Bitcoin is All the Rage. Should You Be Raging Too?

What’s with the sudden Bitcoin obsession? The hype around Bitcoin is raging more than ever before. Naturally, I suspect it has something to do with the price (relative to USD):

Looks like easy money, right? That seems to be what many think (despite inevitable extreme volatility). It’s FOMO at its best: If everyone else is getting rich off of Bitcoin, so should I!

If you’re in more advanced circles your excitement about cryptocurrencies may expand further. Blockchain. Ethereum. Litecoin. Initial Coin Offerings (ICOs). And on and on.

Let’s be clear. It’s a complicated, technical space built on a few big ideas. And the crypto world has dramatically changed since the codenamed Satoshi Nakamoto invented the Bitcoin protocol in 2008. I’d say it’s analogous to the late 1980s internet but advancing faster. Also, by no means at all am I an expert. I’ve studied up some but only know enough to be dangerous. I’m not in the technical weeds myself. This article speaks from one noob to another, and I’ll throw in some helpful resources to check out at the end.

What’s the Big Idea?

Machines don’t communicate and share information the same way as humans. Computers have more information to share, share it faster, and act according to mathematical code. The Internet protocol suite (TCP/IP) provides a conceptual model and sets the rules for how this happens. It’s divided into four abstract layers:

  1. Link layer — defines how data packets are to physically run on a network
  2. Internet layer — connects separate networks (internetworking)
  3. Transport layer — maintains host-to-host communication
  4. Application layer — allows full applications and documents to be exchanged

But here’s the problem, as explained by AngelList CEO Naval Ravikant:

“Where’s the protocol layer for exchanging value, not just data? Where’s the distributed, anonymous, permission-less system for chatty machines to allocate their scarce resources? Where is the ‘virtual money’ to create this ‘virtual economy?’”

He continues:

“Cryptocurrencies are an emergent property of the Internet — almost a fifth protocol in the Internet suite. If Satoshi Nakomoto did not exist, it would still be necessary to invent them. Someday, they will be used by the machines in our network, on our desk, in our garage, and in our pocket to exchange value and achieve consensus at blinding speeds, anonymously, and at minimal cost.”

Bitcoin was the shot heard around the developer world that catalyzed the booming crypto ecosystem that’s emerging today.

Let me clarify a couple points about why cryptocurrencies are special:

  • Distributed network and encrypted. Similar to the internet, Bitcoin (among others) doesn’t run on a centralized server. It’s decentralized among thousands of computers across the world (the miners). Taking Bitcoin down and controlling the market is ridiculously improbable. Once the protocol is running, it’s here to stay. Plus, it’s encrypted; that’s just math.
  • Completely stand-alone. A system like Bitcoin supports itself. Anytime someone transacts, it processes through one of the mining computers. In exchange for facilitating the transaction, the miners receive Bitcoin as payment. There’s a limited future supply, but as transactions rise so does Bitcoin’s value.
  • Goodbye middlemen. This electronic cash will be used to transact, verify and enforce contracts, and perfectly track identity. The blockchain ledger maintains a perfect history of past transactions, and contracts can be upheld when written in perfectly logical code a computer can understand. In many ways it makes third party middlemen unnecessary. It also is sparking those companies to adopt blockchain functionality as fast as possible. It’s a slow change that will accelerate over time.
  • It bypasses central authorities. New regulations will arise, but cryptocurrencies can’t be avoided. The future of market economies will be boosted by the change. Governments need to either learn to adapt or get left behind.

Unbundling the Ecosystem

The most I can do is lightly scratch the surface. This topic is immensely difficult to talk about because of the rapid pace of change. Think about it. The more used and valued a currency is, the more is invented to support its ecosystem. In the physical world we have the Fed, retail and investment banks, brokerages, card networks, and more. The digital world will be similar. Coinbase, Blockstream, 21 Inc., etc. There’s no stronger network effect than money, so I view this as inevitable. The main difference now is that there is still functionality that has yet to be invented. Many hard problems are yet to be solved. It’s the very early days.

Also, it’s important to understand that Bitcoin may be the most recognizable crypto brand, but it is neither alone nor perfect. In fact, there’s a major rift in the Bitcoin community right now. Processing transactions is currently very slow (thanks to small blocksize), so the development community needs to decide how to change Bitcoin to best proceed. Growing pains.

There’s also Ethereum, which over the past three years has made extraordinary gains. It’s more centralized than Bitcoin and allows for other coins and functionality to be built on top of Ethereum’s technology. The Bitcoin vs. Ethereum competition is real, but I suspect that there will be more than one winner, at least for a while.

Another recent invention is Initial Coin Offerings (ICOs). It’s essentially crowdfunding using cryptocurrencies — an unregulated IPO of sorts. The raging popularity will contract as people chasing “easy money” learn lessons the hard way, but there is real value here. The idea that one can raise money for an open-sourced project supported by its early users and onlookers is valuable. If successful, everyone involved (from users to developers) gains value. Everyone is incentivized to win. Of course, what’s possible here change all the time, but some venture capitalists are already supporting this model with their own money. It’s here to stay.

So What Now?

Let me repeat: I’m a noob. As I look far into the future, I have no clue which coins will ultimately win out. I don’t know what crazy new inventions the development community will come up with. I can’t foresee all the ripple effects cryptocurrencies will have on our society. And I have no clue what the timeline looks like. But I do recognize that the ideas of Bitcoin, blockchain, smart contracts, and beyond are pure genius. It’s an antifragile technology that’s here to stay, and the ecosystem and usability will rapidly expand in time. In a decade or two, who knows how cryptocurrencies will be used.

I’ll also suggest that I’m not sure how Bitcoin or Ethereum will do as investments. A couple thoughts. For one, the hype right now is very real… and so is the hype cycle:

Hitting the Trough of Disillusionment is inevitable. All great technologies and companies hit it at some point. People often play forward the future too quickly in their minds. But here’s the thing. Even if the Trough of Disillusionment is hit, the long-term potential still stands. If you’re thinking about investing, decide what your long-term vision for Bitcoin or Ethereum or whatever is. Is it a store of value (like digital gold)? Will it be used for increasingly more transactions (like a real currency)? Something else?

My gut tells me that the core principles will be exponentially larger in time. If Bitcoin and Ethereum survive, they’ll be great investments over the coming decades. Wealth passes from the impatient to the patient. If not, too bad so sad.

Additional Resources

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