Bitcoin’s Future: The Great Deception and the Real Promise

This blog post follows on from my previous one Shattering the illusion: Bitcoin’s limitations as a Currency.

To talk about Bitcoin’s future, we have to look to the past. Flashback to 31^st October 2008, at approximately 2:10 p.m. Eastern Time, (for the record, it was Halloween day) when Satoshi Nakamoto (a pseudonym hiding a person, or team, whose identity hasn’t been uncovered to this day) sent an email with the subject line “Bitcoin P2P e-cash paper” to a mailing list of cryptographers. This mail started with the sentence “I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party”. It then went on to provide a link to Satoshi’s renowned white paper: “Bitcoin: A Peer-to-Peer Electronic Cash system”.

Given Satoshi’s email subject line, should we then consider Bitcoin as digital cash?

Bitcoin, contrary to its founder’s statement, is definitely not cash. D.W. Birch, in his book “The Currency Cold War”, provides the following reasoning:

“Whatever Bitcoin is, it is not cash, for the inescapable reason that cash is fungible…In this context – money – it means that all tokens (bitcoins) are the same and can be substituted for one another… [which]…is not true of bitcoins. They are all different. And because they are all different, their history can be tracked through the blockchain”

The author refers to bitcoins and tokens while pointing out that the transactions are happening and maintained on the Bitcoin blockchain (publicly available here), and they are all different and traceable. (As a matter of fact,  in another book, D.W.Birch suggests that “Bitcoin is better understood … as a peculiar kind of digital commodity rather than as money”.)

Coming to physical cash, if I give you one euro (literally a physical one-euro coin), you may give another coin of one euro back to me tomorrow, and no one can tell the difference between them (and no one cares, right?). This exchange of ours remains completely anonymous, and the origin of our euro coins will remain a mystery, their origin very difficult to trace. You might argue that the same case might not apply to banknotes as they are marked with serial numbers and they might have been just withdrawn from an ATM and directly used for a transaction that finally concludes with the return of the banknotes to the bank itself. But the bare truth is that, apart from in money laundering cases, no one cares much about banknote serial numbers – moreover, there might be the case that the banknotes participate in more than one commodity transaction - thus, for the sake of our argument, the same concept is applicable.

Should we then believe that Bitcoin is as anonymous as cash? According to Bitcoin.org “Bitcoin is designed to allow its users to send and receive payments with an acceptable level of privacy as well as any other form of money. However, Bitcoin is not anonymous and cannot offer the same level of privacy as cash.”

Moreover, the former IRS-Criminal Investigations (IRS-CI) Special Agent Chris Janczewski , has a similar opinion – he traced Bitcoin, that had once seemed untraceable, to crack one criminal case after another— including the seizure of much of the $4.5 billion of Bitcoin stolen during the 2016 Bitfinex hack.

While money exchange was, in fact, the intended purpose of Bitcoin as disclosed in the original white paper, this thesis has evolved over time. In 2017, a debate has erupted within the Bitcoin community over whether to prioritize its functionality as a means of payment or its characteristics as a store of value. The move to make Bitcoin more attractive to merchants and consumers did not prevail over the argument that Bitcoin should be a financial investment. The latter camp wanted Bitcoin as a store of value due to its limited supply and potential as a hedge against inflation, while the former wanted cheaper transactions and faster confirmation times. Unable to reach a consensus, the disagreement ultimately resulted in the Bitcoin hard fork of 2017 and the creation of a new cryptocurrency called Bitcoin Cash (the success of which is still a matter of ongoing discussion and debate).

There is one more point that (quite interestingly) brings Bitcoin as currency, closer to the concept of money: ownership (or wealth) distribution. According to the Bitcoin rich list (as of 26th February 2023), 9.55% of bitcoin addresses own 98.51% of all bitcoins ever mined (some of these addresses might even be owned by the same person/entity). This is an obvious (and similar to money) wealth inequality problem. But then, who said that bitcoins should be fairly distributed among its owners? Perhaps it was “…a monetarist desire to create fairer economies…that gave rise to the advent of cryptocurrencies” as Jack Parkin has written in his book “Money Code Space: Hidden Power in Bitcoin, Blockchain, and Decentralisation”.  Bitcoin was supposed to be distributed evenly to its contributors, to allow for equal power between its builders - this was the dream, but it hasn’t worked out that way.

Summing up, Bitcoin is not digitally fungible like coins, it is not as anonymous as cash and the main current usage of Bitcoin is as a speculative investment. Bitcoin, as mentioned in my previous post, has no intrinsic value and it is not backed by anything, yet there are people investing in it. There are persons or entities with enough crypto coins or tokens to cause a significant impact on its market price, the infamous Whales, either by buying or selling large amounts of it. There are much smaller ones that hold coins rather than selling them in a panic if volatility increases, commonly known as the HODLers. Bitcoin followers advise to HODL your coins despite the FUD of those outside the community. FUD means “fear, uncertainty and doubt.” For the curious reader, I have used some Bitcoin slang here, and I suggest following the above link, to familiarize yourself in it.

Ben McKenzie, one of the leading voices among crypto-sceptics out there, points out that bitcoin (and other cryptocurrencies) are much more:

“…similar to unregistered, unlicensed securities; they’re investments of money in a common enterprise with the expectation of profit to be derived from the efforts of others”

It was not supposed to be this way. Bitcoin, the first and still the most popular cryptocurrency, began its life as a techno-anarchist project to create an online version of cash, as a way for people to transact without the possibility of interference from governments or central banks.

And yet, in the midst of all the turmoil created by people looking to become rich in the blink of an eye, or easily persuaded into unsafe investments, Bitcoin has, admittedly, introduced blockchain technology to the world. This is a truly ground-breaking technological innovation, that is already transforming our financial system and perhaps our society in the years to come. I could not agree more with Cornell University economics professor Eswar Prasad, author of the 2021 book “The Future of Money”, when he has written in a recent New York Times article, that:

“The real promise of blockchain technology, which allows for more access and transparency…At this moment, we have this fantastic technology, which could lead us to a more glorious world”

The opinions and ideas expressed here are my own and I would be happy to discuss them - contact me at Makis.Malioris@worldline.com