Information Asymmetry in Bitcoin — Part I

Twitter @bitcoinbacked

“There is a clear philosophical divide between bitcoin maximalists and everyone else. This boils down to information asymmetry — and maximalists are the beneficiaries…”

Definition, Bitcoin Maximalist: one who believes bitcoin will eventually become the dominant global reserve currency. (This is does not require a belief bitcoin will replace fiat currency or that some altcoins cannot increase in value in the short to mid-term).

Assumptions: This article assumes the reader has an ELI15 understanding of basic concepts of bitcoin as a monetary network.

Suggested Pre-Reading:

1. Modeling Bitcoin’s Value with Scarcity — plan B

2. Bitcoin For Safety — James O’Beirne

3. “The Bitcoin Standard” [Book] — Saifedean Ammous

4. “The Internet of Money” [Book] — Andreas Antonopoulos

Ramble:

“Bitcoin” is an experiment, a consensus mechanism, a protocol, a software (with various releases in simultaneous operation), a financial network, a currency, a unit of measure, and a symbol of cultural resistance to centralized power. Overwhelmingly, newcomers tend to become interested in bitcoin due to recent upside price action. This leads to a heavy focus on bitcoin’s properties as a currency and/or store of value only and attempting to force-fit bitcoin to a traditional investment narrative (hint: you’re gonna have a bad time). In this article, I will highlight some observations as a bitcoin maximalist, which may be less obvious to new crypto enthusiasts entering the space, to help you see things my way.

Many people largely gloss over the fundamentals of bitcoin beyond controlled supply (decentralization, openness, censorship resistance) and even those who have come to appreciate plan B’s Stock to Flow models often look no deeper than price predictions based on scarcity. The ubiquity of “inherent value” arguments, price-focused discussions, bitcoin “dominance”, and apparent universal saltiness toward bitcoin maximalists inspired me to highlight some revelatory discoveries among my endless research that ultimately commanded my submission to this black hole of monetary energy. Like most bitcoiners who joined after let’s say 2016, I initially thought I was late to bitcoin and really hoped to find the “next bitcoin.” My current hypothesis is any being capable of independent research and critical thought who starts down this path will conclude their journey with bitcoin maximalism. What comes next is my perception and opinion on some concepts and viewpoints I believe crypto newbs often overlook or misunderstand.

Inherent Value

This is a stupid argument to have in the first place about any asset because it is practically irrelevant — we wouldn’t be talking about an asset that doesn’t have a market value assigned to it beyond its inherent value. To be pedantic, nothing has inherent value in the sense that nothing has a pure liquid value in all situations. In a broader practical sense to satisfy this argument, if we attempt to rank assets by “inherent value-ness”, bitcoin unquestionably sits high on the list for a unique reason — censorship resistance. Bitcoin [network] is the world’s most censorship-resistant method of transmitting value, and even without the unit value of the bitcoin [currency] itself, bitcoin [protocol/network] is the world’s most uncensorable, immutable method of sending a global signed digital message with a trustworthy timestamp. While free speech may come after air, water, food, and shelter in necessity, it is exceedingly valued by modern society. The recent de-platforming of public figures (Donald Trump comes to mind) should make clear to all the value of an uncensorable, immutable method of sending global signed public messages. This should go 100x for our ability to hold and send value to loved ones or whomever we want. I assume anyone who negatively refers to bitcoin referencing “inherent value” to be either malicious or uninformed of bitcoin’s salient attributes.

OK I see why bitcoin is valuable, now how do I mine some? And how much will I earn from my node?

Isn’t it ironic? When people hear about a new market demand for a purely scarce asset, the instinctive response is to find the easiest possible way to produce more of the asset themselves — to inflate the supply. A complete misunderstanding of bitcoin mining leads people to think it is “free money,” when in fact it is extremely competitive. Due to bitcoin’s difficulty adjustment algorithm and accelerating competition directly correlated to bitcoin’s unit price, the number of miners can increase indefinitely while the amount of bitcoin they can produce/earn as a group continues to decrease predictably. Invariably new entrants to the bitcoin space go through a learning curve — this is part knowledge accumulation, part experience, and part psychological reconditioning. The bitcoin maximalist sees clearly the end goal is accumulation of bitcoin itself, NOT accumulation of production equipment to accumulate future bitcoin, and certainly not to exchange bitcoin for fiat gains (if that needs to be said). By investing in mining rigs rather than bitcoin itself, the investor is now out cash, still has little/no bitcoin, has accepted all the risks associated with operational costs, capital depreciation, and unpredictable rising competition, yet without key benefits of bitcoin including physical security, portability, and liquidity.

Knowledge & Experience

Yeah… the people who have actually used it [bitcoin / other crypto] might know what they’re talking about. I have never, ever, EVER seen a nocoiner speak accurately in a high level of detail about bitcoin, or any cryptocurrency. There is a glaring lack of bitcoin experts who do not believe in bitcoin. Everyone who understands bitcoin and is against it — you guessed it, they have their own better version of bitcoin! That’s it — If there is someone who can debate bitcoin knowledgeably and shoot it down convincingly, I’m all ears. Yet all we ever get is the same FUD about electricity, theoretical supercomputers, etc. and none of the “experts” or perhaps more accurately “professional haters” can ever explain why bitcoin has not only survived but breached new highs yet again, precisely as (and when) maximalists predicted.

Bitcoin blows every altcoin away with total transaction volume, value transacted, nodes operated (does anyone actually run altcoin nodes?) basically every use metric, so even altcoiners as a group likely have more experience with bitcoin than with their own coins, on average. It would make sense maximalists tend to use self custody more than altcoiners for both philosophical reasons and also because they are less likely to trade (most altcoins trade against BTC making it a large portion of trade volume, while most BTC is not trading at all). Among crypto users, bitcoin maximalists have the most choices for wallet support and least motive to hold exchange balances for trading as compared to altcoin holders. Bitcoin is the first, most popular, and longest-surviving cryptocurrency. So as far as depth of knowledge & information goes, bitcoin wins hands down. Keep that in mind when reading articles or listening to “experts” — how much experience do they have with either bitcoin or their favorite copycat?

What about bitcoin’s “experts?”

Price predictions are a good place to start, right? IIRC, the most popular recent (2017+) bitcoin price predictions go something like this:

1. Some kid on 4chan who claimed to be from the future (now proven horribly wrong).

2. A bloatware salesman who wants to eat his own dick (now proven horribly wrong).

3. Plan B’s Stock to Flow models (arguably very accurate so far).

4. <insert_richperson_name> predicts <insert random # based on nothing> (always wrong).

5. Everyone who said bitcoin will go to zero (we’re waiting).

*Chart Source plan B Twitter @100trillionUSD

I am a believer in the plan B analysis since I read the original article. I think most people intuitively understand value as a function of stock/flow makes logical sense, they just know it as the slightly perverted / oversimplified “supply and demand” due to lack of experience with assets that have predictable issuance. I encourage you to analyze plan B’s work yourself, as it is compelling. I don’t know if he self-identifies as a bitcoin maximalist, but he has not extended the stock/flow model to other cryptocurrencies. Regardless, the model lends itself to maximalists as supporting evidence the programmatic limited supply and halving events of the bitcoin protocol are functioning as intended. I don’t know if any altcoins claim to have a value predictive model — that would be amusing since they are all based on bitcoin’s price anyway. You don’t have to believe in the plan B stock/flow model, but if you do you are following the work of someone who after intense original analysis settled on bitcoin as the ultimate store of value asset.

There is a certain sense of solidity and confidence gained in the process of learning to use bitcoin — maturity and size of the ecosystem have a lot to do with this when testing free open-source software, but so does philosophy. For example when you read anything by Jameson Lopp like his Metal Bitcoin Seed Storage Stress Tests, you feel like “ok this is the real deal, I see how it’s secure and I can get behind this”. Of course you can use metal seed storage devices for any seed-based cryptocurrency, but that’s not the point… who tested the devices with a hydraulic press, submerged them in acid, burned with a blowtorch, etc., then gave an objective review of the devices available to all for free? — a bitcoin maximalist and core developer. Follow the information to its source and look at these people. Most of the bitcoin devs are clear about fundamental values and reasons for supporting bitcoin — only those who are unwavering in their support of freedom and openness tend to maintain pristine reputations in the hypercritical bitcoin community.

And how about that nut Michael Saylor? Does he represent bitcoin maximalism? I love the guy as a personality and think he’s helping people understand. He’s also having a little fun. He makes some analogies, some good, some not so good. He’s still figuring it out, but he gets it. And even as a hodler of last resort I must say his boldness in taking us to the next level (corporate adoption of bitcoin as a treasury reserve asset) is encouraging. Saylor is now announcing he will be coaching other businesses to add bitcoin to their balance sheets. Clearly the man has a plan if he intends to be successful, as he typically is, in whatever bitcoin ventures he is brewing up. Full disclaimer: I do hold some MSTR. Why? — Because Saylor talks about the macro environment and bitcoin like he gets it, he spent time doing his homework and arrived at the same conclusions I arrived at independently. It also seems entirely possible he is smarter than me. I see bitcoin has amazing potential, and I have a feeling Saylor knows even more than I do about where bitcoin is going and how to get part of the way there.

Appeal to Authority?

Regarding specific content creators or figures — I had no idea who these people were before I read their ideas about bitcoin. Rather I intend to emphasize wherever in the “crypto” ecosystem I see hardcore objective critical analysis that makes sense to me, the analyst usually turns out to be a bitcoin maximalist. How then do I explain my appreciation for Andreas Antonopoulous’ books (a few of which I do own), his videos, and explanations of bitcoin in my early days? When he was talking about neutrality, openness, bolts and nuts of bitcoin core I was interested, now I see him focusing more on his own agenda rather than neutrally explaining how this stuff works — which he has every right to do. This is unfortunately my perception every “authority” involved with every altcoin — they are doing it to serve some personal goal, not necessarily for the good of the whole in transparent terms. Of course they can still be insightful — I understand devs have their own goals and there’s nothing wrong with that. However, my goals with cryptocurrency are simple — to preserve wealth in the best possible way — and I tend to agree with people who stick to the core values of bitcoin.

Bitcoin is the Next Bitcoin

I know my experience with bitcoin goes far deeper than my experience with any other cryptocurrency project — I’ve read the whitepaper many times as well as the lightning network paper, I’ve run bitcoin and lightning nodes, sent/received orders of magnitude more transactions with bitcoin than any other coin, I can even spit a few direct quotes from Satoshi (oh yeah and I know a little about the entity who launched it). I also know specific situations in my life where bitcoin would solve a problem, like trying to sell a car to a private party without worrying about counterfeit bills or chargebacks. What do I know about altcoins? I looked into a bunch of them. I read some papers and nothing amazed me. Believe me, I wanted something that will grow faster than bitcoin, which had already had it’s big run. Monero does seem to have some advantages, but at severe tradeoffs. Ethereum has certainly made a name for itself but I don’t see anything special there yet. It looks far more likely bitcoin will enable all important features of all altcoins before any altcoin enables all the important features of bitcoin. And from an investment perspective, altcoins are just bitcoin derivatives with extra factors. I challenge any altcoin to stand on its own without a BTC trading pair, or to cross a major milestone bitcoin hasn’t crossed first without making up some new garbage metric. I reserve judgement on the ability of individual altcoins to deliver value, however no currency (crypto or fiat) comes close to bitcoin’s decentralization, and with centralized power comes the ability to print, which will inevitably be used, which leads to an inflating number being divided by hard-capped 21 million which means in the long run ALL ALTCOINS AND CURRENCIES TREND TO ZERO IN A BITCOIN UNIT OF ACCOUNT.

Bitcoin Dominance

This barely dignifies a response, but it confuses people so I’ll go there. Bitcoin created an ecosystem, then parasites attempted to cannibalize that ecosystem. The term “bitcoin dominance” was intentionally chosen because it can only go down from 100%, which gives the appearance that altcoins are “catching up” to bitcoin. False: Dividing bitcoins market cap by (bitcoin’s market cap) + (copycat marketcap) will yield some number less than 100%. Big deal. I won’t even bother joking about what those altcoin market caps supposedly are. You say bitcoin dominance is 70% of the “crypto” market cap, I say bitcoin IS the crypto market and everything else is parasitic. It’s a growing ecosystem so rising tides and all, but at the core every altcoin bows to bitcoin. Bitcoin has 100% dominance and saying anything else is intentionally misleading.

The Great Block Size Debate

This is a fascinating piece of bitcoin history and within this story lies some of the most convincing evidence in support of bitcoin maximalism. I don’t care much about the politics of who was behind which side or who profited — I’m interested in WHY one side won and the other lost. Of course I speak of the rise and fall of the bitcoin cash (BCH) hard fork. Whatever the actual reason it began, the argument as I see it came down to:

BCH: “Bitcoin’s maximum transaction throughput is too low. Bigger blocks would enable more transactions to fit in each block, allowing higher transaction throughput. The resulting increase in size to the blockchain is negligible and through extrapolation of Moore’s law we can infer data storage will never be enough of a problem to full node operators to significantly impact decentralization of the bitcoin network.”

vs.

BTC: “Decentralization is a core tenet of bitcoin and will always outweigh transaction throughput in importance. Bitcoin does not need to increase transaction throughput on the base layer to effectively function as a settlement layer for all global value. Whether or not the BCH code is better than the BTC code (it is not), the changes proposed are not enough of an improvement to incentivize abandoning the bitcoin network to start a new one.”

For node operators to fully embrace any hard fork, they must begin running a new version of the bitcoin software that is not backwards-compatible with the existing bitcoin network. So congratulations, you succeeded in creating a new protocol and currency — you don’t have the bitcoin network behind you until you convince everyone else to drop the existing network and join yours. Of course you can run both versions and participate in both networks, but then you are fighting against yourself. As a computer hardware enthusiast with a day job, I was open to the idea of big blocks because “yeah big deal if I need another hard drive I’ll buy another hard drive.” But the more I thought about it, I embarrassingly realized this made me feel a little 1337 which means my subconscious immediately saw it as a barrier to entry. We don’t want running a node to be cool, we want it to be so boring people don’t even realize they are running it — that is how we achieve maximum decentralization.

“Bigger blocks” was chosen because transaction throughput of a financial network is a reasonable topic of concern. If BCH was to dethrone the king, they need a convincing reason for people to switch. Attacking bitcoin without also attacking every other cryptocurrency is challenging, and transaction throughput was already well established FUD by those who support VISA, SWIFT, and other legacy systems. Higher throughput implies lower transaction fees, and nobody likes paying high fees, so users had incentive to switch also. This was arguably the best shot anyone will ever have at an optional hard fork, and they failed miserably. It’s an uphill battle from the start because people are lazy. If I’m running bitcoin core v 0.1.0 and you release v 0.2.0, I’m not going to switch automatically. If I didn’t need it yesterday I probably don’t need it today either, I’ll check it out later. I’m here voluntarily in the first place and already believe bitcoin works. Next, OK you got me to check out your release, now do I care? Fine, you got me to care about your changes, but wait, wait, wait, this means you’re telling me we’re going to war against my homies and my bitcoin will be worthless some day?, uhh… what are your credentials again? In the end, this was too important a decision to guess on, so I did some thorough research. The proof is in the pudding, and node operators turned out to be highly resistant to any code changes that are incompatible with the existing bitcoin network. For this reason, a hard fork of bitcoin can only overtake bitcoin’s network size and long-term market cap if there is a critical functional change required to the code. Some potential reasons I might consider joining a hard fork would be someone cracking SHA-256, requiring a change to a new hashing algorithm, or a complete miner takeover (state actor) force-feeding us empty blocks for an extended period. If those happened, I might consider a hard fork after checking what my long-time trusted core devs have to say about the release.

But, What If?

Bitcoin automatically wins the crypto value game from a stock/flow perspective due to human nature vs. bitcoin’s controlled supply, network effect, and 12 years of established permanence (Lindy effect). But let’s assume it is possible for an altcoin to “flip” bitcoin. Now the mostly likely contender for an internet-native global reserve currency has shown it couldn’t deliver technological permanence. If that is the case, the replacement cannot be trusted to deliver permanence either, therefore it too, cannot be trusted as a long term store of value. If for example, Ethereum can “flip” bitcoin’s market cap for an extended period, then Ethereum can also be assumed to be replaced in the future, so all the value will move to the next speculative coin, etc. This is beyond obvious security concerns with proof of stake vs. proof of work, hashpower, and even further with Ethereum, the #2 coin, we know reorgs are possible and have already occurred — what is the point of blockchain again? The last nail needed in the coffin is the entire crypto ecosystem is already built on bitcoin as a base layer and that is only growing. Lightning is layer 2, exchanges are L2, sidechains are L2, altcoins are L2 whether you like it or not. everyone in the space should see this but a lot of folks are in denial. “Alt Season” or “DeFi Season” or “we want to print copies of bitcoin Season” will eventually become a tired trick.

OK you win on the shitcoins, but Bitcoin is too new, it is unproven. It will never surpass GOLD.

Bitcoin’s nascency vs. gold as an argument is short-sighted. On an infinite timeline, free markets value assets according to fundamental and practical properties, unless there is sufficient barrier to entry to prevent bootstrapping. Bitcoin’s unique properties allowed it to bootstrap a strong network effect on an entirely different value proposition from gold. While maximalists will argue bitcoin has been syphoning value from gold’s market cap all along, this was not taken seriously outside the bitcoin community until recently. Very few even considered bitcoin a competitor to gold at all, yet now Gresham’s law is leading these titans of scarcity to their appropriate use cases and valuations.

Catastrophic Failure?

OK I’ll give you this one. A fatal exploit in the code everyone missed for 12 years? Sound government fiscal policy (LOL)? End of the internet for some reason? Yes it’s possible bitcoiners are all missing something, but even with that uncertainty, bitcoin stands as the most rational choice for a global reserve currency when it is so clearly superior from a monetary purist standpoint. For the first time we HAVE a choice, and you either make that choice or you don’t. Decide for yourself. Don’t get stuck letting surface level FUD with no logic convince you of anything. Do your own research.

What’s this all about?

As for my intentions of writing this, I don’t care if you buy bitcoin or altcoins or gold or stocks or not. Bitcoin is a foregone conclusion we will continue to see play out, not exactly as any of us imagine, but in a clear and monstrous way. I have no affiliations with any crypto company or publication. I don’t mean to offend anyone and if you disagree with something I say, please prove me wrong. I plan to document this paradigm shift for my own amusement, and hopefully have meaningful discussions along the way. I am bitcoin backed.

Special appreciation to: plan B, Saifedean Ammous, Jameson Lopp, Andreas Antonopoulos, James O’Bierne, and everyone not mentioned directly who contributed to my understanding and fed my obsession on this topic.