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“Crypto? Yeah I have bitcoin!”, says almost everyone when asked about their predictable foray into crypto investing. Bitcoin is quite the golden face of cryptocurrencies, and while it’s expected that rookie investors are inclined to embrace familiarity, a cursory understanding of why or why not bitcoin should first be established.
Blockchains and cryptocurrencies can be extremely esoteric. The idea of a transparent and equitable global network is ironically shrouded in mystery, with industry jargon promoting a warped sense of exclusivity. Which is why many a man on the street might be “into crypto” solely because of the allure of quick and eye-watering profits.
Some “normies”, a less-than-affectionate term for the crypto illiterate, are often excessively perturbed at the idea of an intangible currency, harbouring absurd suspicions that cryptocurrencies are an Illuminati-like Ponzi scheme. While their surmises are comical, they highlight a concerning lack of education; a growing population of investors who are either blindly attracted to or needlessly afraid of thrilling price rollercoasters, all while failing to understand the real value of cryptocurrencies – the underlying blockchain technology.
I’ve been told that I shouldn’t conflate blockchain and cryptocurrencies. But the very existence of each and every cryptocurrency is completely reliant on their constituent blockchains. The value of a cryptocurrency therefore comes from the utility of its blockchain, and it’s imperative that investors understand a blockchain before deciding whether or not to invest in a certain cryptocurrency.
So why invest in the world’s most well-known cryptocurrency? Bitcoin as a currency serves two purposes: a digital medium of exchange on its blockchain, and a potential store of value due to its limited supply (21 million btc). Instead of a central bank, a decentralised network of computers decides its tokenomics (the “monetary policy” of cryptocurrencies) and ensures its security.
Bitcoin is akin to a global currency, one that can be immediately accessed and exchanged regardless of location or social status. Countries like El Salvador are experimenting with using bitcoin as legal tender, due to its ability to be sent and received across borders without banks, therefore providing access to financial services for 70% of the country’s population who are still unbanked. On Wednesday, Bitcoin hit a new record high of USD 69,044, climbing by 346% in the past year, therefore giving it approximately 42% of the total combined value of all cryptocurrencies.
However, Bitcoin’s blockchain, the technology that powers its functionality, has limited utility. It’s simply programmed to be a more transparent payment system with a digital currency as the medium of exchange. Bitcoin is equivalent to a bankless internet banking system, one that does not allow for the development of smart contracts yet, which means that financial agreements (e.g. a loan) with predetermined conditions cannot take place. This begs the question of how Bitcoin as a currency and blockchain fits into the current crypto ecosystem that’s largely defined by the explosive rise of decentralised finance (DeFi) and non-fungible tokens (NFTs).
And Bitcoin isn’t exactly the best payment system either. It can only process a pitiful five transactions per second (TPS), while Visa can process 1,700 TPS. The blockchain has had to adopt a “Layer 2” solution, the Lightning Network – an additional layer that helps to process transactions therefore increasing the network’s scalability. But if a second layer is required, what’s the actual utility of the original Bitcoin blockchain?
“A day in crypto is like six months in the stock market”, said someone on Reddit. While cryptocurrency price fluctuations can be extreme, it also highlights how quickly the blockchain and crypto space is evolving. In Bitcoin’s white paper, Satoshi Nakamoto outlined the advantages of a trustless “electronic payment system” that will allow “two willing parties to transact directly with each other without the need for a trusted third party”. Nowadays, blockchains are that and so much more. The implementation of smart contracts on blockchains is arguably more groundbreaking than blockchains themselves. Smart contracts redefine the fundamental purpose of blockchains, and ironically brings Satoshi’s vision to reality – a trustless system powered by self-executing contracts which enables access to a range of financial/non-financial services without relying on a physical institution.
Bitcoin’s Taproot update – a major upgrade that will equip Bitcoin with light smart contract capabilities and faster transaction speeds – will soon go live. But according to my not-so-precise calculations based on the above Reddit quote, Bitcoin is already eons behind its competitors. Yes, there is increasing institutional interest, and Wall Street is trying to embrace the growing demand for cryptocurrencies via Bitcoin ETFs. But how much of this interest is due to Bitcoin’s utility in the crypto ecosystem? Is it because of the flawed notion that Bitcoin is a reliable store of value? Or is it simply because Bitcoin is the face of cryptocurrencies?
The DeFi and NFT movements revolutionised the blockchain industry because they accentuated the concept of decentralisation. Both innovations propelled blockchain technology beyond a peer-to-peer payment system. They enable users to control and secure their assets on a blockchain without relying on an intermediary, with smart contracts automatically executing the transfer of value. This is why smart contract-enabled blockchains like Ethereum (ETH) and Solana (SOL) are gaining popularity – because they are able to support what might be the catalyst for a more fluid digital economy. Ethereum, for example, is currently undergoing updates that will reduce the supply of Ether, which means that it could also challenge Bitcoin as a potential store of value.
It’s easy to get caught up in the ignorance and superficiality of cryptocurrency naysayers, or the greed of investors looking to capitalise on quick profits. But remember that the utility of a blockchain gives its cryptocurrency long-term value, especially in the current climate. While Bitcoin is truly the “OG”, Satoshi Nakamoto’s brainchild is like the ex-lover we all used to admire – basic.