Kyle Torpey

A series of op eds by Kyle Torpey addressing some of the oft-repeated arguments against Bitcoin.

One of the earliest criticisms of Bitcoin was that the underlying token in the system had no intrinsic value. This point was an area of heavy debate among libertarians and Austrian economists who had become interested in bitcoin as a potential digital alternative to gold in the early stages of the crypto asset’s development.

Much of the debate revolved around Austrian school economist Ludwig Von Mises’ regression theorem, which claims non-monetary use cases as a prerequisite for any good to become a money.

Like many others, I fell on the side of bitcoin lacking any sort of intrinsic value after first learning about the new digital asset, but this was largely due to my lack of understanding around bitcoin’s utility as a digital bearer asset at the time (around 2011 to 2012).

Medium of Exchange vs. Store of Value

My view on bitcoin’s lack of intrinsic value changed once I realized that it was the only option in terms of a permissionless, censorship-resistant digital money.

One of the common arguments around the intrinsic value of fiat currencies, such as the U.S. dollar, is that the key underlying value proposition is that you have to pay your taxes with it. Bitcoin has a similar property where it must be used for censorship-resistant transactions online (yes, there are other options but bitcoin is the most liquid).

The continued existence of this point of view explains the thinking behind the creation of various altcoins focused on low-fee payments, such as bitcoin cash. Although, as Bitrefill CCO John Carvalho pointed out at the recent Understanding Bitcoin conference in Malta, many Bitcoin users have seen their thinking on this topic evolve further over the years.

This is not to say payments are not important (Bitcoin has its own secondary payments network known as the Lightning Network), but rather, the security and stabilization of Bitcoin’s base layer is key to protecting bitcoin’s utility as a store of value.

These two differing views on why bitcoin is valuable was a core aspect of the scaling debate from 2015 to 2017 (I’ve written an in-depth exploration of this point here).

A number of altcoins have arguably made improvements over bitcoin in terms of adding additional payment features. For example, Monero is renowned for the increased levels of privacy it can offer (although bitcoin is now seeing privacy improvements of its own through software like Wasabi Wallet and Samourai Wallet).

As Blockstream mathematician Andrew Poelstra has explained in the past, Bitcoin users simply prioritize security and stability over new, experimental payment features.

One of the key issues with these payment-focused altcoins is that they don’t have the same level of liquidity or network effects found with bitcoin, so bitcoin is still by far the most preferred money in the cryptocurrency space.

The view of bitcoin being a good as a store of value is helpful in terms of increasing the utility of that good as a medium of exchange. If more people are willing to hold a good, then they’re more likely to accept that good as payment.

Of course, having utility as a medium of exchange also assists the store of value proposition. But the key point to realize here is that a good acting as a medium of exchange is only possible if it first obtains some value. You can’t send value through a good if that good’s value is near zero (more on this from Bitcoin creator Satoshi Nakamoto later).

To be clear, it’s not the specific 21 million cap that enables bitcoin’s usefulness as a store of value. Instead, it’s the credibility of that monetary policy that matters in that it can’t be changed on a whim by anyone (not even a collection of the largest companies in the ecosystem).

Bitcoin is generally much less volatile than altcoins, which harms their comparative utility as stores of value (and, therefore, mediums of exchange).

It should also be noted that altcoins tend to be more centralized in terms of influential nodes and less diverse user bases, which puts into question the level of censorship-resistance of these cryptocurrencies as payment networks (see Ethereum’s hard fork to bail out those who were negatively affected by the hacking of The DAO).

So What Is Bitcoin’s Intrinsic Value?

“Intrinsic value” is a weird term when applied to commodities like gold and currencies like the U.S. dollar. There is nothing intrinsic about the value of anything. Value is subjective and comes from outside forces. For example, a gold bar isn’t very valuable to someone stranded on a deserted island alone.

In real terms, what makes bitcoin valuable is that it’s an apolitical digital money. The difficult-to-corrupt monetary policy is at the core of this value proposition, but other attributes and use cases are built on top of that base layer.

So, what about Mises’ regression theorem? Well, technically, bitcoin was valued as a collectible by cypherpunks before it was used as a payment system. Although it was extremely easy for cypherpunks to obtain some bitcoin at a low cost, that cost was not necessarily zero.

This early value as a collectible combined with a permissionless, censorship-resistant payment system illustrates bitcoin’s “intrinsic” utility. Satoshi wrote about this concept on the bitcointalk.org forum before he left the project.

“If [bitcoin] somehow acquired any value at all for whatever reason, then anyone wanting to transfer wealth over a long distance could buy some, transmit it, and have the recipient sell it,” wrote Satoshi. “Maybe it could get an initial value circularly as you’ve suggested, by people foreseeing its potential usefulness for exchange. (I would definitely want some)[.] Maybe collectors, any random reason could spark it.”

Many gold bugs (see Peter Schiff) still think there’s nothing valuable about bitcoin and perhaps they’ll never change their tune. But the same logic economists and financial experts use to argue for the intrinsic value of gold and fiat currencies applies to bitcoin too.

This is a guest post by Kyle Torpey. Opinions expressed are his own and do not necessarily reflect those of Bitcoin Magazine or BTC Inc.

The political spectrum is usually divided into four main categories: libertarian left, authoritarian left, libertarian right and authoritarian right. Those on the left prefer a more controlled economy, while those on the right have a preference for free markets. Libertarians tend to promote more liberal social policies, while authoritarians want to control what people do in the privacy of their own homes.

This is generally how political leanings are defined today, but technologies like Bitcoin and end-to-end encryption are changing that as our digital lives become, in some ways, more important than what we do in the real, physical world.

As technologists have explained to lawmakers around the world over and over again, encryption is either secure or it isn’t. Backdoors for law enforcement do not work because they create security holes. Either the encrypted messages you send over the internet are private or they aren’t.

This leads to a dichotomy where governments can either gain access to their citizen’s private messages, finances and other personal data or they can’t. The situation is black and white: People are either able to use encryption or they live in a surveillance state.

Authoritarians may want access to your personal data in order to make sure you’re following the government-approved social norms, while leftists will want access to your finances in order to make sure you’re paying your “fair share” of taxes.

In an increasingly digital age, both of these political factions would desire what effectively amounts to surveillance in order to bring their values into the digital realm. The libertarian right is the only quadrant that may have no desire or need for mass surveillance.

So, the new political split is between those in favor of surveillance and those in favor of privacy.

Peter Thiel and Reid Hoffman on the Topic

This new paradigm for politics was discussed by PayPal Co-Founder Peter Thiel and LinkedIn Co-Founder Reid Hoffman at the Hoover Institution at Stanford University in 2018.

This contrast between crypto and big data was originally brought up by Thiel in terms of centralization and decentralization.

“Even though I think these things are underdetermined, I do think these two map, in a way, politically very tightly on this centralization [versus] decentralization thing,” said Thiel. “Crypto is decentralizing. AI is centralizing. If you want to frame it more ideologically, you could say that crypto is libertarian and AI is communist.”

Thiel expanded on this idea, noting that AI is about big data, governments controlling all of that data, those governments then knowing more about their citizens than they know about themselves and governments attempting to hold society together through centralized control rather than spontaneous order. He pointed to the Chinese Communist Party’s love of AI and hatred for crypto as a more direct example of this philosophy in practice.

Hoffman tweaked Thiel’s libertarian versus communist analogy and stated, “You could say it’s [anarchy] versus rule of law.”

Thiel added, “I would say AI is a much more transparent world — the centralized world is more transparent. And then the question you go and ask is: What’s the opposite of transparency? Is it criminality or is it privacy?”

Where Will This Take Us?

This move toward digital privacy as the key divider between political ideologies has implications that are difficult to predict. It’s unclear what happens next.

The most interesting development may be with left libertarians, who will need to decide whether or not they actually care about online privacy, because Bitcoin has created a situation where financial privacy on the internet is possible.

In reality, there are limits to the concept of crypto anarchy. While things like Bitcoin may make it more difficult to collect taxes in some instances, governments will be able to evolve in order to protect their revenue streams. Taking the tax issue to the extreme, government employees can still show up at property owners’ homes with guns and demand tribute.

It’s possible that dragnet surveillance may become less useful as more people turn to encryption and old-fashioned police work will be needed more frequently to solve cases.

Of course, this assumes that the advocates of online privacy will win out over the authoritarians from an ideological perspective. It’s still unclear whether much of the population cares about protecting its personal data from the likes of Facebook, Google and government agencies.

At the end of the day, technology is on the side of those who are in favor of strong privacy, which makes it more difficult to control. How this all plays out may depend on how violent leftists and authoritarians are willing to get in order to protect the idea of a centralized, controlled society on the internet.

This is a guest post by Kyle Torpey. Opinions expressed are entirely his own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

Over the years, Bitcoin has gained a reputation for having a “toxic” community of users around it. This accusation is mostly thrown at Bitcoin by proponents of altcoins and those who have supported various Bitcoin hard fork attempts in the past.

Of course, this is an oversimplification of the Bitcoin community. Crypto Twitter, which is the main hub of online cryptocurrency conversations these days, does not make up anywhere near the entire Bitcoin user base. When people talk about the Bitcoin community being toxic, they’re mostly complaining that some Bitcoin users were mean to them on the internet.

Having said that, there is a logical reason that some Bitcoin users get extremely angry at certain members of the greater crypto asset community.

What’s With the Hostility, Man?

Bitcoin is defined by a set of protocol rules. It is these rules, which are effectively set in stone (see: Satoshi), that provide the underlying value proposition of Bitcoin. Bitcoin’s most important feature is not necessarily its specific monetary policy (the 21 million cap) or any of the other specific rules. Instead, the fact that the rules are extremely difficult to change is the key selling point (I’ve written a longer explanation of this here).

Of course, people could decide to abandon Bitcoin and go use something else (an altcoin or some forked version of Bitcoin), but that would necessitate the creation of a new network.

With this in mind, it should become clear why attempts to change the rules of Bitcoin through social attacks are met with disgust. Attempting to use social clout or “thought leadership” in an effort to push users over to a new network with different rules undermines the underlying value proposition of this technology.

If something new were to overtake Bitcoin through pressure from a consortium of influential nodes on the network, then what’s to stop that from happening again with the new coin of the moment? Perhaps more importantly, will the new coin stick to the core ethos of Bitcoin as an apolitical store of value and medium of exchange? If Bitcoin is susceptible to this sort of persuasion from influential players in the space, then it’s unclear how different it is from the traditional financial system or non-cryptocurrencies like Ripple’s XRP.

Bitcoin proved resistant to this sort of persuasion in the case of the New York Agreement, in which a consortium of economically relevant Bitcoin nodes and miners effectively got together to say some new fork of Bitcoin with a larger block size limit (which increases the cost of operating a full node) was going to be the new, official version of Bitcoin.

It’s not a stretch to call the New York Agreement an attack on the whole point of Bitcoin existing in the first place. Various businesses built on top of Bitcoin were putting their own needs ahead of the viability of bitcoin as an apolitical money. Perhaps more importantly, they issued their plan as a decree rather than a proposal.

Yes, those companies had users of their own to represent, but it’s possible that the power of users focused on the store-of-value use case were ignored in favor of those who put greater emphasis on the use of bitcoin as a medium of exchange.

On Twitter, some signers of the New York Agreement referred to those who shared criticisms associated with the 2x portion of SegWit2x as toxic individuals.

At the time, I wrote about how the creation of a federated sidechain may be a more sensible approach to the need to free up block space on the base of the Bitcoin blockchain. But the SegWit2x train had already left the station.

Thankfully, the failure of SegWit2x ended up being nothing more than an illustration of the difficulties associated with pulling off social attacks on Bitcoin. The whole ordeal added credibility to the “digital gold” meme that had long been associated with bitcoin.

Bitcoin’s current consensus rules are the Schelling point when people are unsure of what to do in the case of a network split, which makes it difficult for hard-forking changes to happen without widespread consensus. If there is going to be some kind of hard fork of the Bitcoin network, there better be a damned good reason to do so, such as a critical bug in consensus-related software. Otherwise, the “toxic trolls” are incentivized to respond to your attack on Bitcoin’s apolitical nature.

With all of this in mind, the question must be asked: Who is really the toxic part of the Bitcoin community? Those who attempted to push users to a new network and call it “Bitcoin” or those who said some mean words on the internet?

This is not to say every signatory of the New York Agreement is toxic. Some, such as Xapo CEO and PayPal board member Wences Casares, may have simply made a mistake, while others, such as F2Pool’s Chun Wang, may have never had any intention to run the code associated with the hard-forking portion of the agreement.

If You Break Consensus, You’re Gonna Have a Bad Time

Although the technical details of Bitcoin get a lot of attention, the system is mostly built on game theory. The “toxic maximalism” that is sometimes associated with Bitcoin has its roots in the structure of incentives originally put into place by Satoshi Nakamoto. Bitcoin users are effectively incentivized to attack anyone who attempts any sort of social attack on the system.

When certain individuals or entities push for a noncompatible change to Bitcoin and the “toxic maximalists” respond in anger, it is human nature for those pushing for the incompatible changes to get stuck in their position and become unwilling to admit they were wrong to make the proposal in the first place.

The original mistake was to advocate for breaking consensus without proper support, but that led to a series of other mistakes, which were avoidable.

The block size wars were a valuable lesson for everybody, but they were an especially costly lesson for those who simply could not admit they had made a mistake and continued on their crusade via the Bitcoin Cash (BCH) altcoin.

At the end of the day, those who saw the error of their ways and didn’t go down the path of Bitcoin Cash are better for it. After all, it’s beneficial for everyone if we’re all using the same money. The fact that you can transact with your worst enemies via the Bitcoin network is a big part of apolitical money.

Note: This article was partially inspired by ShapeShift CEO Erik Voorhees’s recent appearance on What Bitcoin Did and BTC Inc CEO David Bailey’s recent appearance on the Stephan Livera Podcast. I recommend listening to both of those podcast episodes.

Last week, there was a panel at SXSW that was effectively a debate on the merits of permissioned blockchains versus permissionless systems like Bitcoin. I listened to the entire audio of the panel discussion, after Programming Bitcoin author Jimmy Song tweeted it out the other day, and I thought he did an awesome job of pointing out the key value proposition of Bitcoin and why it is not worth comparing to permissioned systems.

What Was the Innovation With Bitcoin?

As Song covered in his remarks during the panel, the key innovation with Bitcoin was the use of proof of work to enable anonymous actors to take care of the ordering of transactions in a digital financial system. While other digital cash systems were tried in the past, no one was able to come up with the perfect system that could solve issues related to centralization and Sybil attacks.

With Bitcoin, Satoshi Nakamoto hit the sweet spot.

I recently wrote about this same topic in the context of alternative cryptocurrencies that really shouldn’t be referred to as “cryptocurrencies.” Specifically, something like Ripple (XRP) is not comparable to Bitcoin because the system does not use anonymous validators.

Song hit on this same point while providing his definition of centralized versus decentralized systems.

“Here’s what I mean: it’s centralized if there’s a single point of failure,” said Song. “And I say that because that is exactly how governments control things.”

Bitcoin’s resistance to censorship, shutdown or regulation by governments is its key innovation. This was nothing more than a cypherpunk dream for decades, but Bitcoin turned it into a reality.

IBM’s Christopher Ferris, who took the side of permissioned blockchains in the debate, even asked Song if he was arguing for anarchy over a regulated financial system during the panel discussion.

Yes! That’s the whole point!

“I keep my own keys. I have my own bitcoin. That means real self sovereignty,” said Song during one portion of the debate. “That means real decentralization. I personally like self sovereignty, and I like controlling my own keys, controlling my own money, being my own bank, instead of somebody being able to say, ‘That’s not yours anymore because we don’t like you and we think you’re a political enemy.’”

It is the lack of centralization in Bitcoin that enables permissionless innovation on top of the base blockchain layer. Whether it’s darknet markets allowing for censorship-resistant ecommerce, Abra building a permissionless banking standard, crazy ideas like Bitcoin Hivemind or simply enabling greater levels of financial privacy in a digital age, these sorts of applications are simply not possible with the traditional banking system, which includes the entire permissioned blockchain ecosystem.

This Solution Is Not Perfect, but It’s the Best We’ve Got

It should be noted that, as Ferris pointed out during the debate, there are still plenty of issues with Bitcoin from a usability perspective. Many people simply aren’t comfortable with the risks associated with this new financial system.

Issues like bitcoin’s price volatility, the responsibility of taking care of one’s own private keys, the relatively higher costs that come with decentralization and the lack of user-friendly wallets are some of the problems that are still being worked on 10 years after the network was originally launched.

However, it should be noted that these issues aren’t as important to those who put self sovereignty over everything else. This is what many Bitcoin skeptics do not seem to understand. There are plenty of people who are willing to take on the additional risks of using Bitcoin simply because they wish to be in full control of their own finances and also want to support the ability for anyone else in the world to gain this level of extreme financial freedom.

New solutions to the various usability issues with Bitcoin are also coming online on a regular basis.

Comparing Bitcoin to traditional banks or permissioned blockchains doesn’t make any sense. Bitcoin is something completely different that was created for a specific purpose: financial self sovereignty.

This is a guest post by Kyle Torpey. Views expressed are his own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.