posting a photo, elegantly, not holding the day’s newspaper, but the hash of a recent Ethereum block. However, during the time between the reports and this, the price of ether reacted with an enormous dive.
The lesson is clear. Digital gold cannot have a public figure or intellectual leader whose death could swing the price, or who could shape its future according to their own interest. The only larger cryptocurrency that has this feature is bitcoin. Satoshi is anonymous, nobody would know if he died. And he disappeared, so he wields no influence.
Sovereign in every respect
Only bitcoin has the gold-like independence from any party. Unlike with diamonds, no one has a monopoly on it. Unlike with Libra, there is no one to threaten, blackmail or imprison. Unlike with Ethereum, no one can shape the project according to their own or someone else’s interests. Bitcoin has no leader.
A recurring criticism of bitcoin is that it cannot have value, since it is not backed by any government, state or central bank. But these critics are missing the very essence of it. The complete opposite is the case. It is valuable because no one is backing it.