Almost every article on the internet about Bitcoin uses a photo avatar of the crypto-currency, including this one. But this physical representation, while understandable, is rather misleading. This is because Bitcoin is a crypto-currency that promises you the safe, reliable payment of…nothing. As strange as it sounds, even though Bitcoin currently trades at more than $7,000 per unit, it is a completely virtual, purely conceptual, Veblen good.
Now, I’m sympathetic to many of the arguments put forth by crypto-currency enthusiasts. The world desperately needs some form of stable currency that is free from the manipulation of self-serving central banks and rapacious politicians. Crypto-currencies fulfill some of these needs, but not all of them. Bitcoin, for example, is an excellent medium of exchange, but a poor store of value.
The origin of Bitcoin reads like a cyberpunk Tom Clancy novel. The conceptual framework for the granddaddy of all crypto-currencies was laid down in a white paper posted online in November 2008 titled “Bitcoin: A Peer-to-Peer Electronic Cash System“. The author was one Satoshi Nakamoto, a pseudonym for an unknown individual or group of like-minded individuals. To this day no one knows who Satoshi Nakamoto, the pioneer of the world’s first practical crypto-currency, was. And it is highly unlikely anyone will ever find out.
On January 3, 2009, the mysterious Satoshi Nakamoto mined the very first Bitcoin into existence. This was in the form of 50 unspendable Bitcoins – the legendary initial Bitcoin block known as the Genesis Block. On May 22, 2010, a famous transaction involving the delivery of two Papa John’s pizzas in exchange for 10,000 Bitcoin took place. While the payment was only worth $41 at the time, right now, in the fall of 2017, these same 10,000 Bitcoin have a market value of more than $72.4 million.
Bitcoin is an almost perfect medium of exchange. It can be used to securely make transactions around the globe in a matter of minutes without the fear of receiving counterfeit Bitcoins or having your identity stolen. It achieves this via the impressive technology of the blockchain. The blockchain is basically an unforgeable, publicly auditable, electronic ledger than is constantly verified by a distributed computing network. The blockchain prevents the creation of any counterfeit Bitcoins, while simultaneously ensuring that only legitimate, authorized transactions are validated.
As Bitcoin has gained public exposure over the years and the price has risen, experts have come to laud the ingenious crypto-currency. One major advantage enjoyed by all crypto-currencies, including Bitcoin, is that they are strictly limited in supply. New Bitcoins are only created via mining, the name given to the process of verifying transactions in the blockchain. Central banks can create dollars, euros or yen with impunity, but Bitcoin is beyond their reach.
Some proponents of crypto-currency compare Bitcoin to gold. Both take real effort to mine; Bitcoin in the form of electricity for blockchain verification and gold in the form of diesel, electricity, steel, concrete and skilled labor. But Bitcoin isn’t perfect.
The premiere crypto-currency has two problems. First, unlike precious metals, Bitcoin doesn’t have any intrinsic value, rendering it a poor store of value. Apologists counter that this deficiency is offset by its usefulness as a medium of exchange. And it is true that Bitcoin is perfectly adapted as a medium of exchange to the online cyber-world of the 21st century.
Others readily acknowledge Bitcoin’s shortcoming as a store of value, while simultaneously arguing that fiat currency is almost identical in this regard. Although fiat currencies are still available as physical notes, they are also becoming increasingly virtual in the modern era. Fiat currencies, much like Bitcoin, rely on their widespread acceptance by other members of society for their value.
But there is a problem with that comparison. Fiat currencies are the official money of nation-states. They are accepted as payment for both taxes and debts, thus generating fundamental demand for the currency. This constitutes the underlying, intrinsic value of non-redeemable fiat currencies. These advantages are not shared by Bitcoin, which cannot be used to pay taxes or debts directly.
Some crypto-currency fans believe that the widespread adoption of blockchain technology for other applications will confer some benefit on its original incarnation in Bitcoin. While I readily agree that the blockchain may one day become widely used in a variety of different ways, this will not benefit Bitcoin investors in the least. Bitcoin has no patent on the blockchain concept and will not receive any royalty payments or other remuneration from its use in other industries.
In the end, Bitcoin is completely virtual, without any tangible presence or value. Even worse, the creation of new Bitcoins consumes real resources in the form of electricity, but provides no practical benefit outside of the Bitcoin ecosystem. Bitcoin’s blockchain, by itself, is an insufficient reason to use the crypto-currency. But these facts don’t mean that Bitcoin isn’t an important first step on the road to better, truly desirable crypto-currencies.
In my opinion, Bitcoin represents blockchain 1.0. It has a self-verifying and manipulation-proof digital ledger, but is ultimately completely self-referential. Ethereum, a newer crypto-currency, uses a different, more advanced blockchain implementation. I call it blockchain 2.0 because it has the ability to execute complex, automated transactions or “smart contracts”. But I suspect the real breakthrough will come with the future creation of blockchain 3.0. I think that blockchain 3.0 will combine the best attributes of blockchain 1.0 (an incorruptible public digital ledger) and blockchain 2.0 (smart contracts) with a third element – the creation of valuable intellectual property via the verification of the blockchain.
This has already been pioneered with Primecoin, which relies on a prime-number driven blockchain verification system. Prime numbers are the basis of modern cryptography and the discovery of new prime number chains can theoretically have useful computing and mathematical applications outside of the Primecoin ecosystem. Unfortunately, Primecoin lacks the features of Ethereum’s blockchain 2.0. While it is certainly a step in the right direction, I feel that Primecoin doesn’t quite fulfill the ultimate promise of blockchain 3.0.
Another example of computationally intensive computing that could possibly be adapted for blockchain 3.0 would be Folding@home. Folding@home is a distributed computing network where average people donate their spare computer CPU cycles to simulate protein folding in order to advance medical research related to debilitating diseases such as Alzheimer’s, cancer and HIV. An improvement in our understanding of diseases resulting from blockchain 3.0 calculations would be extraordinarily beneficial to society.
A crypto-currency incorporating blockchain 3.0 would effectively solve the store of value problem that has plagued the industry since its inception. Such a crypto-currency would not only excel as a medium of exchange and facilitator of complex transactions, but would also provide tangible value to society outside of its own ecosystem. Unlike the parade of less advanced crypto-currencies mined today, the electricity used to mine a theoretical blockchain 3.0 crypto-currency would provide useful benefits to humanity instead of simply vanishing into the atmosphere as waste heat.
