Bitcoin: beyond speculation

Bitcoin continues to make waves, or rather its price. After collapsing from a high of around USD 20’000 in December 2017 to just over USD 3’000 towards the end of 2018, the first cryptocurrency by capitalisation returned to USD 20’000 in December 2020, reached USD 64’000 in April and lose 50% of its value after multiple negative news, the first being the China ban. But despite this volatility, in spite of all the criticism, in spite of all the obstructionism, bitcoin has continued its ascent for 12 years undaunted, such that it has now also entered the portfolios of several institutional investors. How is this possible? The reasons behind the success of this cryptocurrency are not speculation, but three pillars: the technology, the economic theory, and the philosophy of bitcoin. Understanding bitcoin means understanding the society to come. Let us try our hand at this not easy task.

  1. The technology

No one, before the advent of bitcoin, had been able to create a non-duplicable digital object. We all know that when we send a picture via our mobile phone, we are actually sending a copy of this picture, which in turn can be duplicated by the recipient. The inventor of bitcoin solved this problem with what has been called the blockchain, a technology that ensures that not only is there just one copy of a digital asset, but that the same asset cannot be spent twice. In practice, when I send my digital asset (bitcoin, for example) to a third party, I lose possession of it permanently. This sounds like a small thing, but in fact it is one of the biggest breakthroughs of recent years. The bitcoin blockchain is managed through a decentralised ledger, in other words without a single person recording information on this ledger, but with multiple people (or rather programmes called nodes) recording and verifying the records of transactions and guaranteeing their immutability. In practice, there is no longer a single person who keeps records (as, for example, in a bank) but an unlimited number of nodes, which can be kept by any person, replicating all the transactions carried out. Whoever wants to manipulate a record will have to manipulate all nodes simultaneously, an action that is practically impossible. Doesn’t the blockchain seem like an important invention? Here are a couple of examples: a voting system based on the blockchain would guarantee secure, unforgeable and transparent voting (avoiding reactions like those seen in Belarus or in the democratic United States); a financial system based on the blockchain would allow for fast, cheap and secure transaction management (it is not for nothing that the Swiss parliament has just amended its financial regulations by introducing blockchain technology without any dissenting votes); a news certification system on the blockchain would allow everyone to identify fake news. Today we are still at the beginning of the long road that will lead to the adoption of blockchain technology in various fields, but we are already seeing the first practical applications here: the new Lugano card uses blockchain technology to transfer LVGA points. This technology was created to manage bitcoin, which is its first application, and is the basis of bitcoin’s technological success: in 12 years, bitcoin’s blockchain has never crashed (not even for maintenance, which does not exist), has never been hacked (third-party deposits have been hacked, not the blockchain) and has never made a bad transaction. Obstacles remain to be solved (first and foremost scalability, which to date is still limited) but confidence in bitcoin’s technology is now established even by bitcoin’s critics.

2.    Economic theory

What is the real value of a bitcoin? Bitcoin as such has no value, it is just an accounting unit. The true value of bitcoin is only given by the number of people who use it. The more people who use it, the greater its value. This rule, known as Metcalfe’s law, states that the usefulness and value of a network is proportional to the square of the number of users. When bitcoin was created in 2008, after the last economic crisis, its creator, an unknown person with the pseudonym Satoshi Nakamoto, wanted to achieve a twofold goal. On the one hand, he wanted to create a digital currency designed specifically for trading on the internet, and on the other hand, a store of value. Satoshi Nakamoto feared that all the money printed by states to overcome the crisis of 2008 would increase inflation, causing the currency to lose value. It is no coincidence that in the first blockchain of bitcoin Satoshi Nakamoto wrote a message: the headline of the Times newspaper of 3 January 2009, which announced the intervention of the British Exchequer to save yet another bank (see photo).

In case of inflation, consumers should invest their assets in a deflationary asset, such as gold, to protect their purchasing power. However, gold does not lend itself to being used as the currency of the internet. In order to guarantee the deflationary value of bitcoin, Satoshi Nakamoto has limited the maximum number of bitcoins that can be issued to 21 million, introducing a mechanism that halves the number of bitcoins issued every four years approximately (to date 18.6 million have been issued) to 21 million. It is no coincidence that the number 21 (mio) was chosen for the maximum amount of bitcoins available. In fact, it is estimated that there is as much gold in the world as a cube with 21 metres on a side. The reference to gold is therefore direct. Today, with the Covid crisis, the deflationary effect of bitcoin is attracting institutional investors who fear an inflationary wave. Could the manoeuvres taken by states and central banks to overcome the pandemic crisis cause the value of our currency to plummet? Bitcon could be a kind of insurance against this apocalyptic scenario. This is why not only Tesla, Square and Microstrategy, but also pension funds are buying small (for their fees) amounts of bitcoin as insurance in case inflation shows up. Even Kenya’s central bank has decided to hold reserves in bitcoin! But the real revolution of bitcoin is that it is a currency not issued by any central entity. As it does not need a central body to control it, bitcoin is not tied to the economic policies of central bodies. The economic policy of bitcoin is actually left to its users themselves. Indeed, today’s bitcoin is quite different from the bitcoin issued 12 years ago. Each user can propose changes to the protocol and when the majority of nodes decide to adopt the new version of the protocol, it comes into force. Bitcoin is therefore a democratisation of money and represents the ideals of the Mt. Pelerin society, an organisation founded after the war by economists of the calibre of Friedrich Hayek, Karl Popper and Milton Friedman to support neo-liberal principles and which advocated, among other things, the liberalisation of certain state activities, including central banking. And this brings us to the third pillar of bitcoin: philosophy.

3.   The philosophy

What do Jack Dorsey (founder of Twitter and Square), the Winklevoss twins (from whom Zuckenberg allegedly stole the idea for Facebook) and thousands of other people around the world have in common? They all have a bitcoin symbol in their Twitter bio. These people follow the neoliberal principles of the Mt. Pelerin society brought back to the 21st century. They are people who believe that the intervention of the state and other powerful few in monetary policy is no longer for the common good, but for the good of the few. They are people who believe that the community, not a few multinationals or hedge funds, will always make the best decision for society. It is the philosophy of an open-source society, like the bitcoin code, which is accessible to all, not protected by intellectual property rights, which sees in the adoption of the protocol, and not in its monetisation, true wealth. The figure of Satoshi Nakamoto himself, who after inventing bitcoin disappeared in order to guarantee precisely that decentralisation necessary for his currency, is an integral and indispensable part of this philosophy. Bitcoin has thus become an idea, a lifestyle, a revolution. This is the philosophy of the Millennials, young people who value social media more than a luxury car (which they rent at most, but do not buy). What happened a few months ago with the shares of the company Game Stop is an example of this philosophy. Small savers intervened not so much to make money or save a company in difficulty, but to punish the arrogance of a hedge fund ready to destroy a company by wiping out hundreds of jobs. It is the masses that revolt with the powerful few.

How will bitcoin evolve in the coming years? Will it continue its spectacular rise to become a real currency or will it be blocked by states, like China, afraid of losing one of their greatest powers (monetary policy) to those people who are also their citizens? Whatever happens, bitcoin has now entered history and will surely be remembered as the beginning of the era of change and perhaps 3 January 2009 will be remembered as the start of the digital revolution.