Dangerous Medicine and Fool's Bitcoin
Obi Nwosu is the CEO and co-founder of Coinfloor, the UK's longest-running Bitcoin exchange. He has over 20 years’ experience building online marketplaces and bringing virtual currencies to tens of millions of people. Obi writes The Road to Bitcoin Hegemony, a weekly recap of some of the most impactful developments in Bitcoin.
Welcome to The Road to Bitcoin Hegemony, a weekly analysis of some the most interesting developments in Bitcoin and why they matter in Bitcoin's journey towards monetary dominance.
Inflation — It’s a Helluva Drug
The late, great Robin Williams once observed that cocaine is God’s way of telling you you’ve got too much money.
And if you don’t believe in God, well — there’s always the Bank of England.
The Bank’s letter to retail banks last week was a tacit admission that it thinks we’ve got too much cash in our pockets. All of us: the furloughed employee of a Covid-closed business trying to survive on two thirds of his salary; the freelancer who’s seen her clients evaporate; the laid-off workers counting the pennies until their Universal Credit comes through.
We all understand the arguments. Desperate times require desperate measures, and it’s natural that policymakers want to get the economy moving by encouraging consumer spending.
But the Bank’s proposals are charting a course that spells misery for people who have already suffered more than enough. Negative interest rates, combined with the worldwide splurge of money-printing, would erode what little value remains of our hard-earned savings.
Inflation is a hell of a drug. It’s the crack cocaine of fiscal policy: addictive, damaging, difficult to escape... and always hitting the poorest hardest.
Had the Bank of England canvassed the views of retail bank customers themselves, they would have found that the rate of interest among savers for this proposal would be completely negative. But then, who asks turkeys for their opinion on Christmas?
This double whammy threatens to make turkeys of us all. The Great Panjandrums of the world economy are proposing simultaneously to take value from the back door through inflation, while carrying cash out the front door via negative interest rates.
Anyone with a bank account knows that this is a bad idea. Everyone’s instincts are screaming that, in this time of unprecedented uncertainty, the only approach that makes any sense is to hold onto as much of our wealth as we possibly can.
Unfortunately, the average consumer has few (if any) options when it comes to storing value. They can’t invest whatever wealth they might retain in property, stocks, art or vintage wine. So these proposals, designed with the best of intentions, will only exacerbate inequality and hurt the hardest-up the most.
Which is what makes Bitcoin such a critical weapon in the ordinary consumer’s fight to hold onto their wealth. With the world’s governments seemingly set on hooking us on the economic equivalent of a speedball — negative interest rates mixed with a hefty dose of inflation — more people are realizing that Bitcoin is the only way that they can protect their savings. As they struggle with a crisis beyond their control, central banks are reaching for some incredibly dangerous medicine. These proposals are the economics of despair, forcing consumers to spend, spend, spend by slashing the value of fiat cash. I prefer the economics of hope.
When people feel that their savings are secure, surely that’s a much firmer footing on which to grow consumer spending and start building an economic recovery — far better, in my view, than feeding an addiction to twin drugs designed to destroy the value of money itself.
All that Glitters Isn't Bitcoin
Last week’s Forbes article about Tether, "Has Bitcoin Finally Met Its Match?" had me at the end of my rope. Not because I’ve got a problem with so-called ‘stablecoins’ like Tether. Rather, it was the willful comparison of apples with xylophones.
Bitcoin has no more met its match than Lewis Hamilton is threatened by Lionel Messi. They’re both playing very different games.
As its name suggests, Tether is tied to the dollar. That might make sense for its intended applications, but it certainly doesn’t make it a challenger to Bitcoin. And that’s not just my view, but straight from Paolo Ardoino, CTO of Tether, who said that the coin is meant to complement, not compete with Bitcoin.
By now, everyone should know that there are multiple categories of cryptocurrencies, some of them competitors but many with discrete (and often unique) applications. But for some people, it’s taking the satoshi a long time to drop.
Let’s look at some of these categories. First we have stores of value or “ideal money.” In this, the most valuable use case of all, Bitcoin is not just the clear leader — it’s the only game in town.
Then we have smart contracting platforms, sometimes referred to as the “World Computer.” This is where Ethereum sits, and it’s a space that gets a lot of buzz. The potential (claimed) applications are legion... but a store of value they ain’t.
Another category are asset-backed or security tokens, which are linked to some form of organizational equity. Most DeFi tokens sit here. Lastly, we have fiat-backed tokens like Tether, which are effectively just digital versions of analogue currencies.
However, much more interesting stories emerge when we compare coins within these categories.
First, Bitcoin absolutely dominates its market. It is approaching 95% market share and, as it’s free from any anti-monopolistic competition policy, this crushing lead is only set to grow further.
Secondly, Ethereum is doing pretty well at what it does. It has 60 to 70% market share in the smart contract platform wars. That’s a long way from the hegemony that Bitcoin enjoys in its own category, but it still represents an uphill battle for any would-be world computer competitor.
The asset-backed token market is much more varied, with no clear winners. This is likely to remain the case for some time, since this is such a broad category with so many different use cases.
Finally, we have stablecoins. At first glance, Tether seems to have a commanding 75% market share. Impressive... until you remember that stablecoins are simply digital fiat tokens. In other words, Tether isn’t competing against Bitcoin at all: it’s a vanishingly small player in the far bigger fiat currency market, competing with existing currencies such as the dollar, euro, pound sterling (and their digital equivalents).
Of course, the only universally beneficial application for cryptocurrencies is as a store of value. Stablecoins like Tether are great for trading and speculation but provide no protection from inflation, and they are definitely not new. As for world computers and asset-backed tokens? The kindest thing I can say is that the jury is still out. Only time will tell whether they live up to the hype (although I have my own thoughts on the matter).
The lesson remains the same: Don’t be tempted by sparkly new cryptocurrencies that will, in all likelihood, turn out to be fool’s gold. All that glitters is not Bitcoin.
And Finally...
In such an action-packed week it was difficult to choose just two stories. So let me briefly address Andrew Bailey's comments on whether or not Bitcoin has intrinsic value. Semantics aside, Bitcoin’s value, the price people think it is worth, continues its steady climb... What central bank leader can say the same of his or her own currency?