Today is the start of Hereticon, an annual conference that celebrates heretical ideas. Why celebrate thoughtcrime? According to Hereticon:
While our culture is fascinated by the righteousness of our historical heretics, it is obsessed with the destruction of the heretics among us today
Most of the heretics of the past were wrong, just like today’s heretics. But history teaches us that leaps in human progress usually start with radical new ideas that are rejected by “experts.”
Ignaz Semmelweis, the Hungarian doctor who discovered the importance of handwashing in 1847, was universally ridiculed and forced into a mental asylum for advocating his views. Today, handwashing is one of the least controversial positions imaginable, but there is no shortage of radical ideas that will get you “canceled.”
While many blame “woke cancel culture”, “big tech”, or “big government, ” the root of hostility to heretical ideas is in our epistemology – our understanding of the origin of knowledge. To nurture radical new ideas, we need a marketplace of ideas that values both dissent and rationality. I believe that Bitcoin will play a major role in making these new marketplaces possible.
What Is The Problem?
The problem with “Big Tech Censorship” is not that big tech is run by the left. It’s that the enlightenment idea of objective truth has been replaced by tribalism. “Truth” is determined by group identity, not the relation of your ideas to reality. If a “majority” of “experts” say something is true then that is true.
Reality is objective – it exists independently of our opinions. The only way to obtain knowledge is through empirical evidence and a valid epistemological process – what we call “the scientific method.” The means to discover the truth are available to everyone with an Internet connection today. The problem is that intellectuals on both sides of the political divide no longer believe people to be capable of evaluating facts for themselves. They think that we believe whatever the groups we identify with tell us to think. If it is impossible to have a rational discussion about truth, then force is the only way that we can establish the “truth.”
The Importance of Dissent
Moral and intellectual progress requires all issues to be open to debate.
We should value disagreement because we believe that every bold new idea begins as a radical thought by a single individual. An open marketplace of ideas is required for the best ideas to flourish. Just as material markets require the freedom to adapt to a constantly changing world, so does the marketplace of ideas. Any society that forbids open debate faces stagnation, decline, and ultimately ruin. This has nothing to do with whether the entity doing the censorship does so through government censorship or through “community standards.”
It is fine for a community to exclude some views. A “community” is a group of people with like-minded ideas interests, and it is necessary to exclude disruptive individuals from such a group. But social networks like Facebook, Twitter, LinkedIn, TokTok, etc are not “communities.”
A social network is a platform for communities. Not allowing the communities within a platform to decide which views are acceptable leads to the decline of the entire platform. When such censorship is embraced by all social platforms, it leads to the decline of a society.
(Note: Politicians in democracies don’t like to censor directly, but they often employ the threat of censorship with Congressional hearings and the like. It’s usually impossible for users to tell whether a private platform censors of its own volition or under duress.)
More Closed Platforms Are Not A Solution
There are three reasons why it’s hard to compete with a Facebook or a YouTube:
First, 99% of the content that people want to post does not violate their rules. Of the 1% that is blocked, most is worthless, but .1% is vital commentary. It’s that .1% that we need to protect. It’s impossible to compete with Big Tech because that 99% of content has too much network lock-in for an alternative to succeed. (Sorry Parler, MeWe, Gettr, etc).
A second problem is that any alternative to Big Tech platforms will start with users who Big Tech rejected. The alternative platform will require those users to survive. By virtue of being rejected by Big Tech, the alternative will be banned by Big Tech for refusing to censor “unacceptable” content. They will be kicked out of app stores, their payment provider will cancel, their web hosts will cancel, their SMS, auth, email, KYC, DNS, firewall, CDN, messaging, and every other service provider will cancel. As a CTO, I depended on over a dozen different services to power my organization, and over the course of 2020, most of them updated their terms of service to justify censorship of politically incorrect customers.
The third problem is that running a platform is expensive. To pay for the platform, you need advertising. But if most (or any) of your content is what Big Tech rejected, you will find it difficult to attract advertisers. If you try to get users to pay for your service, your payments processor will fire you, as OnlyFans found out.
The Need For Decentralized Alternatives
The more intolerant the legacy networks become, the more motivation and expertise will flow into decentralized alternatives like Mastodon, PeerTube, ActivityPub, and Diaspora.
However, content is not enough. To enable an alternative, we need to decentralize the content layer, the Feed, and the value layer.
Decentralizing Content
IPFS is a peer-to-peer protocol for censorship-resistant content storage.
Decentralizing The Feed
The Feed is the personalized list of Facebook posts, Instagram photos, Twitter Tweets, & TikTok/YouTube videos you see to discover new content on each platform. The Feed can never be neutral or objective. The Feed is tailored to your interests, but it depends on both machine learning and product managers’ opinions about what you like. Because there is always far more content created than you can consume, each platform has to decide how to filter that content to maximize the appeal of their platform. This is necessarily a subjective process – should you see more news posts or posts from friends? Should you see more inspirational, graphical, or factual content? What content should be excluded entirely? These questions are data-driven, but ultimately humans decide on the tone of each platform. The Feed is very good at being addictive and is one of the main reasons why second-tier platforms cannot compete. The Feed is expensive to maintain, but being customized also makes it very valuable.
I would like to see Content separated from Feed. Search engines are examples of Feeds competing for the same content, but we don’t have an equivalent for social networks. You should be able to create Content once, then choose what Feed service to use to discover other’s content. If a Feed becomes too intolerant or allows too much spam, I could switch to another Feed to find my content. My friends would discover my content through several Feeds, tailored to their vision of content discovery.
Decentralizing The Value Layer with Bitcoin
Until we have a censorship-resistant Internet, we cannot have censorship-resistant social networks. To have a censorship-resistant Internet, we need censorship-resistant money, because running social networks is expensive, and centralized payment services are single points of failure. Space on the feed has enough value to pay for decentralized networks, but we need censorship-resistant money for advertisers to pay for space on the feed. Bitcoin can fulfill this role.
What Can I Do?
Support decentralized payments by using Bitcoin
Use Brave browser, or another browser with built-in support for decentralized content hosting like IPFS.
Publish content on blockchain-powered content platforms like Steemit
My survey of 2500+ crypto scam victims identified some key signs that a crypto project is a scam. Whether it’s a scam from the start, or just doomed to fail and waste all your money, here are six ways to tell if a crypto project is a scam:
1: Does this project have a legitimate profit model?
There are a few legitimate ways to make a profit in crypto, such as mining, lending, staking, and yield farming. Learn what each means to so can evaluate if an opportunity is legitimate. Never invest money in projects whose business model is not disclosed or that you do not understand.
Legitimate CeFi platforms clearly state what they do with customer funds, list their fee schedule, and expected returns. DeFi platforms should list token allocation, a link to the whitepaper, and smart contract source code. Never invest in Defi projects without a whitepaper or documentation stating the tokenomics.
2: Is this project feasible and sustainable?
Even if a project is legitimate, it needs to have a business model that is scalable and sustainable. For example, many projects aim to create coins for very narrow niches, like a token to pay your dentist. Such a project will never achieve a very large market cap. It’s also not sustainable because the token doesn’t add any value to its target market, and so it will never pay off for investors.
3: Does this project have independent verification or third-party certification?
Be extremely careful about platforms that offer to trade your money. There are only a few legitimate ways for businesses to trade customers’ money. In the US, they must be either a hedge fund or registered brokerage. They will be licensed with a regulatory body such as FINRA & SIPC or the SEC (via FORM D filings). Be aware that scammers are impersonating licensed financial professionals, so it is necessary to independently verify their contact information via FINRA BrokerCheck, LinkedIn, etc.
Note that hedge funds are not even legally allowed to directly advertise their services, so if someone is messaging you via Instagram and asking for deposits in anonymous crypto payments, it is 100% a scam.
In DeFi, services like RugDoc rate the legitimacy of financial platforms. RugDoc will tell you if a project has passed independent security audits like Certik. Never invest in a DeFi project without a security audit, or if rated as high risk by RugDoc.
4: Can you independently verify this token or platform?
A common scam in crypto is to impersonate a legitimate platform or token. To avoid this scam:
1: Always access crypto services through their official website and never trust “support” links found through search engines or social media. Scammers are placing search ads that fool you into thinking their fake website is a legitimate platform.
2: Be very careful of social media recommendations. Always check independent sources like RugDoc (for DEFI) or FINRA (for CeFi)
3: If buying a token, confirm the contract ID matches at CoinMarketCap.
5: Is this project run by a reputable team?
Many DeFi projects are anonymous, but CeFi projects should always disclose their management team. Always check that the bio on the project page matches what you can find on LinkedIn and Twitter.
Launching a cryptocurrency exchange is an incredibly technical endeavor. Does the management team have the required technical experience or are they just paid celebrities? Do not simply look at the number of Twitter followers they have, as that is easy to buy.
Conclusion: Signs of a crypto scam:
According to my survey of 2500+ scam victims, fraudulent schemes have a few things in common: unrealistic returns, high-pressure tactics, sales pitches via messaging platforms, no mention of fees, & lack of reputation.
Scammers have deployed thousands of bots on social media platforms like Instagram, Facebook, LinkedIn, Telegram, and Twitter to push their platforms or pump up their tokens. Never trust social media recommendations, even from a friend, as scammers are hacking profiles to push their scams. Check to see if a project has a legitimate community on Reddit or Discord.
Gold and Bitcoin are fungible, durable, portable, divisible, & scarce. Both have limited acceptance today: there are few goods & services you can buy directly with gold or bitcoin.
But Bitcoin has six advantages over gold:
1: Bitcoin is far more portable than gold. You can send it anywhere in the world instantly for a trivial fee.
2: Bitcoin transactions can be instantly and remotely verified. It’s impossible to fake a Bitcoin transaction. Verifying receipt of gold bullion is an expensive, error-prone, and physical process that requires either trust or expertise in gold assaying.
3: A bitcoin is divisible into 100 million satoshis. Gold bullion can be expensive or impractical to split into tiny fractions.
4: The supply of Bitcoin is completely independent of the price. The creation of Bitcoin follows a fixed schedule with a hard limit of 21 million. The supply of monetary gold increases when the gold price goes up, due to increased mining and redirection from industrial use.
5: Bitcoin is relatively easy to secure. You can memorize a Bitcoin seed. Bitcoin can only be stolen by improper security & privacy practices. On the other hand, even the most secure gold vault is vulnerable to armed theft by criminals and governments – as has often happened.
6: Bitcoin currently has limited vendor acceptance, but you can use Bitcoin debit cards with point of sale conversion to fiat. Gold can be used as a store of value, but in most of the world, it involves much effort to be exchanged for goods. There is already one country that uses Bitcoin as legal tender (El Salvador) and this number is likely to grow.
So Why is Gold More Valuable Than Bitcoin?
Gold does have one important advantage over Bitcoin:
Gold has been used as a store of value for all of human history, all over the world. Bitcoin is only 13 years old. This is why the market cap of above-ground gold is currently 10x that of Bitcoin. On the other hand, the fact that Bitcoin has grown nearly 200% per year to a market cap of nearly $1 trillion demonstrates that it is rapidly gaining credibility.
Over the long run, I expect the fundamental advantages that Bitcoin has over gold to be reflected in their relative market caps.
But for every crypto scheme which is outright theft, there are ten trash crypto-assets created mainly to take your money and run. Each project has a story of why they are a great investment. But dig deeper and the business model is a mirage. What the founders really want to do is create as much momentum as possible and sell at the top before the illusion of value vanishes.
Sometimes you don’t have to dig very deep. For example, “BabyCake” is an explicit Ponzi scheme, if you look beyond their promises of “bringing passive income into people’s lives.” It’s one of the first tokens to have a Ponzi scheme built right into the smart contract. I count 63 other “baby” named pyramid schemes.
Usually, though, the catch is buried deeper and requires understanding the crypto ecosystem. Let’s review why there are so many scams and trash coins in crypto and how to avoid them.
Why are there so many crypto scams?
Anonymity
Cryptocurrencies are only pseudo-anonymous. It’s impossible to know who owns some coins from an address alone. But if you interact with the legacy financial system, for example, by cashing out your gains for fiat, your identity can sometimes be found. If you commingle your funds by moving them together, it’s possible for a chainanalysis algorithm to link activity to an identity. When I try to help victims of fraud, I can often follow the transaction trail to the cold-wallet of some exchange where the crooks traded Bitcoin for a local currency.
I think the bigger problem is that our legal systems aren’t adapted to deal with crypto fraud. Our legal institutions don’t take small-scale crypto fraud as seriously as fraud with “real” money. Lack of international cooperation means that even if I know which exchange was used to cash out stolen crypto loot, they are unlikely to cooperate with local law enforcement.
Bleeding Edge Technology
Bitcoin and cryptocurrencies are still very new. The tools needed to secure Bitcoins are still evolving and rough around the edges. I predict that in a few years, we will carry credit-card-sized devices with biometric readers that make storing and using Bitcoin both safe and foolproof. Until then, the tools for storing and transacting cryptocurrencies are rapidly evolving. There are safe methods to keeping your crypto safe (like hardware wallets, multi-sig, and steel seed backups), but many people aren’t aware of the proper techniques. Accidental and malicious loss of funds is, unfortunately still common.
Transaction Finality
A bigger reason for fraud in crypto is that crypto transactions are irreversible for almost all coins. In the legacy financial system, a fraudulent credit card charge, bad check, or unauthorized wire transfer can usually be reversed. If the theft is big enough and your lawyers are good, the legal system will tend to intervene on the victim’s side. In the crypto space, however, no matter how unjust the theft, there is nothing that can be done.
(Keep in mind though that government theft of savings through inflation and taxes is a far bigger problem than theft of crypto. While this is unfortunate for victims of theft, transaction finality is one of the primary reasons why Bitcoin is so revolutionary: it is impossible to conduct legal plunder of people’s wealth.)
A Free-Market Alternative to Wall Street
“Wall Street” (i.e. traditional securities markets) is often portrayed as the epitome of capitalism. The reality is that the government has regulated most of the profits out of securities available to the non-elite. Crypto-assets and exchanges allow novice investors access to venture capitalism for the first time since the Securities Act of 1933 limited investments in unregistered securities to “accredited” investors. Initial Coin Offerings offer normal people the ability to invest in startups without having to be worth or put up millions of dollars. DeFi (decentralized finance) exchanges operate using smart contracts, without any centralized entity to regulate. With DeFi, anyone to mint and create a market for a new token, outside the ability of any government to regulate.
The flip side is that just because everyone can create and sell their token does not mean they have a viable business model or any technical skills. All you need to be able to do is market your coin, not do anything useful with it. The vast majority of crypto projects trend back to a value of zero.
Bitcoin’s Success Inspires Copycats
Most crypto scams are not outright theft but an attempt to make a quick buck by riding on Bitcoin’s coattails. Profiting from Bitcoin’s rise requires an initial buy-in and patience. Want to make billions with an investment of zero? Too impatient for a mere doubling of your money each year? Just copy Bitcoin’s code, change a few parameters (invent some justification why they are needed) and launch your own altcoin. Repeat the scheme a few more times and get 12,881 crypto-assets tracked by CoinMarketCap.
Many projects start out well-intentioned. The founders may want to be revolutionaries just like Satoshi Nakamoto or they might have some justifiable disagreements with the team that maintains Bitcoin. However, the decentralized nature of crypto assets means that once a coin is out there, speculators will run with it. Quite often, the founder exits early with a small fortune and the project evolves in a completely different direction. The founder of Dogecoin sold everything to buy a used Honda Civic. His coin now has a $32 billion market cap.
Buy And Hold Your Entire Crypto Portfolio In Bitcoin
The only guaranteed way to avoid falling for a crypto scam is to keep 100% of your crypto portfolio in Bitcoin. Investors fall for crypto scams when they try to beat the returns of Bitcoin through a variety of other coins and schemes.
Let’s analyze objections to a 100% Bitcoin portfolio and how it gets investors in trouble:
Objection #1: Bitcoin’s returns are not good enough
No other cryptocurrency can match Bitcoin’s track record. Consider Ethereum, which has beaten Bitcoin over the last 4 years. But this assumes you had the foresight to participate in Ethereum’s ICO. Ethereum is up 2.7x since its 2017 high, whereas Bitcoin is up 3.3x. The point is that you’re not missing out by not buying the latest hot altcoin. By the time you hear about it, any potential for astronomical returns is long gone. If you had bet on Ripple when it was #2 In 2017, you would only have 1/3rd of your portfolio left.
The only way to become a successful long-term investor is to study the fundamentals of an asset, not its price. Bitcoin is the future of money. No other altcoin comes close to Bitcoin as money. Bitcoin’s top competitors are smart contract platforms of various kinds. Their usefulness for real-world business models is currently unproven.
Objection #2: You heard some altcoin is better than Bitcoin
Novice Bitcoin traders want to be above-average investors. Of course, we can’t all be above average. But many nonetheless try to add some extra alpha to their portfolio by buying a hot new coin or timing the market.
Those familiar with the efficient market hypothesis understand the difficulty of consistently beating the market. The prices of assets reflect all current information known by participants. Unless you can consistently evaluate the fundamental value of assets more accurately than others, you won’t beat the average. When you try to time the market, your emotions work against you, urging you to buy after an asset goes up, and sell when the asset is low.
Of course, if you invest in Bitcoin, you’re already disagreeing with the vast majority of investors who have little or no exposure to it. Why not disagree a little more and buy some altcoins? Here is the difference:
Bitcoin has a simple business model (“Hard Money You Can’t F*ck With”) and a 12-year track record. Altcoins are all either a technical variation on Bitcoin (fba vs proof of work, or dag vs blockchain) or an entirely different business model (smart contracts). It’s much more difficult to understand the technical merit and value proposition of these assets. None have Bitcoin’s track record.
As a managing partner of a cryptocurrency hedge fund, it is my full-time job to research and write about cryptocurrencies. Yet the vast majority of my crypto portfolio is in Bitcoin because I do not feel qualified to judge the technical merits of various projects. I have a background of 17 years in software development and architecture. I personally designed a Bitcoin exchange. Do you think you can do better based on YouTube and Twitter personalities?
For example, even if Dash is technically better than Bitcoin, is it going to beat Bitcoin’s network effects? What’s to stop Bitcoin from adding whatever killer feature Dash offers? Are you qualified to make these judgments, or are you buying based on the rumor mill?
If you are personally involved in a crypto project, I understand your decision to invest. But don’t expect to beat Bitcoin based on scrolling crypto news sites.
Once you master the advanced trading screen, you feel like you have the key to mastering the markets. By taking a few online courses, you can develop a unique system that consistently earns you profits. During a bull run, when everything is going up, it’s easy to conclude that you are in fact a pro.
It is possible to earn a consistent edge in crypto – just not by you. Crypto markets are manipulated by whales (big traders) with powerful marketing machines. There is no way to predict their actions, but they will use your emotions against you. They also pay lower trading fees than you, while your profits are eaten up by fees.
Objection #4: You want to diversify your crypto portfolio
One of the main reasons people hold a basket of crypto assets is that they don’t know which will be successful in the long run. This is a reasonable concern. In practice, however, choosing which assets should go into your portfolio is very difficult.
The principle behind diversification is that by holding uncorrelated assets, you can reduce the volatility of your portfolio while maintaining the rate of return. Diversification works great for the stock market because the profit margin tends to be the same across different sectors. Also, the stock market has 120+ years of precedent to predict future trends.
The same isn’t true of the cryptocurrency market. The price of crypto is based almost entirely on anticipation of future demand, not current demand. Bitcoin’s price depends much more on speculation than current demand as money. Furthermore, money is a natural monopoly, so it’s likely that only a single coin will emerge dominant. (Likewise for smart contract platforms.)
If we assume that a single asset will emerge dominant, which one do we choose? One option is to look at the total market capitalization of each coin (hence CoinMarketCap.com being the #1 crypto site). But this is misleading. If I create a token called “Veksler Coin” with a supply of 1 billion and sell a single coin to my friend for $1, I instantly have a $1 billion dollar market cap with a $1 inflow. MarketCap rankings are key for adoption, so there is extremely strong pressure to manipulate them. Even though Bitcoin has less than a 50% market cap, the vast majority of fiat inflows go to Bitcoin. In short, there is no reliable metric for market capitalization.
Some organizations advocate automatically rebalancing your portfolio in response to market cap changes. My fund does that to an extent, though we only trade coins that our research has vetted. However, if you are managing your own portfolio, are you prepared to continually rebalance your portfolio — and pay the capital gains tax on any profits?
Objection #5: You want to earn passive income from staking/yield-farming/crypto lending
Many Bitcoin investors believe that it isn’t enough to hold Bitcoin. You don’t just sit on your cash, right? You invest it in a productive enterprise to earn a return. Just holding an asset is speculation, and that’s bad, right?
There are two problems with this reasoning:
First, Bitcoin is fundamentally different from fiat money. The problem with fiat money is that it’s an inflationary asset. You have to put your money to work just to preserve your wealth. By contrast, when the quantity of money is fixed (as with hard money like gold or Bitcoin), a growing economy means that the share of wealth represented by each unit keeps increasing. Furthermore, the adoption and therefore demand for Bitcoin is rapidly increasing. Bitcoin is not just a static asset like cash or gold. It is also a money transmission network that provides ongoing value to people. Simply holding Bitcoin is an investment into the future of money.
Is a few extra percent return on top of Bitcoin’s 200% average worth risking your principal?
The second issue with many “crypto-investments” is their inflationary design. Consider staking. Cardano staking returns a 5.x% APY reward rate. Cardano also has a 5.7% inflation rate. You must stake to preserve your wealth. This is Cardano’s way of motivating users to delegate their ada to trustworthy stake pools. Staking may be a legitimate way to secure a crypto asset, but it isn’t a legitimate income stream.
More egregiously, consider coins like CAKE, which has a 73% APR (previously 450%+) in the Auto CAKE Syrup Pool. How is PancakeSwap able to offer those returns? There is a handy chart here. Clear as mud? The supply of CAKE is completely arbitrary and the reward rate is a combination of investor subsidies, high growth rate, and high inflation that changes day by day completely at the whim of the CAKE governance process. It’s fun to gamble with, but should you trust your life savings with this scheme?
Objection #7: You want to trust an expert (or algorithm) to trade your crypto
Never expect other people to be smarter with your money than you.
Many people will give you advice on how to invest your money. But just because someone made a lot of money managing other people’s money, doesn’t mean they did their customers a favor. Extensive research shows that index funds perform better than actively managed funds. Crypto isn’t any different.
Keep in mind that the volume numbers of many exchanges on CoinMarketCap are fake. It is much easier to manipulate the prices of crypto assets than you would think. Twitter, Telegram, and YouTube are filled with pump and dump schemes. If an investor finds a consistent advantage in the market, he will not give it up by publicly sharing it. Only those who can’t make a living by trading run YouTube channels about it.
The only reputable actively traded crypto funds are crypto hedge funds. They are open to accredited investors and have minimums of $50K and up. Be very clear on the value they are providing over you just holding Bitcoin before you decide to invest in one.
Conclusion: to avoid buying trash crypto that wastes your money, stick with Bitcoin
The crypto space moves fast. Dozens of new coins go live daily. The top 10 coins today look very different than five years ago. I can’t promise you who the leaders in this space will be in the future. What I do believe in is that fundamental value is what drives long-term trends. The asset that has the most universal business model, can scale to meet consumer demand, has the biggest real-world network, and the most robust community is Bitcoin. If that changes, I’ll be the first to let you know.
If Bitcoin and other cryptocurrencies were to disappear tomorrow, what legacy would they leave behind?
I can think of three main impacts:
First, Bitcoin raised awareness of the flaws in fiat money, the superiority of sound money, and the potential of people to trade with each other without third-party intermediaries.
Second, Bitcoin has provided a life raft to millions of people under regimes suffering hyperinflation (like Venezuela), confiscation (like India), or currency export controls (like China). These people have been able to safeguard and use their savings.
Third, Bitcoin has advanced the state of cryptography, from a plaything of spy agencies and banks to a ubiquitous privacy layer securing the information of the entire world.
While each of these points could be an essay, I want to focus on the third impact today, starting with the state of cryptography before the invention of Bitcoin.
In his 1988 “Crypto Anarchist Manifesto“, Timothy C. May introduced the concept of crypto-anarchism, the idea that ubiquitous encryption would allow total freedom of trade by blocking the ability of governments to spy on and thus interfere with markets.
Inspired by his essay, thousands of aspiring “crypto-anarchists” (like me) installed software like PGP/GPG and tried to bring about the revolution. Then we ran into a few problems:
First, the software was way too complex for laypeople to use. Only dedicated hackers have the ability and patience to encrypt our communications. As long as only a few cooky radicals used cryptography, there was no incentive for merchants to adopt it. Likewise, email and messaging platforms were not encrypted, and using encryption branded you as a radical, and maybe even a criminal.
Second, the public did not believe in the potential of encryption. This was for two reasons: First, cryptography was seen as something for the NSA and CIA, not the public. Until 1992, cryptographic algorithms were on the U.S. Munitions List as Auxiliary Military Equipment. While using encryption within the U.S. was protected by the first amendment, it was illegal to export strong encryption outside the U.S., which crippled the commercial cryptography market. Second, it was believed that hackers could break cryptographic algorithms — it was simply a matter of applying sufficient computational power. To some extent, until the adoption of AES in 2001, this was true.
The third problem we ran into was conducting an anonymous exchange. There was no way to transmit value without eventually involving the legacy financial systems, which were becoming less and less anonymous. Efforts to create a digital proxy for gold such as e-gold and e-Bullion survived for a time, but were shut down by the U.S. government around 2009. The Foreign Bank Account Report of 2010 was part of a wave of global regulations which ended banking secrecy worldwide.
This context is important to understand the import of Bitcoin’s invention in 2008:
Until Bitcoin, the entire field of cryptography lacked strong real-world validation. While the banking industry used things such as RSA tokens and browsers used SSL for decades, their security was unproven. Because it is generally possible to reverse or void legacy financial transactions, the financial industry does not face a strong motivation to ensure the integrity of its cryptography.
As Bitcoin’s market cap grew from $0 to over $1 trillion today, larger and larger sums were protected by cryptography. For the first time, there was actual value behind cryptographic algorithms, and the entire field of cryptography began a rapid evolution. A $1 trillion prize is available to anyone who can subvert the security behind Bitcoin. This is an enormous incentive to advance the entire system of cryptography, from better algorithms to the ecosystem of software and hardware devices.
In 2021, the entire world has moved online. 67% of the world’s population has a mobile device – nearly all adults, and quite a few children. Within a decade, nearly all of those users will use a smartphone, which facilitates not only voice conversations but embedding all aspects of one’s life – business, shopping, education, romance into the global Internet. Thanks to advances in cryptography, we’ve seen the vast majority of that communication moved from plain-text to encrypted networks. With the notable exception of Chinese platforms, the most popular apps now use P2P encryption. WhatsApp, Telegram, and Signal are end-to-end encrypted, so no individual or government can spy on them. (Apple iMessage is E2E encrypted when iCloud iMessage backups are turned off). VPN networks have gone from corporate and esoteric to cheap and ubiquitous. In 2011, I struggled to set up my VPN while living in China to evade censorship. In 2021, in the U.S. I use my home VPN like millions of other Americans to enhance my privacy. It’s fast, invisible, and costs under $2/month.
Today, all my computers and backups are encrypted, and they come with hardware-level encryption so that there is no impact on performance. I secure my access to Google, Facebook, and other popular services with U2F hardware tokens. My Bitcoin is secured by hardware wallets that incorporate plausible deniability and multiple cryptographic signatures.
While we can’t simply give Bitcoin credit for all these achievements, embedding value in communication networks has been the single most powerful incentive for the world to step up its security game.
Observe that after the NSA paid RSA $10 million to backdoor the security tools used by the world’s largest corporations, it took from 2006 to 2013 for the world to exploit the flaws in RSA. By contrast, cryptocurrency exchanges and custodians are a much more lucrative target, and thus face much stronger pressure to keep evolving their security practices. When Northrop Grumman was hacked with the RSA exploit, some Chinese or Russian agent received a promotion, whereas the hackers of Mt Gox, Binance, and dozens of other exchanges were set for life, with little fear of repercussions.
Today, I am a lot more skeptical that ubiquitous encryption will bring about Timothy May’s dream of a crypto-anarchist utopia. However, I think there is a very good case that the invention and adoption of Bitcoin has dramatically advanced global privacy and financial autonomy.
When Robinhood disabled customers from buying GameStop, some people in the WallStreetBets subreddit suggested a need for a “decentralized brokerage.” Others said that “GameStop is the new Bitcoin.” Yet others decided to target the Dogecoin cryptocurrency, which spiked over 500% before it failed to process transactions due to overload.
The premise behind these ideas is hilariously wrong, but it’s worth exploring why.
It’s not surprising that young people growing up in the age of decentralized and censorship-resistant cryptocurrency exchange expect stock exchanges to be decentralized and censorship-resistant too.
Stock exchanges do exist to make business ownership accessible to everyone. Unfortunately, while trading stocks has become much cheaper and easier thanks to technology, the value of owning stocks has fallen dramatically.
To be listed on a stock market, a company has to pass many very expensive regulatory hurdles. But by the time a company goes public, much of the risk (and therefore profit) has been taken by venture capitalists and private equity investors.
The 2001 and 2008 financial crises led to the 2002 Sarbanes-Oxley and 2010 Dodd-Frank Act. These regulations made it much more expensive to go public, which has led to an over 50% decline in the number of publicly-traded companies. There are now just 3,530 publicly traded companies in the US. Anyone can buy a stock on their phone today, but by the time the government lets the company sell you shares, most of the profit potential has already been captured by wealthy venture capitalists and private equity investors. It’s no wonder people are looking at cryptocurrencies for more risk and return.
Back to the idea of a “decentralized exchange.” We think we own the stocks we buy, but that is not legally true. Cede and Co. legally owns all publicly issued stock in the United States – over 50 trillion dollars worth. It processes over $500 trillion and 325 million trades in these stocks on behalf of individual investors. New York State appointed Cede as the central securities depository in 1973, and all stock exchanges settle their transactions there.
You might think that when you buy a stock, Cede enters your name in a ledger somewhere, but that’s not true either. Cede only records the “street name” — the name of the brokerage which holds the security. The brokerage (ETrade, Robinhood, etc) is responsible for tracking who has rights to shares. You can request to get paper share certificates issued on your name (like investors used to get), but no one does this anymore.
This is a very simplified version of how stock ownership works, but I hope you can see why the idea of a “decentralized brokerage” is absurd.
On the surface, a centralized cryptocurrency exchange work in a similar way. When you buy Bitcoin on an exchange, you get a right to some amount of cryptocurrency. Until you withdraw it to your wallet, you only have a claim to your assets.
The big difference between a share of Gamestop and Bitcoin is that you can take purchase and take possession of Bitcoin without any intermediary. Whether you use a decentralized exchange, buy from a friend, or mine it yourself, no approval is needed for the transaction, and no authority can block the trade or take it away. It’s also impossible for anyone to devalue your Bitcoin by issuing more of it beyond the set mining rate.
These are the real reason why Bitcoin has value. Eventually, the GameStop share price will fall back down to reflect its fundamental nature as an outdated and failing business model, while the Bitcoin price will keep rising as users validate its fundamental nature as an alternative to the failing system of central banking.
What about Dogecoin? If the whim of the members of an investing community drives cryptocurrency prices, can Bitcoin achieve any kind of long-term stability? The Dogecoin outage is a clue.
The Doge network does not have enough nodes to process transactions. The reason Bitcoin has been able to hold a dominant market share since 2009 is that it has the biggest ecosystem of miners, users, and service providers. Unless another cryptocurrency obtains a compelling technical advantage, and the Bitcoin network is unable or unwilling to match it, Bitcoin will keep its lead.
Here’s the short version of why he’s wrong: Yes, Tether creates systemic risk for Bitcoin. But the key claim that new Tethers are fraudulently created without dollars to back them is pure speculation. Furthermore, the impact of a Tether collapse decreases as the ecosystem grows, so there’s no need to be “frantic” about a “crypto doomsday.” Finally, stablecoins like Tether should not be confused with true cryptocurrencies like Bitcoin, which do not fall in the same category of risk.
Speculation about whether Tether is backed by dollars has been going on almost since the currency was created in 2014. Tether is the primary onramp to buying cryptocurrencies on many exchanges, so during Bitcoin bull markets, Tether issuance does too. This fuels speculation about whether Tether is backed by dollars. It’s a fair question to ask. But note that Tether honored withdrawals from 2017 to 2018, when the price of Bitcoin fell from 20K to $3.2K. Total market capitalization decreased from $821 billion to $105 billion, and Tether’s market cap fell from 2.8 to 1.6 billion. I question the accuracy of all of these numbers, but it’s clear that Tether weathered a major selloff.
At this point, everyone in the know has accepted that Tether is less than 100% backed by dollars, but as long as the crypto selloff is not too severe, it has enough reserve to weather most storms. Even if Tether comes up short and becomes unable to honor all withdrawals, a partial devaluation will result in a haircut for Tether holders, not a doomsday for a market that is used to huge day to day swings.
Let’s speculate on a key question: if Tether isn’t a fraud, why don’t they perform an audit and come clean about their books? The answer is that crypto occupies a legal gray area, and exposing all their accounts would put Tether’s banking relationships at risk. Until about a year or so ago, banks categorically avoided any crypto business. They would close accounts of consumers who wired money to crypto exchanges and scan peer to peer payments for any mention of crypto. Legitimate crypto entrepreneurs had to stash vast amounts of cash like drug dealers cash because they couldn’t maintain any bank accounts for long. My partners and I were very fortunate to have relationships to open a bank account for our hedge fund in 2017.
Now imagine how difficult it would be for Tether to store billions of dollars in a fully disclosed manner. It’s clear now that Tether decided to obscure their banking relationships and use less-legitimate partners, and lost some of their funds as a result. Today, fully audited stablecoins such as USDC and USDG compete with Tether, but their market share is still a minority.
Regulated stablecoins are a great solution for many, but not all. For a stablecoin to be audited, their banking partners require strict KYC, and exchange partners that redeem those coins must obtain government licenses. This means that there is an ongoing demand for stablecoins that can be redeemed in a less-regulated environment. This is one of the reasons why Tether is so popular: it helps crypto traders work around currency controls in various Asian countries, especially a big one that starts with C. The other reason is that Tether allows less-regulated exchanges to exchange in leverage, market manipulation, and other practices that regulated exchanges can’t get away with. Still, the bottom line is that stablecoin competition is great and lowers the overall systemic risk posed by Tether.
Finally, a stablecoin like Tether should not be confused with Bitcoin. There’s no doubt that market manipulation, massive leverage, and fake trading numbers dramatically inflate the demand for crypto and market cap numbers during each bull run. However, unlike a Ponzi scheme, Bitcoin recovers after each crash, even as most other cryptocurrencies falter. Bitcoin serves a practical purpose and that in turn, drives legitimate long-term investors and institutions to Bitcoin.
Tether may collapse one day. But with ever-growing competition from audited stablecoins, there’s no reason to think that it will take the entire crypto market with it, that it will happen soon, nor that Tether holders will be left with nothing.
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2022 Update:
A year later, Tether and Bitcoin are doing better than ever. Furthermore, Tether now represents a minority of stablecoin holdings, with the new players being fully audited and even US-based. Tether publishes details about its holdings and has completed *seven* independent audits that confirmed that Tether is indeed fully backed. (I tried to link to their audits, but Facebook blocks it as “spam”)
But most importantly, what all critics missed is that Tether *had* to be secretive about their holdings because creating a stablecoin had no legal precedent. Tether pioneered the field and made it possible for all of its fully-regulated and compliant competitors to exist.
Regulators are hostile to innovation, and entrepreneurs often have to take risks and prove that their ideas are sound before their business model is accepted as legitimate.
I’ve seen people lose their Bitcoin in every way imaginable, and I want to help you avoid the most common mistakes. Are you thinking long-term? Will your storage medium last 10 years? Will your family be able to access it in the event of your death? Have you considered that the same events that will cause Bitcoin to go up in value may cause you to lose control of it?
What is the best way to store Bitcoin?
In 2019, a hardware wallet is unquestionably the best way to store Bitcoin. There are three good options: Trezor, Ledger, and KeepKey. I prefer the Trezor, but pick any of them, then write down your seed on paper, and put that paper in a safe.
What’s your excuse for not using a hardware wallet?
Most of you are not using a hardware wallet. You keep Bitcoin with an exchange like Coinbase, or an app running on your phone or desktop. But these come with major risks:
Will your Bitcoins survive the shift to a Bitcoin economy?
Bitcoin is an extremely risky investment. If Bitcoin goes up tenfold or a hundredfold, what will come down? It could be the dollar’s value. It could be the banking sector. It could be the entire global economic regime. We have no idea how governments will react: will they try to ban Bitcoin, confiscate it, or embrace it? If you are relying on someone else to keep your Bitcoin safe, will they survive that change?
Don’t trust exchanges and other third-party custodians
When you buy cryptocurrencies, you are betting that our economy will experience a dramatic shift to digital money. We have no idea which businesses or apps will survive that shift or how long it will take. Imagine if you had to pick just one company to bet on the future of the Internet during the dot com boom. Are you smart enough to pick Amazon.com rather than AOL or Pets.com? The only thing that you can trust to survive almost any economic upheaval is a backup stored on paper (or even better, metal) under your control.
Don’t trust desktop or mobile wallets
Most people who decided to keep their Bitcoin in an app came to regret it. Bitcoin Core took a few hours to sync in 2013 but now can take weeks -if your Internet is fast enough. Multibit was a great wallet in 2015 but now doesn’t work on many computers. Many people who you got Bitcoin in 2010 forgot the password they used by 2019. Modern computers are notoriously insecure. Key loggers and remote access trojans can record your keystrokes and copy all your files. At one point in the lifetime of Windows XP, it only took a few minutes for the average computer to become infected once exposed to the Internet. Operating systems today are much more secure but are you willing to bet that someone won’t find a catastrophic Windows zero-day exploit when the Bitcoin market cap is $1 trillion?
Paper wallets and brain wallets were good for their time, but I know many people who misplaced their paper wallet or forgot the exact phrase they used for their brain wallet. Some people who used a paper wallet found out that it could only be decrypted using the exact browser used to make it. Paper wallets and brain wallets also compromise your privacy by forcing you to keep all your Bitcoin in a single address.
What about my altcoins?
Trezor and Ledger now both support many coins and hundreds of tokens, so you have no excuse not to use them for your entire portfolio. Both Shapeshift and Exodus now work with hardware wallets to let you visualize and manage your entire portfolio.
BIP39 codes are supported by many different coins besides Bitcoin. While something better than BIP39 may come along, it’s very likely that as long as Bitcoin is around, there will be some implementation of the BIP39 algorithm to restore your wallet. You’ll be able to get your Bitcoin back even if the company that made your hardware wallet is long gone.
Keep your recovery seed safe
You can generate the seed completely offline and without using a computer – just plug in your hardware wallet directly to a power source. Instead of paper, use a Billfodl or CryptoSteel to keep your recovery words protected against fire or flood.
Because they are universal, a BIP-39 seed is also the best way to secure your legacy for your family, so consider adding instructions to locate your recovery seed in your will.
If you are concerned about the security of your seed words, you can cut the list of 24 words in half and keep them in two places.
Never type your seed directly into your computer — even just to print it on paper because your handwriting is bad. Remember that hardware wallets will never ask you to type your seed directly into your computer. When restoring your seed, they all use some kind of indirect entry method (such as entering the words out of order) to protect against keyloggers.
So, what’s your excuse for not using a hardware wallet for your Bitcoin?
The hostile reception that Facebook’s Libra coin received from Congress should be viewed as a validation of the need for Bitcoin.
As a fiat currency pegged stablecoin, Libra offers little threat to the U.S. dollar’s monopoly. To Libra users, it would be little different from PayPal, Alipay, Apple Pay, Google Pay, WeChat, Zelle, or the dozens of other peer to peer payment platforms around the world.
I certainly have my reserves about both Facebook and Libra, but a “blockchain-enhanced” payment network that competes with Paypal is hardly the terrorist event of the century. It is highly unlikely that President Trump wrote his rant against Libra himself – his tweets were likely scripted for him as the party line against potential dollar competitors.
What’s crystal clear from this episode is that anything which is remotely a threat to the U.S. dollar’s dominance as the world’s reserve currency will be swiftly neutralized.
This is precisely why a peer to peer, decentralized network like Bitcoin is needed: any centralized challenge to the dollar’s dominance, by a company or nation-state, is likely to face swift retribution from the United States government. The U.S. economy relies on the dollar’s status as the world’s reserve currency to keep issuing new debt to sustain our unsustainable budget deficits.
This makes it all the more essential (for those of us who wish to safeguard our life savings and ensure an economic recovery based on sound money) to support decentralized, borderless, and censorship-resistant alternatives like Bitcoin. While Bitcoin is certainly not entirely immune from legislation, it is substantially more control as can be seen in countries such as Venezuela, China, and India, where it is still widely used despite being banned.
There are valid reasons to criticize Bitcoin, but price volatility is not one of them.
Why does the price of Bitcoin change so much from day to day? The answer is simple: the value of Bitcoin derives almost entirely from speculation on future adoption of Bitcoin rather than practical use. Bitcoin speculators are betting on the likelihood that Bitcoin will become offers a credible alternative to fiat paper money or commodities like gold.
No one knows the future, so many individual market participants speculate about the future using the information available to them. They will naturally disagree and change their opinions over time as new knowledge becomes available. Good and bad news such as statements by governments, thefts from exchanges, or new startup ventures provide new information about the future and so influence the price. Traders also react to the predictions of other traders. This is how price discovery works in any market. Those who make successful predictions earlier and more often will accumulate more Bitcoin, thus rewarding those with the best judgment.
If you think that the Bitcoin trading is driven by too much hype, consider that the world’s economy currently hangs on the rants of President Trump’s reactions to the latest Fox News broadcast, and how the Federal Reserve reads the tea leaves of the market this week.
By contrast, crypto traders are ultimately responding to the long term success or failure of the Bitcoin ecosystem. This process of information discovery is always messy, but it is not any more arbitrary than the fake drama of the political news cycle.
Many critics of Bitcoin consider the fact that Bitcoin is a speculative asset as sufficient reason to dismiss it. But all entrepreneurial initiatives are speculative at the start. Bitcoin is like any early-stage startup. One investor claims a 10% stake for $1 million for a valuation $10 million, while a later round might value a $10% stake at $100 million. As a startup proves that its technology and businesses model is sound, and begins to make profits, it’s market cap grows. As profit transitions from potentiality to an actuality, the market capitalization becomes more stable. We are seeing a similar process with Bitcoin, except its ambition and potential is far larger than a startup, so the process takes far longer.
Bitcoin will achieve price stability when a large portion of Bitcoin’s market cap is used for practical purposes rather than speculation. The practical value of Bitcoin is as a means of exchange and store of value.
Can we track the adoption of Bitcoin as practical money? Yes. When Bitcoin was invented, only a few highly technical users had the skill to make Bitcoin transactions. Over the last 10 years, the cryptocurrency ecosystem has grown and evolved. Bitcoin is now easier to use, safer to store, and the number of businesses who accept it is in the tens of thousands.
Still, in all but a few narrow use cases, it is still more convenient to use more traditional payment networks. That’s normal — monopolies are broken not by assaulting their business model head-on, but within narrow edge cases where it is easier to build a superior alternative. In the case of Bitcoin, it is already a viable option for cross-border money transfers from nations with currency controls, trade in black and grey market goods, funding of politically incorrect institutions, and of course, criminal operations. In developed countries with robust financial networks, Bitcoin is only used by its most devoted followers, as the traditional financial system is still far easier to use.
That doesn’t mean that we will not see a sudden and unpredictable shift in which Bitcoin suddenly overtakes traditional financial networks. The Western banking system suffers from major and intractable structural faults and is ripe for disruption. By contrast, here is a single Bitcoin transaction worth $670 million dollars with a total fee of $7.82. Imagine how much more effort and due diligence a banking transaction of this size would take. A transaction to buy your morning coffee with Bitcoin comes with the same level of security.
We’ve seen how countries like China evolved from a cash-only society to one entirely dominated by mobile payment apps for practically all applications in just a few years. With Whole Foods, Home Depot, and other major stores now accepting Bitcoin, virtually all millennials using smartphones, and growing instability in the global fiat money regime, the currency marketplace could be ready for disruption. Or not. The “flippening” between the dollar and Bitcoin could be decades away. The point is that there is nothing fundamentally wrong with speculating on the possibility of a Bitcoin-based economy and global monetary standard if you believe (as I do) that the technology is fundamentally sound and capable of evolving to handle the business of 7 billion people.
Why does the price of Bitcoin change so much from day to day? The answer is simple: the value of Bitcoin derives almost entirely from speculation on future adoption of Bitcoin rather than practical use. Bitcoin speculators are betting on the likelihood that Bitcoin will become offers a credible alternative to fiat paper money or commodities like gold.
No one knows the future, so many individual market participants speculate about the future using the information available to them. They will naturally disagree and change their opinions over time as new knowledge becomes available. Good and bad news such as statements by governments, thefts from exchanges, or new startup ventures provide new information about the future and so influence the price. Traders also react to the predictions of other traders. This is how price discovery works in any market. Those who make successful predictions earlier and more often will accumulate more Bitcoin, thus rewarding those with the best judgment.
If you think that the Bitcoin trading is driven by too much hype, consider that the world’s economy currently hangs on the rants of President Trump’s reactions to the latest Fox News broadcast, and how the Federal Reserve reads the tea leaves of the market this week.
By contrast, crypto traders are ultimately responding to the long term success or failure of the Bitcoin ecosystem. This process of information discovery is always messy, but it is not any more arbitrary than the fake drama of the political news cycle.
Many critics of Bitcoin consider the fact that Bitcoin is a speculative asset as sufficient reason to dismiss it. But all entrepreneurial initiatives are speculative at the start. Bitcoin is like any early-stage startup. One investor claims a 10% stake for $1 million for a valuation $10 million, while a later round might value a $10% stake at $100 million. As a startup proves that its technology and businesses model is sound, and begins to make profits, it’s market cap grows. As profit transitions from potentiality to an actuality, the market capitalization becomes more stable. We are seeing a similar process with Bitcoin, except its ambition and potential is far larger than a startup, so the process takes far longer.
Bitcoin will achieve price stability when a large portion of Bitcoin’s market cap is used for practical purposes rather than speculation. The practical value if Bitcoin’s is as a means of exchange and store of value.
Can we track the adoption of Bitcoin as practical money? Yes. When Bitcoin was invented, only a few highly technical users had the skill to make Bitcoin transactions. Over the last 10 years, the cryptocurrency ecosystem has grown and evolved. Bitcoin is now easier to use, safer to store, and the number of businesses who accept it is in the tens of thousands.
Still, in all but a few narrow use cases, it is still more convenient to use more traditional payment networks. That’s normal — monopolies are broken not by assaulting their business model head-on, but within narrow edge cases where it is easier to build a superior alternative. In the case of Bitcoin, it is already a viable option for cross-border money transfers from nations with currency controls, trade in black and grey market goods, funding of politically incorrect institutions, and of course, criminal operations. In developed countries with robust financial networks, Bitcoin is only used by its most devoted followers, as the traditional financial system is still far easier to use.
That doesn’t mean that we will not see a sudden and unpredictable shift in which Bitcoin suddenly overtakes traditional financial networks. The Western banking system suffers from major and intractable structural faults and is ripe for disruption. Here is a single Bitcoin transaction worth $670 million dollars with a total fee of $7.82.
Imagine how much more effort and due diligence a banking transaction of this size would take. A transaction to buy your morning coffee with Bitcoin comes with the same level of security.
We’ve seen how countries like China evolved from a cash-only society to one entirely dominated by mobile payment apps for practically all applications in just a few years.
With Whole Foods, Home Depot, and other major stores now accepting Bitcoin, virtually all millennial using smartphones, and growing instability in the global fiat money regime, and the currency marketplace could be ready for disruption. Or not. The “flippening” between the dollar and Bitcoin could be decades away. The point is that there is nothing fundamentally wrong with speculating on the possibility of a Bitcoin-based economy and global monetary standard if you believe (as I do) that the technology is fundamentally sound and capable of evolving to handle the business of 7 billion people.
When you buy cryptocurrencies, you are betting that 
