There is a Race For an Internet-Native Currency, and Bitcoin is Leading It.
The first thing to come to mind when you hear “Bitcoin” is probably a number — and that number is probably its price. Right now, the price is rapidly rising. Other times, it is rapidly declining. Sometimes, it does nothing. So what does this price really tell us about Bitcoin’s future?
Bitcoin’s price is one of many indicators of its position in the global race for an Internet-native currency. And let’s be clear. It is a race. These are its top four contenders:
Bitcoin (“BTC”) is the native asset of the world’s first blockchain, as introduced by Satoshi Nakamoto on October 31, 2008. It is an open, decentralized ledger maintained via open source code. An Internet-connected device is all that is required to interact with Bitcoin.
Fiat-Backed Stablecoins (Tether & USDC)
Fiat-backed Stablecoins are digital assets which are pegged to other national currencies (usually the US Dollar) such as Tether (“USDT”) and USDC. Stablecoins are built on public blockchains such as Ethereum but require a trusted intermediary to manage and maintain the peg; Tether depends on Bitfinex and USDC depends on Circle & Coinbase.
Libra is a private (“Permissioned”) blockchain project proposed by Facebook. It is designed to be a low-volatility cryptocurrency similar to Stablecoins such as Tether and USDC but unique in its structure and basket of supporting assets, which are continuing to evolve. Facebook has led the development of Libra so far, but intends to hand its administration off to the Libra Association if/when the project comes to fruition; key companies including Visa, Mastercard, Mercado Pago, PayPal, Stripe, and eBay have all recently exited the project.
Central bank digital currency, or the CBDC, is a new form of money issued digitally by the central bank and to serve as legal tender — a country’s sovereign currency. It has no physical form like cash, but is backed by the reserves of valuable assets that commercial institutions deposit in the central bank.
Forbes reports that China’s big four state-owned commercial banks, as well as fintech giants Alibaba, Tencent, and Union Pay will be the first batch of participants in the CBDC. The use case for the CBDC beyond China is currently unclear, and it has been reported that China will do a regional rollout, beginning in Shenzhen.
Aside from price, digital assets have other fundamental indicators including:
- Market Cap: The total value of the asset.
- Daily Transaction Value: total $USD value of all transactions/day.
- Daily Transaction Volume: total # of transactions/day.
- Daily Transaction Fees: total $USD value of network transaction fees.
- Mining Distribution: approximate # of central entities with controlling shares of the Hash Rate.
- Hash Rate: a general measure of the processing power of the network.
Let’s compare these fundamentals among our contenders:
The data speaks for itself. Bitcoin is the most-valuable, most-used, most-secure Internet-native currency among the bunch. And there are a lot of unknowns with Libra and the PBoC. You’ll notice that Tether has ~$6.5B more than Bitcoin in 24h Txn Value, and this is largely due to the huge volume of trades done between Tether and other cryptocurrencies (mostly Bitcoin):
Tether is the only fiat money option for many of top exchanges, and is a bit of an elephant in the room. Tether is supposed to be 100% backed up with cash and equivalents. However, A Tether Attorney admitted earlier this year that Tether is in fact only 74% backed by cash and equivalents. Yet, it still trades at its $1 peg and accounts for significant trading volumes. Frances Coppola from Forbes does a wonderful analysis, if you care to learn more.
Why The Internet Needs Its Own Currency
As the Internet was being developed, its creators’ envisioned a way for users to transfer value and reserved Error Code 402 (Payment Required) for future use. However, they were unable to solve the Byzantine General’s Problem; the copy/paste nature of data precluded the possibility of digital scarcity. Bitcoin was the first technology to solve this problem with a clever combination of cryptography, distributed systems, and economic incentives.
For those with access to bank accounts that can easily be connected to online payment networks (PayPal, Alipay, Venmo, etc.) there frankly is no need for an Internet-native currency, so long as the counter-party is on a compatible network. But for the 6.5% (8.4 million) U.S. households that are unbanked and the 18.7% ($24.2 million) U.S. households that are underbanked (those who have a checking/savings account but rely on alternative financial products/services such as Payday loans) the need is more apparent.
And the U.S. is one of the best-banked countries in the world — the situation is much worse outside of the U.S., where 1.7 billion adults are unbanked:
As more and more commerce goes online, those without the ability to transact value over the Internet will become increasingly marginalized, and will be at a higher risk of predatory lending. Furthermore, financial privacy is at serious risk in the age of mass surveillance. All U.S. Financial Institutions must comply with AML/KYC (“Anti-Money Laundering” / “Know Your Customer”) regulations, which require financial services companies to collect personal identifying information from customers (often times including a government-issued photo ID) and monitor their transactions in order to prevent criminals from profiting off ill-gotten funds. While these regulations are effective for law enforcement, they reduce the expectation of privacy for digital dollars.
Bitcoin exchanges provide the on/off ramps between fiat and bitcoin, and must also comply with AML/KYC laws. And while these exchanges are required to buy and sell bitcoin, they are not required to send or receive it; anyone with an Internet-connected device can send or receive bitcoin. This has resulted in thriving secondary peer-to-peer exchanges such as LocalBitcoins and Paxful, and provides hope for the underbanked:
An Internet-Native Currency Should Be as Free and Open as The Internet
The Internet is a free and open borderless network which requires no permission to participate. Only Bitcoin shares these unique qualities. Tether, Libra, and especially the PBoC CBDC all depend on permission from Governments under the condition of regulatory compliance in order to exist. Bitcoin depends on the Internet to exist.
Interacting with the Internet does not require a Government-issued photo ID, and neither should its native currency. Libra must comply with AML/KYC regulations, which will almost certainly require some form of ID verification. It’s not clear what the requirements for the PBoC CBDC will be, but there will certainly be some control there.
Bitcoin has not only existed for well over a decade, it has thrived as it evolved from a project into an industry. Despite being the largest target for the world’s most talented hackers, it remains resilient and secure by the merit of its open source code, governance, and Cryptoeconomics. It requires no ID verification or personal information. Bitcoin miners process transactions without discrimination, and will never file Suspicious Activity Reports.
Bitcoin skeptics like to point out that Bitcoin is more of an investment asset than a currency, and for the most part they are right. It takes time, research, and technical breakthroughs to make Bitcoin as usable and accessible as a currency. We are getting there with with innovations such as Lightning Network, but we’re just not there yet.
On Energy Consumption
Bitcoin skeptics also like to point out the fact that the Bitcoin network consumes more energy than many developed nations:
While bitcoin’s increasing energy use over the years is somewhat a symptom of its success, it is important to put it into perspective. It is easy to criticize bitcoin’s energy use because bitcoin’s energy use is obvious; bitcoin mining is an energy-intensive operation. That is a fact. The amount of energy required to process a simple credit card transaction is less obvious, but includes:
- Large data centers powering hundreds of thousands of servers for transaction processing, fraud detection, clearing, etc.
- Vast amounts of real estate consuming large amounts of energy.
- Fleets of armored diesel trucks.
Bitcoin requires none of the above, and may actually be the most energy-efficient system for secure global value transfers.
The Final Stretch
Bitcoin is gaining traction in the U.S. According to Coinbase, Americans Googled “Bitcoin” more times than “royal wedding” or “election results” last year. Coinbase has assembled some excellent data points on this below:
Globally, governments are starting to warm up to Bitcoin:
There are currently over 9500 bitcoin nodes distributed around the world, working in concert to securely process transactions on the bitcoin network:
The race is still on, and while bitcoin has a solid lead, the outcome is still unknown. So how will we know when the race ends and who wins it? I’ll let this well-known meme answer that one: