Do Some Homework On Crypto
Bitcoin is a different kind of beast that can be difficult for people to understand. New things usually are. And while Bitcoin is nearly eleven years old, it represents a completely new type of asset. Let’s break down what I perceive to be the three major components of Bitcoin’s value:
PAYMENTS — WHAT PEOPLE THINK OF
As investors near the Bitcoin iceberg, the first thing they see is payments—after all, it’s a cryptocurrency, right? Currencies are used for payments and so Bitcoin must be all about payments.
It’s true: Bitcoin is certainly used for payments, and this is an important part of its value. However, it’s not widely used for payments and, while it may be increasingly important over time, it isn’t the most important component of Bitcoin’s value today.
Why don’t people use Bitcoin for payments more often? Simply put, people don’t like to spend appreciating assets. Given the choice of payment methods, people like to spend in the “currency” that is likely to be worth the least tomorrow. At this point, that’s not Bitcoin.
Furthermore, most people don’t buy Bitcoin for payments. That’s simply not why they acquired it. Even if you could, very few investors would pay for their coffee with AAPL stock because that’s simply not the reason they bought Apple stock in the first place—same with Bitcoin.
Lastly, people don’t generally use Bitcoin for payments because goods aren’t broadly priced in BTC terms. Goods aren’t broadly priced in BTC terms because, if they were, the price would have to update several times each minute just to maintain a consistent revenue for the seller.
In short, the major drawback to using Bitcoin for payments is that it is volatile, which is neither a great ingredient for payments (medium of exchange) nor the pricing of goods (unit of account).
Longer term, however, I expect Bitcoin will be increasingly used for payments because, as adoption grows, volatility declines and rapid appreciation diminishes.
DIGITAL GOLD — WHY PEOPLE BUY
While payments are the first thing that people think of for Bitcoin, the reason that most people buy today is its utility as “digital gold”—this is the center of buoyancy for the Bitcoin iceberg.
People are attracted to an asset that is provably scarce, nearly impossible to seize or censor, and part of a decentralized and permission-less network that anyone can participate in.
As a venture firm dedicated to the blockchain and crypto ecosystem, we’re constantly collecting data points from around the world, but one of my favorite anecdotes is a doctor in Brazil who has converted his medical practice one day a week into a “bitcoin consultancy,” where all he does is help doctors and other people get set up with Bitcoin.
The main reason they want to buy? They’re terrified of wealth confiscation in light of a burgeoning public deficit. To be clear, they’re not rushing to put all of their assets into Bitcoin, but it’s a piece of a defensive strategy for some Brazilians to retain their hard-earned wealth.
PROGRAMMABLE ASSET — WHY BITCOIN WILL ATTRACT MASS APPEAL
Lurking below the surface, the most under-appreciated component of our Bitcoin iceberg is its value as a programmable asset.
When we take something from the physical world and make it entirely digital (“natively digital”), we shed many of the constraints of the physical world. Today, our legacy financial infrastructure is not natively digital.
Companies like PayPal have done a tremendous job making it easier to use our outdated financial infrastructure in a digital age, but they didn’t recreate the infrastructure itself. In contrast, blockchains are enabling new natively digital financial infrastructure in the form of Bitcoin, Ethereum, and others.
As a result, we can do new things: We have programmable assets for the first time.