10 years ago, an open-source project that nobody would have given any serious chances to, stormed the world. Bitcoin, a combination of cryptography, economics and peer-to-peer communication, became in just a decade a serious contender for gold, as a store of value. Whether or not you “believe” in it is not a question anymore, the crypto-currency is already a reality and its market share is poised to reach 1 trillion US dollars in the next week or so.
But there is something that puzzles me in this story.
Let’s take it slowly.
Be Your Own Bank?
That’s the mantra of decentralized finance: “be your own bank”. The blockchain promise is that we can eliminate the middle man (read: the greedy banks) and, at least on paper, this seemed doable. There are a few caveats to this, and I already wrote about them at the link above, today I’m going to focus on something else.
Specifically, what I’m going to ponder today is the strange love and hate relationship between early adopters, speculators, banks and the regular Joe.
You see, in order to be your own bank, you need to have access to some sort of fungible token (fungible: each token is equal to the next, they’re all identical). It’s impossible to be a bank, any bank, without some underlying value that you store and manage.
Early adopters had a big advantage in this game. They got access to the token at a very low price. Being it the price of mining, or the price of the token in fiat. The lowest recorded value for a Bitcoin is $67. As of today, its price was $52,000. Also, mining is not an option anymore for an individual user, mining hashpower is concentrated in the hands of a few huge, elusive and specialized factories. This simply means that if you are not an early adopter, and I guess 99.99% of the planet’s population is not, you won’t have access very easily to this token.
So, the entry barrier for the regular Joe is already quite high.
Another point is that Bitcoin became very fast a speculative asset. Speculation is based on future appreciation, so here again, those who amassed some Bitcoin along the way, or even those who are buying now tiny fractions of it at (perceived) exorbitant prices, are doing this in the hope that it will increase in value. The focus here is not on financial independence per se, but on rapid and predictable gains. And it’s this speculative nature of the asset which attracted players not necessarily keen on decentralization.
You clever bastard, yes, you guessed it: I’m talking about banks.
Every bull run of Bitcoin’s is fueled at least partially by rumors of “institutional buying”, as a strong indicator of value appreciation. In layman terms, this means individual Joes are seeing banks buying Bitcoin as a bull sign: “if big players are coming in, the supply will decrease faster, which will increase demand, which will skyrocket the price – ta-daa: we nailed it!”
Only we didn’t.
You see, the only way to get Bitcoin now is with fiat. Either by buying it on exchanges, or by paying electricity if you’re a miner. And who has the highest stash of fiat? Banks, of course (practically, governments can print money ad infinitum, but let’s stick with banks for now).
You see the conundrum?
If the value contained in Bitcoin, as an economical ecosystem, is controlled by banks, then that value is no different from fiat. It’s just another asset managed by a middle man. The more Bitcoin is bought by institutional players (banks, funds, big corporations) the less decentralized it becomes. To the point that, sometime in the future, the entire blockchain can be halted, because there won’t be enough relevant users of it. There’ll be just a handful of big players, like the mining factories, all rotating tokens between them, in an empty circle.
The bewildering conundrum is that a big part of “being your own bank” mantra is based on acquiring a token, and this token can be acquired only with fiat, which is controlled by governments and banks.
If and when there will be a way in which this token can be acquired by any regular Joe who wants to be his own bank, a fiat-free, yet verifiable and affordable way, then the conundrum will be solved.
Until then, though, we’re bound to experience its bewildering consequences.