Untangling the blockchains and why your crypto choice matters.
I recently watched a video made by Economics Explained, a Youtube channel that I believe makes very good non-partisan economic videos. I highly recommend the channel as an unbiased educational Youtube creator. Therefore I was excited to see their recent video on Cryptocurrency released a few months ago.
However, I saw that they made a common and key mistake that I see in most standard economic videos covering cryptocurrency: the assumption that Bitcoin is a good representation of what buying any cryptocurrency represents.
I personally do not take a strong position on Bitcoin. I think it was a smart proof of concept and made a lot of tech nerds rich which I give my general thumbs up to for smart people having resources. However, I do agree with EE that as a general investment it is not particularly smart. Perhaps you can argue that it is a good cryptocurrency to first buy in order to be able to exchange for other tokens, but I think the key point stands that it does not have any inherent value because it does not create anything of value.
The bitcoin blockchain is only used to verify bitcoin transactions.
Yes, mining represents computational work, and that gives bitcoins value, but that work doesn’t actually do anything for the world. (In fact, environmentally it’s actually a major negative) Some crypto enthusiasts argue that bitcoin is performing the “work” of banks. Lots of people are willing to invest in financial institutions who only serve to move money about so why should this be any different? However, banks create value by owning assets that appreciate in value. When you put money in a bank and get interest in return, that interest at the end of the day comes from things like stocks or real estate, which create value for consumers through the companies or businesses they represent.
Okay, well then that's that. Bitcoin is just a fake bank for gamblers that doesn’t make anything of value and will eventually collapse. There’s truth to that argument if you observe Bitcoin in a vacuum. However, what it misses out on is assuming that the crypto space is just Bitcoin.
Far from it. That is like looking at the internet in the 90’s made up of porn and cat videos in the early days and arguing what value that holds? The value of cryptocurrencies is in platforms like Etherium that actually inspire productivity and creation.
The value of bitcoin to me, is just a way to buy Etherium (with cheaper transaction fees than going through USD).
However, the crucial point here is that Etherium, to me, has value. Why? Because I can buy things with it. Because developer time and artist time is valuable. I want to invest in the hard work and creations that people make on this platform. Because those creations require space on the Etherium blockchain, that means investing in ETH.
I’ll break down the key difference using exactly the same 3 points as Economics Explained. Currency, Store of Value, and Gambling.
Is bitcoin a good currency?
Well… not really. At least for me. I can’t spend it easily on physical items and most of the digital items I want are listed in ETH or other E20 tokens. So maybe its a slightly better currency than USD for my digital goods but why bother with the middle step?
Is Etherium a good currency?
Well maybe not for buying real-world items. But for me, it’s a pretty useful one. I like making and buying things on the Etherium blockchain, I have general use for $10USD of spending money every couple weeks just to tip creators and buy cool art. This was my initial justification for buying Ether. I wanted a thing (to post PixelArt) that I had to pay for in ETH. I didn’t need to break out much of my technical skills to want to and to be able to make that purchase either, so it seems pretty accessible as well.
Value: Is bitcoin a good store of value?
Well like gold, it is a fixed supply, and certainly is currently acting a bit like a typical store of value. But where I worry about leaving money in bitcoin long term is just that I don’t see what assets it owns. While it could certainly continue to be a good store of value, if all I want is to buy an asset like that I would buy gold or something more proven because the value of something as a store of value is largely determined by its historical value that causes people to put faith in its continued value. While I think bitcoin will always have some amount of continued value, I feel that relative to the currencies I care about it will eventually fall because it isn’t representing a real store of wealth or creating new value in the world.
Value: Is ETH a good store of value?
I think so. Why? Because it has a lot of collateral. Think about the store of value of gold like this: your gold has value because the general gold supply has value. Most of this supply is in large banks and countries. These supplies have value because they use the gold as collateral so that people will respect their debt when they make loans on products and services. These products and services create more economic value, and the gold becomes worth even more. Similarly, your ETH has value because the supply of ETH comes from the blockchain, the blockchain’s collateral is all of the things that are build using the infrastructure, every piece of digital art, every application running Solidity contracts, etc. These applications create more value through more people seeing and becoming interested in art and more people using the applications. Thus your ETH maintains and grows its value.
Gambling: Is Bitcoin a gamble?
Yes. Agreeing with the analysis of Economics Explained’s video bitcoin is a gamble because more money will be put into the system to get bitcoin then will ever come out of the system. For me this is a problem because, as stated, bitcoin doesn’t have an intrinsic value and is mostly not useful for anything other than maybe serving as a gateway currency to other coins. (Which I see ETH as a way better fit for so no reason for bitcoin, really.) Therefore, I don’t see any way for the total value of bitcoin to grow infinitely and at some point people will lose money.
Gambling: Is Etherium a gamble?
Yes (monetarily). In following with the definition of the video, it is true that people will put more money into Etherium than they will ever get out.
No (as determined by economic value). Here is the difference between Etherium and Bitcoin. Perhaps I put $10 into ETH. Then I spend $10 on a couple of Axies and a piece of digital art. I never withdraw my ETH. If I would have been willing to spend $15 on these items then the Etherium ecosystem has created $5 of economic surplus. This is defined as the difference between the amount of value someone receives from a product and the amount of money they had to pay for it.
So yes, for every dollar that someone makes on ETH appreciating someone else has to “lose” a dollar to buying ETH and not redeeming it. But these people likely do not view their investment as a “loss” because they received real value in the form of digital goods or services.
At the end of the day this boils down to what I think is important to understand about most of the crypto space. If you think of it as gambling you will lose. If you are just trying to predict where the next bubble will be you might get lucky but you’re not doing anything worthwhile. But…
if you are investing in products, creators, artists, and applications that you think are going to be successful, then you are doing just that, investing.
For start-up open source projects on Etherium, issuing an E20 token is like issuing stock. People buy the token with the assumption that the platform will eventually provide services that are only payable with that token. Therefore, by getting in early and buying tokens before the release of the product, they will be able to either buy more product later or sell their tokens to people who didn’t want to take the risk. Etherium got a lot of crap for the largest application for a while being CryptoKitties. Yeah, the fastest products to get to market are simple and overpriced. But that doesn’t mean they don’t act as proof of concept.
Nowadays you can invest in full-fledged video games, art galleries, censorship-free Youtube style video platforms like LBRY, and even social media and article sites like Cent where you can read this exact article!
Of course, to buy any of the tokens used in these games, or on these platforms, you will need ETH.
A word of caution. Because most people don’t know what to look for in buying a cryptocurrency, it is much riskier than buying traditional assets. It is also much less accessible to the average investor in terms of asset analysis. After all, to really understand the value of a cryptocurrency what you really want to do is understand the engineering skill, integrity of code, and design expertise that is going into its platform. But I think a simple tip is: don’t buy bitcoin, buy Etherium. Think about what real-world assets you are buying when you pay your money for a digital currency. Yes, the money may be digital, the product may be digital, but if it’s a worthwhile investment there will be real-world labor, skill, and applications involved in creating and using those digital assets.
Meanwhile, next time you hear someone talking about how worthless bitcoin is, make sure they know how to untangle their blockchains.