The ‘Bitcoin is money’ narrative is dying, Ignacio de Gregorio explains why
Bitcoin was conceived as money
Bitcoin, back when it was created in 2009, was conceived as a permissionless, peer-to-peer decentralized network. That is, a distributed network that lets anyone, anywhere, send a transaction to another person, at any point in the world, with no intermediaries, and no political, national, or geographical boundaries; just with the power of the internet.
In other words, Bitcoin was conceived as a digital currency.
Many years afterward, that narrative looks as dead as they get. Bitcoin scalability capabilities are, at the very least, debatable, as it is only capable of executing, at best, 7 transactions per second, in comparison with the 24,000 that VISA claims to be capable of.
The Lightning Network comes to the rescue… allegedly
Some will say you have the Lightning Network, an L2 on the Bitcoin network that is far more scalable and performant. L2s take a considerable portion of the transactions off the main chain, execute them separately and broadcast the result of that execution back, speeding the overall validation process while allegedly benefiting from the main chain’s security and decentralization.
However, there are many voices claiming that the Lightning Network is increasingly centralized. If that was really the case, we have a serious problem because centralized blockchains don’t seem to make much sense at all.
Sacrificing decentralization for the benefit of scalability is just turning blockchains into another centralized database but more complex and hard to maintain.
There is some debate about centralized blockchains
Some argue that centralized blockchains would still be superior to centralized databases, due to the benefits of storing the hash of the previous block in the next one, therefore making it a lot easier to detect tampering.
This claim has, by no means, a shared consensus among the cyber security industry — for instance, you can define SQL triggers in centralized databases to immediately detect those modifications.
However, indeed, it is generally harder to modify a blockchain, albeit being centralized, than a standard database, but it is also harder to maintain.
Alt-blockchains are closing in… quickly
Moreover, other blockchains seem to have gained the advantage in that sense, with some of them claiming upwards of 5,000 TPS or even the 120,000 TPS that Sui, the new generation blockchain I described in my last post, claims to have achieved.
For all those reasons, many experts claim that Bitcoin has already lost the boat of that narrative, as, by the time the Lightning network actually delivers top-notch TPS with proven decentralization, it could be too late.
Even so, it is important to acknowledge that many of these alternative solutions are compromising decentralization for the benefit of scalability. This solution has the same issue as the Lightning Network, they must prove they can scale while remaining sufficiently distributed so that security and availability remain high.
Nevertheless, some governments are moving forward with Bitcoin
Despite all this bad sentiment, there is also some hope, as countries like El Salvador have pushed forward Bitcoin as legal tender.
In fact, El Salvador’s government made a press release in which they explained that:
- Citizens living abroad had sent more than $50 million worth of Bitcoin to friends and family, and
- $52 million worth of BTC remittances had been processed via the country’s national digital wallet service Chivo through the first five months of the year alone
Promising numbers indeed.
However, Bitcoin’s hopes for success rely on tier 1 economies accepting it as legal tender
Bitcoin needs healthy and strong economies to embrace Bitcoin as a digital currency for it to succeed. However, as of today, that is not the case, as:
- Both El Salvador and the Central African Republic (CAR), the two countries that have legalized Bitcoin for use as legal tender, have very strong economical reasons for doing so.
- Also, with the dollar turning more expensive by the day, economies with weak currencies and a high percentage of national debt in dollars will also have some interest in Bitcoin legal tender.
- Many of those countries, for instance, the vast majority of the South American economies, not only have a large chunk of their debt in dollars, but they also happen to have a lot of inflation — especially Argentina and Venezuela — , and also have a lot of imports having to be paid in dollars.
- This situation is aggravated by the fact that workers in those countries, fearing the never-ending weakening of their country’s currency, demand payment in dollars, thus increasing the dependency of the national economy on the dollar, a dollar that is stronger against their coin by the day, thereby impoverishing the citizens of the country.
Incentivizing the use of Bitcoin could be an interesting way to reduce that dependency on the dollar, so it wouldn’t be surprising for me if countries in that predicament turn to Bitcoin as a pragmatic and brandable solution.
Despite this, Bitcoin still needs the richer countries to also hop on Bitcoin’s bandwagon for it to succeed.
The gold narrative
Nowadays, due to the reasons stated in the first section, the narrative for Bitcoin has switched to ‘Bitcoin is digital gold’, arguing that Bitcoin will be a hedge against inflation and economic downturns, a way to maintain the value of your wealth just like gold has done that exact same thing over centuries, as gold:
- Has always been valuable to almost any civilization or empire due to its preciousness, adding to the actual utility it has today in areas like jewelry or electronics (in the latter case mainly due to its capacity to conduct electricity with minimal corrosion).
- Has actual use cases which prove its value, as well as the fact that gold has proven to be very, very stable in value across centuries (and generally outperforming most assets in downturns, when investors flock to it as a safe haven).
However, many reasons can be stated to neglect, as of today, this comparison. For starters, Bitcoin is very volatile, which is actually contrary to gold, and thus eliminates the claim of an inflation hedge.
As long as Bitcoin’s value doesn’t remain stable, it can’t be proven to be a safe haven.
In fact, Bitcoin has never been exposed before to the high inflation we are seeing nowadays, so Bitcoin must prove its value as a hedge against inflation in these times to truly demonstrate that narrative.
Also, unlike gold, Bitcoin (and the crypto space in general) remain heavily correlated to markets, especially the Nasdaq. The main tech index and Bitcoin have been traditionally very correlated, although this week’s uncorrelation between both has prompted many to suggest that Bitcoin is finally uncorrelated to it.
Despite this, it is very early to say, so we must just assume that, until proven wrong, Bitcoin is correlated to the markets and, therefore, incapable of serving as a hedge against inflation (as markets are very correlated to it and react very negatively to the bad news of inflation).
So if the ‘digital gold’ narrative is still unproven, what’s Bitcoin’s use case then?
In case the ‘digital gold’ narrative is finally not possible, Bitcoin can always rely on its most important asset, its security, thanks to being the most decentralized blockchain of them all, as Bitcoin’s Nakamoto coefficient is over 200 times bigger than the closest blockchain, Avalanche.
The Nakamoto coefficient is one of the most common ways of determining a blockchain’s degree of decentralization. Put it simply, the more decentralized a network is, the more secure, as it is a lot harder, both in computing power (for Proof-of-Work blockchains) and economically (for Proof-of-Stake blockchains) to tamper and modify, as well as having an almost 100% uptime since its inception.
But why is this important?
Well, being one of the most secure data systems in the world opens the Bitcoin network to a huge manifold of possible use cases, use cases that need their data completely secure.
Consequently, the possibilities are endless, as systems and solutions that will require that level of security will be in the many over the upcoming decades.
One example is Web 5.0, Jack Dorsey’s vision of the future of the internet
Bitcoin’s intrinsic security enables Bitcoin to be the identity layer, the layer that will account for people’s identity and the privacy and protection of their data, in Jack Dorsey’s Web 5.0, an evolution of the actual Internet where Bitcoin will play a major role.
Therefore, Bitcoin will offer the concept of self-owned identity, a way to guarantee you are the sole owner of your identity and underlying data.
No more having to create profiles on each website you want to log on to, handing your data and private details for them to benefit from.
Bitcoin will succeed one way or the other
In a nutshell, don’t be discouraged by bad news concerning Bitcoin’s problems with being a currency or a hedge against inflation.
Even if those don’t come true, there are still plenty of great use cases. Nevertheless, we are talking about the most secure and decentralized blockchain today.
Note: Bitcoin needs to improve in terms of mining pools, as six of them control 80% of mining power. This could question the network’s decentralized nature.
The bottom line is that Bitcoin surely isn’t perfect, but it has the opportunity to become a foundational technology for our digital future.
But how will Bitcoin finally serve society it’s still early to tell, but the Bitcoin as a digital currency narrative is starting to become harder to envision.