And we are not downplaying the risks, which truly are existential. In fact, the scaling debate that is fast approaching its boiling point could result in two (or even more) different versions of bitcoin in the coming months. This potential “hard-fork” is the culmination of a multi-year debate over what bitcoin is and how it should evolve to deal with the unavoidable expansion of its main blockchain.
To try make a long story short, a hard-fork implies a fundamental change in the bitcoin protocol, which has the potential to undermine bitcoin’s role as an immutable store of value. This could bring the entire experiment crashing down. But there is hope: the market has seen forks before. Even if this one is contentious, the bitcoin network should adapt to support the version with the most potential. The bitcoin community has proved remarkably resilient over time. As Satoshi (the author/s of the original bitcoin white paper) wrote, “the network is robust in its unstructured simplicity.”
There are a few other factors which will impact the various use-cases.
First, bitcoin’s first-mover advantage gives it an enormous competitive edge and credibility as a digital store of value. Network effects – a phenomenon where each additional user in a network makes the entire network more valuable for all users – are the backbone of how cryptocurrencies gain acceptance and scale. They also create winner-take-all dynamics. If bitcoin can get through this year without compromising its perceived value, it may reassert itself as the dominant digital asset.
Second, bitcoin is losing its role as the currency of choice for cybercriminals. As the world gets increasingly wired and digitized, cybercrime will unfortunately grow with it. British insurer Lloyds estimates the costs of all cybercrime to businesses of nearly $500 billion a year globally. Juniper Research recently predicted that total costs of data breaches would increase to $2.1 trillion by 2019. In many of these cases, good actors will be forced to transact with bad ones in the currency of their choice. Corporations have been stockpiling bitcoin (and driving up the price) for years to be able to pay up quickly in the event of a ransomware attack, but cybercriminals are beginning to move on to other, more secretive digital coins.
The two with the most promise are Zcash and Monero. These “altcoins” (launched as alternatives to existing digital assets) have an extra layer of anonymity in their protocols, which allows the details of transactions to be hidden from anyone other than the two parties involved. Bitcoin transactions are technically still anonymous, but the keys used to authorize transactions are visible to everyone on the network. If a key is somehow traced back to an individual, every transaction that person has ever made is visible to the network.
Finally, to be fair to digital assets, similarly circular if-by discussions can be held across a wide range of assets today. With interest rates at or near the lowest levels in history – and some cases negative – investors have been incentivized to do some very peculiar things in the search for both returns and stores of value.
How Different Are Digital Assets Really?
According to a 2013 study by MasterCard, more than 80% of consumer spending in the U.S. was cashless. Paper money represents less than 5% of the broad money supply globally and that number is declining fast. Electronic currencies are already commonplace in our day-to-day lives. A crucial difference between something like bitcoin and a U.S. dollar is of course that the dollar is legal tender, but what if governments begin to accept bitcoin or something else as legal tender (like Japan has already done)?
Digital assets have no yield, but how different is that to the massive segments of the global bond markets that yield even less? Bloomberg reported in May that there was $9.5 trillion worth of sovereign bonds that had negative yields. Even in parts of the cash or bond markets where nominal yields are positive, they are often negative on a real (inflation-adjusted) basis.
Now consider that there are online platforms where you could loan out bitcoin as collateral for digital asset margin trading accounts and earn double-digit returns. Or you can simply lend your bitcoin to a business or individual on a peer-to-peer platform and earn similar yields.