Initially, the term “crypto asset” meant bitcoin and nothing else. However, the sector has undergone a massive expansion creating thousands of crypto assets and alternative tokens over the last decade. And while all of this activity was made possible by the Bitcoin network’s fundamental use of blockchain technology, the reality is that bitcoin’s intended utility is quite different from basically any other cryptographic use case.
Bitcoin has an intended use case as a new, global, digital, decentralized, permissionless, custodial, and apolitical monetary and financial system that rewards and protects savers far more than the current core banking system. But the rest of the crypto market mainly involves riskier and more speculative use cases that may not stand the test of time and often reintroduces many of the problems that Bitcoin was intended to solve, particularly with regard to issues related to trust and counterparty risk.
The underlying point of Bitcoin is to move away from central banking and towards a bitcoin standard, which would entail restructuring the economy with a greater emphasis on saving and less speculation or outright betting on financial markets. To put it bluntly, most of the rest of the crypto market is in direct contrast to bitcoin. It works more like a casino than an innovative financial phenomenon. These contrasting philosophies illustrate why it makes sense to differentiate bitcoin from the rest of the cryptocurrency market.
What is the Bitcoin Point?
To understand the differences between bitcoin and the rest of the crypto market, it makes sense to first look at the intent and purpose behind the creation of Bitcoin in the first place.
Bitcoin creator Satoshi Nakamoto, just over a month after the network launched, wrote:
“The root of the problem with conventional currency is all the trust it takes to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is littered with breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with only a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.”
In essence, bitcoin is an alternative to the current standard of inflationary currencies issued by the government and central banking institutions. Due to its deflationary monetary policy, bitcoin allows users to store their savings in money that is destined to appreciate in the long term as the economy grows.
Under an inflationary regime, saving is discouraged through currency depreciation over time. Not wanting to see their savings lose value over time, users of inflationary currencies are effectively pushed into investments that offer potential returns but also carry additional risk. Under a bitcoin standard, people can theoretically hold bitcoins as savings and not have to worry about central bankers’ policies or make the right investments to combat inflation.
Before Bitcoin, this role of non-inflationary money was mainly played by gold. However, gold has some drawbacks and is not suitable for the Internet age. For example, the use of gold for online payments requires the introduction of centralized custodians to process transactions, leading to many of the aforementioned banking-related issues that Satoshi wrote about thirteen years or so ago. Additionally, bitcoin can be securely stored in ways that gold cannot through methods such as multi-signature addresses and brain wallets. This is why bitcoin is often referred to as “digital gold” and “gold 2.0.”
Of course, bitcoin has not yet achieved its goal of becoming the gold standard for savings in the digital age. For now, it is still generally viewed as a risky asset, as illustrated by its recent price surge on news of slowing inflation. That being said, as Bitcoin continues to grow and exist, it should be better understood by the market, less volatile, and a better way to save.
Use of blockchains for gambling and speculation
Now that we’ve established the intended use case for bitcoin as a safe and conservative form of digital savings, let’s compare and contrast that with the rest of the crypto market. In short, the vast majority of the cryptocurrency market is not much more than gambling on variations of Ponzi games and Nakamoto schemes. Everything about bitcoin is focused on limiting risk, while almost everything else in crypto is focused on increasing risk and attracting more participants to the casino.
To get a clear picture of the cryptocurrency market, let’s look at the types of activities that use the block space on Ethereum, where much of this non-Bitcoin activity takes place today. As of this writing, the biggest gas guzzlers on the Ethereum network fell into four categories: non-fungible tokens (NFTs), stablecoins, decentralized exchanges (DEXs), and widely criticized crypto tokens built around personality cults like XEN. and HEX. Notably, all of these use cases operate in the realm of speculation rather than money or savings, which is the intended use case of bitcoin.
Speculating with NFTs involves factors outside of the tokens themselves, most notably in the form of a centralized issuer. For example, a hypothetical 1 of 1 NFT associated with one of Ye’s (formerly Kanye West) albums may have experienced extreme devaluation in the wake of the artist’s infamous interview with radio host Alex Jones where he praised Adolf Hitler.
There is also nothing stopping an issuer from diluting the value of a particular NFT by creating and selling more tokens (similar to coin inflation). Also, the NFT phenomenon itself may not take off and become much less relevant over time. Lastly, if the successful NFT iteration does not use a blockchain, potential comparisons to bitcoin would also be bogus from a technical perspective.
Like NFTs, today’s popular stablecoins also have centralized issuers, so they’re also very different from bitcoin in that they require trust in a third party (much like the traditional banking setup you wrote about). satoshi). Although the assets themselves are less speculative due to their objective of price stability, they play the role of tokens in the crypto casino.
That being said, stablecoins have also played a role in giving people dealing with troubled local currencies access to US dollars. However, it is unclear how long this can last, as tighter regulation of stablecoins could drastically upset the market. Although decentralized alternatives have been in the works for many years, a perfect solution has yet to be found.
Currently, DEXs are mainly used for transactions involving the aforementioned stablecoins. If stablecoins are removed from the equation, DEXs are mostly just casinos for Ponzi games, some of which might not be listed on traditional centralized exchanges (CEXs).
Additionally, Chainalysis recently revealed that a large part of DEX activity is often maximum extractable value (MEV) bots leading users. On top of that, it is not clear how much of the trading volume is simply arbitrage with other exchanges. These DEXs and other decentralized finance (DeFI) applications also often hold their own proprietary tokens, which can be used to speculate on the potential success of the DeFi application. However, it should be noted that the connection between the owner token and the success of the application is sometimes unclear.
Source: Kyle Torpey
Crypto tokens like HEX and XEN are pure Nakamoto schemes and have been in many iterations over the years. This is crypto Ponzi gaming in its purest form.
So, taking a closer look at these four use cases, it’s clear that not only are they different from bitcoin but, in many cases, they operate at the opposite end of the risk appetite spectrum. It is not yet clear if a sustainable killer use case can be built on top of Ethereum or one of the other similar blockchain platforms. Still, it may not matter for the foreseeable future. Crypto may persist as a new avenue for online gambling and get-rich-quick schemes for some time as many people are interested in that sort of thing. Either way, it makes sense to differentiate bitcoin as a savings technology from the rest of the market.
Those interested in developing a new monetary paradigm and economy based on savings can keep bitcoin, and those who want to gamble can have fun in the rest of the crypto market. Of course, many will also go for both options (and store their crypto earnings in bitcoin).
The native crypto assets of Ethereum (ETH) and other similar blockchains (e.g. BNB, TRX, ADA, and SOL) have benefited from acting as the base layers of the blockchain for gambling, Ponzi games and the general speculation surrounding blockchain experiments.
And holders of these types of base layer crypto assets will benefit as long as the game of musical chairs continues at the application level. So could these base layer assets be more comparable to bitcoin? Or what about more directly competing alt-cryptocurrencies like Dogecoin and Monero? We’ll cover that and more in part two.
This post Differentiating Bitcoin from the rest of the cryptocurrency market: Part 1
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