Happy birthday to Bitcoin! Twelve years ago this Jan. 3, at the tail end of the recession caused by the 2008 financial crisis, the pseudonymous entity who called themselves “Satoshi Nakamoto” mined the very first bitcoin, two months after publishing a white paper outlining their idea for a “peer-to-peer digital currency.”
Bitcoin has since gone through a few iterations of perceived utility. Is it a pure alternative to established fiat currencies? Is it a liquidity provider for the illicit underground markets of drugs, kidnappings-for-ransom, and guns? Part of the cyberpunk manifesto? Or the enabler of an investment vehicle structurally similar to the collateralized debt obligation that caused the 2008 recession in the first place — and gave birth to the environment in which crypto flourished? The answer can’t be found in one, specifically, but rather in a mixture of all of the above.
With that in mind, here are three defining moments in the history of the world’s oldest and largest cryptocurrency that made it what it is today.
Who else other than drug dealers accept payments in bitcoin?
Once upon a time, everyone thought that bitcoin would quickly become another form of money that retailers accepted. But that never exactly caught on. Coinbase Commerce only does $100 million a year in volume. Visa does $2 trillion a quarter. Given the pseudo-anonymous and censorship resistant nature of bitcoin, there’s an obvious utility for drug markets on the darknet. And at one time, bitcoin was pretty much the darknet. Data from 2013 showed that 80% of all volume on the bitcoin blockchain went to settling transactions related to Silk Road. Subsequently, when Silk Road was shut down in October 2013 the price of bitcoin plummeted. Do you think any institutional investor would be interested in this? Fuggedaboutit.
Is Bitcoin part of the cyberpunk anarcho manifesto?
The only other time the price of bitcoin crashed as hard as it did post-Silk Road was when the fledgling exchange Mt. Gox was hacked and many bitcoin — now worth billions — vanished into the hands of crooks.
From this point onwards, research into custody solutions — a staple of the traditional equities and commodities space — began in earnest. Custody solutions — a registered, insured third-party holding the asset on your behalf — are a must for any sort of institutional money to enter a market. Without custody solutions, there wouldn’t be any big institutional buys like MassMutual’s recent US$100 million investment in bitcoin, or the Guggenheim fund’s plan to purchase up to US$500 million worth. There would be nowhere secure to place the funds. Telling, perhaps, then that one of MassMutual’s first investments in the space after its bitcoin buy was a $5 million investment into NYDIG, a custodian.
With all of this, are we drifting away from what bitcoin was initially intended to be? A challenge to the established institutional power structures. But that’s no longer the case, now, as an alternative asset class it’s simply something else being held in the portfolios of the largest institutional investors. Just another asset.
That’s not necessarily a bad thing. As an alternative asset class there’s a better chance for regulators to give it a fair shake. Being associated with traditional banks and high-net worth individuals and not synonymous with drug dealers or kidnappers is much better for bitcoin’s health and life expectancy. Hence why former bitcoin nemesis PayPal — which infamously used to suspend accounts that were associated with cryptocurrency — now offers its users the opportunity to trade crypto. The accounts are now much less likely to be illicit and its users a flight risk.
Remember when pools of mortgages were packaged together into a security and sold to investors with the promise of continual appreciation given of the real estate market — the underlying asset — and these were used as leverage for future investments? Remember how in the early days of bitcoin, there was a mantra of forcing reform on what was seen as a sick financial system akin to a house of cards?
Well let me tell you about the riskiest part of decentralized finance (DeFi): liquidity pools. Liquidity pools like SushiSwap and SashimiSwap package together high interest loans given to DeFi traders along with a portfolio of other assets into a token. With a belief of a perpetual bull market, these platforms are unstoppable. Some people are obviously making money, as the assets locked into DeFi have now at $16 billion as of this writing. But many of the best-known DeFi tokens have crashed, with some dropping by as much as 50%. That’s what happens when the underlying asset is synthetic and tied so directly to the market that it is traded upon.
As a near-teenager, bitcoin is coming into its own, but it will also likely go through an identity crisis. As bitcoin becomes further entrenched into Wall Street and traditional finance, what is going to happen next?
Satoshi’s vision — whatever it was — will still carry on, as the technology underlying the Bitcoin blockchain has begat an entire generation of new cryptos and uses, enabling the rise of efficient peer-to-peer methods of transmitting funds like stablecoins or Ripple XRP. Without bitcoin, central bank digital currencies (CBDCs) as we imagine them today also likely wouldn’t exist.
But the dream of bitcoin as a self-contained alternative financial system for anarcho-capitalists collectives is coming to an end as the pillars of traditional finance join the party and bitcoin gains stature and respectability. It’s not a bad thing, per se, but it is a lot different than what most people thought of bitcoin in its earlier years, during the times when many weren’t sure Satoshi’s baby would survive another day.
Bitcoin lives — we’ll toast to that!