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Inside the Bubble

Bitcoin has the world captivated. Everybody from your barber to your grandmother wants to know what it is, but more importantly: How to make money off of it.

As of the time of writing, bitcoin could fall 90% from its current levels and still have outperformed stocks, bonds, and real estate in 2017. It has risen over 2500% YTD and counting. Many of the zealots of traditional finance have been crying bubble since 2011, when the price topped $30 for the first time before tumbling back to $2. The truth is, they’re right. Bitcoin is a bubble, and it has been a bubble multiple times before. But this may not be a bad thing.

Bubble conditions are generally defined as periods where speculation and irrational exuberance surrounding an asset get so feverish that the asset’s value begins to surpass its fundamentals. While this has arguably happened twice before in bitcoin’s history, neither time were the stakes as high, or the gap between price and fundamentals as wide as today. Bitcoin is in the middle of an identity crisis, just as the world at large is taking notice of it for the first time. People worldwide are buying bitcoin with no idea what it is, hoping that it will make them rich. The problem with this is that bitcoin doesn’t know what it is either.

The bitcoin religion has effectively divided into two warring sects. With Satoshi playing Muhammad, both sides claim to be fulfilling the true vision of their creator, and while violence has yet to break out, the community as a whole is more polarized than ever. On one side you have the “core” developers, who claim Satoshi never intended for blocks to exceed 1mb in size. Now that blocks are filling up for the first time, making transactions both slow and expensive, this side points at a store of value or “digital gold” case as bitcoin’s destiny. On the other hand, you have big-blockers who advocated a block size increase to alleviate some of bitcoin’s scaling issues. When neither side could come to an agreement, big-blockers forked off their own chain now known as bitcoin cash. This side believes that Satoshi always meant for the block size to increase when the original 1mb filled up, and they advocate for bitcoin being a peer-to-peer electronic cash first, store of value second.

Both factions claim to be the “real” bitcoin while denouncing the other. However, this dogmatic absolutism has alienated parts of the community, and divided bitcoin at the very moment it’s being shown the spotlight.

With droves of speculators climbing in expecting to get rich, bitcoin’s network is being pushed to its limit as both fees and average confirmation times are mooning. Bitcoin’s original promise of “low-cost, instant transactions” is getting further from reality by the day. The irony in this is that while its actual utility goes down, its value continues barreling upwards.

Historically, when speculators drove up bitcoin’s price only to have it come crashing down, the loss in value was ameliorated by the fact that bitcoin had utility and a clear value proposition. If bitcoin were to crash today it wouldn’t have that benefit, and its first mover advantage is all but squandered with plenty of viable alternatives on the market. What is bitcoin’s true destiny? Does anybody know?


Satoshi’s Prophecy

One thing we do know is that Satoshi Nakamoto was/is a genius, and that they thought ahead. The most calculated move they made was to stay anonymous, for the greater good of both themselves and the network. Maybe Satoshi knew that bitcoin would run into these scaling problems, and was intentionally vague on his intended solution. Satoshi was most likely fully aware of bitcoin’s limitations, which begs the question of why he seemingly left out a scaling solution. Maybe our deified Satoshi put such forethought into his creation that he designed it to fail spectacularly.

“They expect one of us in the wreckage, brother”

Satoshi originally proposed bitcoin to a cryptography mailing list in 2008. Some cryptographer activists identify as “cypherpunks”, a group that aims to spur social and political change through advanced cryptography methods. Satoshi could be described as a cypherpunk himself, and the original bitcoin proposal includes references to other cypherpunk innovations such as hashcash and Nick Szabo’s bitgold.

It could stand to reason that while Satoshi knew he had something groundbreaking, he also knew that it would need years of testing and protocol improvements to compete with established financial systems like JP Morgan, Visa, and Paypal. Perhaps, in another stroke of genius, Satoshi saw bitcoin’s future laid out before him. He knew that his project was revolutionary yet incomplete: bitcoin wasn’t meant to be the future- it was meant to market the technology that the future would be built upon. By tapping into human greed, Satoshi created the perfect martyr for blockchain technology, and along the way ushered in a new era of financial services. Just scrolling through coinmarketcap.com, you can find several bitcoin alternatives that fulfill Satoshi’s original vision, only cheaper, faster and with more efficient consensus than bitcoin.


Building a Better Future

The simple fact is that blockchain technology has come leaps and bounds since 2008. With bitcoin reaching mainstream success, the world’s most elite developers have come together for blockchain research around the globe. Breakthroughs have been made in consensus, infrastructure, and privacy that are too complicated to implement into bitcoin’s original protocol. Even if they could be, bitcoin’s increasingly political climate makes cooperation impossible. It is naive to think that the lofty goals often prophecized by maximalists can be reached by this technology in its primary iteration. For cypherpunk ideals to truly be fulfilled, for information and privacy to truly be free, we must accept this as fact and be prepared to move forward as such.

Source: Ari Paul, Blocktower Capital

For those who enjoy making comparisons to the rise of the internet, think of bitcoin this way. In 1993, Marc Andreessen released Mosaic, the web browser that first popularized the internet. While it was revolutionary at the time, and people were able to glean the wide implications of something so innovative, Mosaic was still far from the perfect implementation. Andreessen himself returned 3 years later to release Netscape, an even more powerful version that brought more people access to the internet. However, even Netscape was eventually squashed by Google, which has gone on to become the largest internet company on the planet.

Granted, there are many differences between internet and blockchains, but this analogy should serve to underline the unlikelihood that bitcoin will become the end all be all cryptocurrency.


Tech adoption curve. Forbes estimates we are at .5% global cryptocurrency adoption.

This memo might get construed as anti-bitcoin, but what it really is more than anything is pro-crypto. While the first mover advantage and Metcalfe’s law are significant benefits for bitcoin, using the network effect alone to justify bitcoin’s continued success is equally as naive as using it to justify the continued existence of current financial services… no matter how big or entrenched something is, people will eventually find their way to the best available alternative.

So is bitcoin a bubble? Definitely. But is that so bad? Yet to be seen. The collective conscious still has a long road ahead of it in terms of understanding blockchain’s potential. I do think bitcoin’s best value proposition now is as a digital store of value, like gold that doesn’t need to be housed in massive vaults and can be transferred with relative ease (compared to physical gold). Maybe Satoshi’s real vision is the one currently materializing. One thing for sure is that when this speculative bubble bursts, out of its ashes will rise a next generation protocol that takes the bitcoin experiment’s mistakes, learns from them, and completely disintegrates our current social, political, and economic infrastructure.

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