Original author: Lyn Alden

Original compilation: Luffy, Foresight News

When investing in Bitcoin as an asset, or in companies built on the Bitcoin network, we need metrics to assess the progress of the investment thesis and, in turn, the health of the Bitcoin network.

Bitcoin is more than just a price on a chart, its an open source network with millions of users, thousands of developers, hundreds of companies, and multiple ecosystems built on top of it. Most Wall Street analysts and retail investors dont actually use a Bitcoin wallet, self-custody the asset, send it to others or use it in the various ecosystems, but doing so is very useful for basic research. helpful.

Bitcoin means different things to different people. It enables portable savings, censorship-resistant global payments, and immutable data storage. If you are an investor in high-quality U.S. or European stocks and bonds and you are not thinking about the Bitcoin network from the perspective of a middle-class saver in Nigeria, Vietnam, Argentina, Lebanon, Russia, or Turkey, then you have not fundamentally analyzed the capabilities of this asset. Example.

The bottom line is that people assess the health of their networks in many different ways. If Bitcoin doesnt match the results they want, they may conclude that Bitcoin is underperforming. On the other hand, if Bitcoin does exactly what they want it to do, then they may believe that Bitcoin is still doing well even though there is still a lot of friction to resolve.

Ive spent a lot of time in recent years studying currency history and a lot of time in the startup/venture capital world surrounding Bitcoin, studying the technical details of the protocol so I consider it when assessing the health of the Bitcoin network. Some unique key indicators. This article will go through them one by one and understand how the Bitcoin network performs on each one.

• Market Cap and Liquidity

• Convertibility

• Technical security and decentralization

• user experience

• Legal acceptance and global recognition

Market Cap and Liquidity

Some people say price doesnt matter. They often say, 1 BTC = 1 BTC. It’s not Bitcoin that fluctuates, it’s the world that fluctuates around Bitcoin.

There is some truth to this. The maximum supply of Bitcoin is 21 million coins, created and distributed in a pre-programmed decreasing pattern. The Bitcoin network produces an average of one block every ten minutes based on an automated difficulty adjustment mechanism, and it has operated with remarkable consistency since its creation, with higher uptime than Fedwire. I don’t know what the supply of USD will be next year, but I know what the supply of Bitcoin will be and can directly audit its exact supply at any time.

But price is an important signal. It doesnt mean much on a daily, weekly, or even yearly basis, but it does mean a lot on a span of several years. The Bitcoin network itself may be the heartbeat of clockwork order in a chaotic world, but price remains the measure of its adoption. Bitcoin is now competing in the global currency market against over 160 different fiat currencies, gold, silver, and various other cryptocurrencies. As a store of value, it also competes with non-monetary assets like stocks and real estate, or other things we can own with limited resources.

It’s not that the price of the U.S. dollar moves around Bitcoin, as some proponents claim. Bitcoin is a younger, more unstable, less liquid, smaller network than the U.S. dollar, and it is more volatile than the U.S. dollar. In some years, Bitcoin holders can buy more real estate, food, gold, copper, oil, SP 500 stocks, dollars, rupees, or anything else than they could in the previous year. But in other years, they have much less to buy. Bitcoins price fluctuates primarily on a mid-term basis at any given time, and its fluctuations affect the purchasing power of holders. Currently, the price of Bitcoin has risen dramatically, which means that Bitcoin holders can buy more things than they could just a few years ago.

If Bitcoin prices stagnate for a long period of time, we may need to think about why Bitcoin fails to attract people. Doesn’t this provide a solution to their problem? If it doesnt solve the problem, why?

Fortunately, as shown in the image above, this is not the case. Bitcoin’s price continues to make history cycle after cycle. It is one of the best performing assets in history. I would say that this trend is holding up pretty well given the significant tightening of central bank balance sheets and the sharp rise in positive real interest rates over the past few years. Judging from on-chain metrics, historical correlation with global broad money supply, and other factors, Bitcoin will continue its long-term path to adoption and growth.

Then theres liquidity. What is the daily trading volume on the exchange? How much transaction value is sent on-chain? Money is the best selling commodity and liquidity is very important.

Bitcoin also ranks very well on this metric, with billions or tens of billions of dollars in daily trading volume against other currencies and assets, and it is on par with Apple (AAPL) stock in terms of daily trading liquidity. Unlike Apple, which sees the vast majority of its trading volume on the Nasdaq exchange, Bitcoin is traded on a number of exchanges around the world, including some peer-to-peer markets. Daily on-chain transfers on the Bitcoin network also reach billions of dollars.

One way to think about liquidity is that liquidity begets more liquidity. For money, this is an important part of network effects.

When Bitcoins trading volume is thousands of dollars per day, a person cannot invest a million dollars without the price fluctuating significantly, and he even has to spread his transactions over the course of several weeks. Its not a liquid enough market for them.

When Bitcoins daily transaction volume is millions of dollars, one cannot invest a billion dollars or even spread the transactions over several weeks.

Bitcoin now has billions of dollars in daily trading volume, but trillions of dollars of capital pools still can’t invest a meaningful part in it. There’s still not enough liquidity for them. If they started investing hundreds of millions or billions of dollars a day, it would be enough to tilt supply and demand toward buyers and drive prices up significantly. Since its inception, the Bitcoin ecosystem has had to reach a certain level of liquidity to gain the attention of larger capital pools. Its like an upgrade.

So, when the price of Bitcoin exceeds $100,000 or $200,000, who will buy it? Who is the entity that wouldn’t buy Bitcoin before it was so powerful? At $100,000 per Bitcoin, each sat is worth 0.1 cents.

Just like the price of 400 ounces of gold (delivery standard gold bars) is not important to most people, the price of each full Bitcoin is not important. What matters is overall network size, liquidity and functionality. What matters is whether their share of the network maintains or enhances their purchasing power in the long term.

Like any asset, Bitcoin price is a function of supply and demand.

The supply is fixed, but at any given time, some of it may be in the hands of a weak hand or a strong hand. During a bull market, many new investors buy excitedly, and some long-term holders reduce their positions and sell to these new buyers. During a bear market, many recent buyers sell at a loss, while more committed individuals rarely sell. Supply shifts from weak players looking to make a quick buck to strong players that wont give up easily. The chart below shows the percentage of Bitcoin that has not been moved on-chain in over a year, along with Bitcoin’s price:

When Bitcoins supply is tight, it only takes a little bit of new demand and new capital inflows to significantly increase the price, because existing holders wont create a huge supply response function. In other words, even if the price rises significantly, it will not encourage a massive sell-off of more than 70% of the tokens held for more than a year. But where does this need come from?

Generally speaking, the biggest correlation I find with Bitcoin demand is the global broad money supply in U.S. dollars. The first is global money supply, a measure of global credit growth and central bank money printing. Part two, the reason why the dollar denomination is important is because the dollar is the global reserve currency and therefore the primary unit of account for global trade, global contracts, and global debt. When the dollar strengthens, countries debts become stronger. When the dollar weakens, it softens countries debt obligations. Global broad money in U.S. dollars acts like an important liquidity indicator for the world. How quickly are fiat currency units created? How strong is the US dollar relative to other currencies in global currency markets?

Look Into Bitcoin has a macro data suite and as part of it they show the price of Bitcoin versus the rate of change in global broad money, which I used to create a chart:

Here we compare the exchange rates between two different currencies. Bitcoin is smaller, but is getting stronger over time due to its ongoing supply halving and 21 million supply cap. The dollar is much greater in value and goes through periods of weakness and strength, but mostly it is weak and in increasing supply with shorter periods of cyclical strength. Both Bitcoin fundamentals and USD fundamentals (global liquidity) will affect the exchange rate between the two over time.

Therefore, when I assess the market cap and liquidity of the Bitcoin network, I do so based on global broad money and other major assets over time. It doesn’t matter if it has ups and downs, after all, it is from zero to an unknown future, and it is accompanied by fluctuations. Rising prices attract leverage and ultimately lead to a crash. If Bitcoin is to be widely adopted, it must continually go through cycles and move away from leverage and circular collateralization.

Bitcoin’s notorious volatility is unlikely to abate significantly unless it becomes more liquid and widely held than it is now. There is no solution to Bitcoin’s volatility other than more time, more adoption, more liquidity, more understanding, and a better user experience on wallets, exchanges, and other applications. The asset itself changes only slowly, while the worlds perception of it, the process of adding and removing leverage on top of it, goes through manic and depressive cycles.

What would I worry about? If global liquidity rises for a long time but Bitcoin price remains stagnant, or if global liquidity is so but Bitcoin fails to consistently make new highs on a multi-year time frame. We will then have to ask some hard questions about why the Bitcoin network was unable to capture market share for a very long time. But so far, by this metric, its pretty healthy.

Convertibility

Bitcoin has gone through multiple narrative shifts in its 15-year lifespan, and interestingly, almost all of them were explained by Satoshi Nakamoto, Hal Finney, and many others back in 2009 and 2010 on the Bitcoin Talk forum discussed. Since then, the Bitcoin market has grown strongly around different use cases for the network.

Its like the parable of the blind men and the elephant. Three blind men were each touching an elephant; one touched the tail, one the sides, and one the tusks. They were all arguing about what they were touching, when in fact they were all touching different parts of the same object.

An important recurring topic in the Bitcoin ecosystem is whether it is a method of payment or a method of savings. The answer is of course both, but sometimes the emphasis changes. Satoshi Nakamotos original white paper was about peer-to-peer electronic cash, although in his earlier posts he also talked about central bank currency devaluation and how Bitcoin is resistant to such devaluation due to its fixed supply (i.e. as a method of savings). After all, money does have many uses.

Am I contradicting myself? Well, then I contradict myself, I am broad-minded and all-encompassing.
——Walt Whitman

Paying and saving are both important and go hand in hand. Since Bitcoin was primarily designed as a low-throughput network (to maximize decentralization), it primarily functions as a settlement network. Actual daily consumption transactions need to be completed at a higher layer of the network (such as Layer 2).

• Bitcoins ability to be sent from any internet user to any other internet user in the world is an important part of what makes it work. It provides holders with the ability to make permissionless, censorship-resistant payments. In fact, its first use case was over a decade ago when WikiLeaks was desupported by major payment platforms. WikiLeaks subsequently turned to Bitcoin to continue receiving donations. Democracy advocates and human rights advocates in authoritarian regimes exploited it by, for example, bypassing bank freezes. People use it to escape unfair capital controls that seek to permanently lock them into rapidly depreciating developing country currencies.

• Likewise, Bitcoin’s 21 million supply cap and immutability make its rule set (including the supply cap) believable, which is what makes Bitcoin attractive. The supply of most currencies increases indefinitely over time, even golds supply increases by an average of about 1.5% per year, but not Bitcoin. If people dont want to hold it, but just convert back and forth from fiat to Bitcoin for settlement/payments briefly, then this will add all kinds of friction, cost, and external scrutiny to the network. When you do want to hold Bitcoin for the long term, paying with or receiving payments in Bitcoin is the best way to go.

Therefore, it is the combination of payments and savings that is important. The key to thinking about this question is optionality. If you hold Bitcoin for the long term, you have the option of taking that wealth anywhere in the world, or making permissionless, censorship-resistant payments to anyone with an internet connection in the world if you want or need to. Your money cannot be unilaterally frozen or devalued by any bank or government with the stroke of a pen. It is not limited to a narrow jurisdiction, it is global. These features may not be important to many Americans, but they are significant to many people around the world.

Many countries impose capital gains taxes on Bitcoin (and most other assets), which means that if people sell or spend it, they must pay tax on its cost basis and their accounting must be tracked. This is an important part of how countries maintain their currency monopoly. This may disappear as Bitcoin becomes more widely adopted and some countries designate it as legal tender. But this tax is now a reality in most places, making spending in Bitcoin less attractive than fiat currencies in many cases. This makes me not want to spend too much money yet. But then again, Im in a jurisdiction where payment friction with fiat currency systems is rare.

Greshams Law states that with fixed exchange rates (or, I think, some other frictions like capital gains taxes), people will spend the weaker currency first and hoard the stronger currency. For example, in Egypt, if someone has US dollars and Egyptian pounds, they spend the Egyptian pounds and keep the US dollars as savings. Alternatively, if every one of my Bitcoin transactions is subject to tax, but my USD transactions are not, then I will generally spend the USD and keep my Bitcoin. Egyptians can spend dollars and I can spend bitcoins in many places, but we both choose not to.

Thiers Law states that when a currency becomes extremely weak beyond a certain point, merchants will no longer accept it and will instead demand payment in a stronger currency. At that point, Greshams Law will be overturned and people will have to spend more money. When a currency collapses completely, those who have been saving in dollars in those countries tend to start spending dollars, and the dollar even replaces the weaker currency in the medium of exchange.

In most economic environments, it is not just the merchants who sell goods and services that are important, currency brokers are also important. In Egypt or many developing countries, businesses like restaurants may not accept U.S. dollars, even though they are a valuable item that can appreciate in value in that country. Sometimes youll need to convert to local currency before you can spend money at official merchants, but less official merchants are often more likely to accept premium currency payment methods.

Lets say I bring a stack of physical dollars, a few South African Krugerrands, or some bitcoins to a country, but I dont bring a Visa card. How can I get local goods and services? I can find a merchant that accepts these currencies directly, or I can find a broker that will convert these strong dollars into local currency at a fair local price. For the latter approach, like if I were entering an arcade or casino, I might need to convert the real global currency into the monopoly currency of this place, and then convert back to the real global currency when I leave. It sounds ironic, but its true.

In other words, what we need to know is the marketability or convertibility of a certain currency, not just how many merchants accept it directly or how many merchant transactions a certain currency completes. To give an obvious example, the number of people in the world who pay directly with gold is extremely low, but the liquidity and convertibility of gold are very high. You can easily find buyers for identifiable gold coins almost anywhere at fair market prices. Therefore, gold offers its holders quite a few options. Bitcoin is similar in this regard, but more portable around the world.

Most fiat currencies are extremely liquid and marketable within their country and are accepted by almost all merchants. However, except for a few legal currencies, all legal currencies are not marketable and convertible overseas. In this sense, they are like arcade game tokens or casino chips. For example, my Egyptian pounds and Norwegian krone were virtually useless in New Jersey, even if I found a place where I could exchange them easily:

Egyptian and Norwegian banknotes

To roughly quantify it:

• The physical dollar has 10/10 convertibility in the United States, 7/10 in some countries, and perhaps 5/10 in other countries. There is a range, but overall it is usually the best-selling currency in the world right now. Sometimes you can spend it outright, sometimes you have to redeem it first, but either way theres often plenty of liquidity.

• Most physical currencies are also 10/10 convertible in their home country, but only 1/10 or 2/10 convertible elsewhere. When they are outside their jurisdiction, it takes quite a while and probably a very high discount rate to find someone willing to exchange with them. Its like arcade game tokens.

• Gold has 6/10 convertibility almost everywhere, making it one of the bearer assets that is as convertible as the US dollar. You cant spend it as easily as a countrys local fiat currency, and overall its a small amount to spend, but you can easily exchange it for liquid value in almost any country. Gold is a globally recognized liquid and fungible form of value.

• Bitcoins convertibility is around 6/10 in many urban centers around the world, in the sense that it is similar to gold, but in many rural areas its convertibility drops to around 2/10, similar to that outside monopoly boundaries legal tender. But its on a strong upward trend and has made so much progress from nothing in just 15 years. Additionally, in most countries it can be converted online into mobile top-ups, digital gift cards that can be spent locally, and other forms of value, so for those carrying Bitcoin, the total number of offline and online conversion methods Significant.

In my opinion, the right question is If I carry Bitcoin with me, can I easily spend or redeem its value? In many urban centers in developing countries like South Africa, Costa Rica, Argentina or Nigeria, Or basically any developed country, the answer is a pretty resounding yes. In other countries, such as Egypt, this has not really happened.

By now, Bitcoin will definitely become more convertible in any given number of years.

The Rise of Bitcoin Central

In my opinion, the most promising trend is the growth of many small Bitcoin communities around the world. El Zonte in El Salvador is one of them, and it caught the attention of the countrys president. But there are also other community booms, such as Bitcoin Jungle in Costa Rica, Bitcoin Lake in Guatemala, Bitcoin Ekasi in South Africa, Lugano in Switzerland, Madeira FREE and many other areas that have become dense areas for Bitcoin use and acceptance. Bitcoin sales and convertibility are quite high in these places. Bitcoin hubs keep popping up.

Additionally, Ghana hosted the African Bitcoin Conference for two consecutive years, hosted by a woman named Farida Nabourema. She is an exiled democracy advocate from Togo who understands that financial repression is a tool of authoritarianism and is a critic of Frances neocolonial currency in force in a dozen African countries. Additionally, Indonesia now hosts regular Bitcoin conferences, hosted by a woman named Dea Rezkitha. There are Bitcoin conferences all over the world.

There are also smaller organizations such as Bitcoin Commons in Austin, Texas, Bitcoin Park in Nashville, Pubkey in New York, and Real Bedford in the UK, which are all local Bitcoin hubs. It has become increasingly common to have a dedicated Bitcoin community or regular meetups in a given city. BitcoinerEvents.com and other websites can help you find them, and they can also serve as conduits for exchanging Bitcoins.

There are also apps that allow you to find Bitcoin merchants in your area. For example, BTCMap.org allows you to find merchants around the world that accept Bitcoin. Both the BTC Prague Conference 2023 and the Bitcoin Africa Conference 2023 appear on the Fedi Events app. In addition to serving as a Bitcoin wallet, the app provides a schedule of all the major events at the conference, including an interactive map showing the locations of merchants in the area that accept Bitcoin payments, such as artificial intelligence using Bitcoin Lightning Network micropayments assistant. (Disclosure, I am a Fedi investor through Ego Death Capital.)

Technical security and decentralization

My friend and colleague Jeff Booth often uses the phrase as long as Bitcoin remains secure and decentralized before describing his vision for the future of Bitcoin and its macroeconomic impact. In other words, this is an if/else view based on the assumption that the network continues to operate the same way it has for the past 15 years and that the characteristics that make the Bitcoin network valuable continue to exist in the future.

Bitcoin is not magical. It is a distributed network protocol. In order to continue to exert its value, it must function through opposition and attack, and it must be the best and most liquid way. The concept of Bitcoin is not enough to have a real impact on anything; what matters is the reality of Bitcoin. If Bitcoin suffers a catastrophic hack or becomes centralized (permission required/censored) then it will lose its current use case and its value will be partially or completely lost.

In addition to network effects and associated liquidity, a focus on security and decentralization is largely what sets Bitcoin apart from other cryptocurrency networks. It sacrifices almost every other category of performance: speed, throughput, and programmability in order to be as simple, lean, secure, robust, and decentralized as possible. Its design maximizes these characteristics. All additional complexity must be built on the network layer on top of Bitcoin rather than embedded in the base layer, because embedding these features into the base layer would sacrifice the performance of key attributes such as security and decentralization.

Therefore, it is important to monitor Bitcoin’s level of security and decentralization when building and maintaining long-term themes about the value and utility of the network.

security analysis

Bitcoin, as an emerging open source technology, has a very strong security record, but it is not perfect. As I wrote in Broken Money, here are some of the more noteworthy technical issues it has faced so far:

In 2010, when Bitcoin was brand new and had almost no market price, the node client had an inflation bug, which Satoshi Nakamoto fixed with a soft fork.
In 2013, due to an oversight, a Bitcoin node client update accidentally became incompatible with the previous (and widely used) node client, resulting in an unexpected chain split. Within a few hours, developers analyzed the problem and told node operators to return to the previous node client, resolving the chain split. In the more than a decade since then, the Bitcoin network has maintained perfect 100% uptime. Even Fedwire experienced outages during this period and failed to achieve 100% uptime.
In 2018, another inflation vulnerability was accidentally added to the Bitcoin node client. However, this issue was identified and carefully fixed by the developers before being exploited, so it did not cause problems in practice.
In 2023, people began using SegWit and Taproot soft fork upgrades in ways that developers had not anticipated, including inserting images into the signature portion of the Bitcoin blockchain. While this is not a bug per se, it shows the risk that certain aspects of the code may be used in unintended ways, which means continued conservatism is required when performing upgrades in the future.
Bitcoin faces the “2038 problem” that exists in many computer systems. By the year 2038, the 32-bit integers used for Unix timestamps will run out of seconds for many computer systems, causing errors. However, since Bitcoin uses unsigned integers, it wont run out until 2106. This problem can be solved by updating the time to a 64-bit integer or putting the block height into a 32-bit integer. But from what I understand, this may require a hard fork, which would mean a backwards-incompatible upgrade. This shouldnt be difficult in practice, as its obviously necessary and can be done before problems arise (even years or decades), but it may open a window of vulnerability. One possible approach would be to release backwards-compatible updates first, but activate when the integer is exhausted, thus solving the problem.
–Broken Money, Chapter 26

Bitcoin does recover from technical issues. The basic solution is for node operators on the decentralized network to roll back to updates before the bug existed and reject new updates that cause the problem. However, we must imagine the worst case scenario. If a technical issue goes unnoticed for years and becomes part of a wide network of nodes, and is then discovered and exploited, then this is a more serious problem, a catastrophic problem. While not impossible to recover from, it would be a serious blow.

As Bitcoins codebase persists for years or even decades, it becomes more solid and benefits from the Lindy Effect.

Overall, the incidence of major errors has decreased over time, and the fact that the network has maintained 100% uptime since 2013 is notable.

Decentralized analytics

We can use node distribution and mining distribution as key variables to measure decentralization. A widely distributed network of nodes makes changing network rules very difficult because each node enforces the rules for its users. Likewise, widely distributed mining networks make transaction review more difficult to achieve.

Bitnodes identifies over 16,000 accessible Bitcoin nodes. Bitcoin Core developer Luke Dashjr estimates that the final total number of nodes will be over 60,000, taking into account nodes running privately.

By comparison, Ethernodes identifies about 6,000 Ethereum nodes, about half of which are hosted on cloud operators rather than running on-premises. And since Ethereum nodes use too much bandwidth to run privately, this is probably closer to the actual number.

Therefore, Bitcoin is quite powerful in terms of node distribution.

Bitcoin miners cannot change the core rules of the protocol, but they can decide which transactions do or do not enter the network. Therefore, miner centralization increases the likelihood of transaction censorship.

The largest publicly traded miner, Marathon Digital Holdings (MARA), has less than 5% of the network’s hashrate. There are several other private miners of similar size. There are also various public and private miners owning 1-2%, as well as many miners with even less computing power. In other words, mining is indeed quite decentralized; even the largest players only have a small allocation of network resources.

Since China banned Bitcoin mining in 2021, the United States has been the largest mining jurisdiction, but its mining computing power is estimated to be less than half of the total computing power. It’s ironic that China remains the second largest mining jurisdiction because even with their high levels of authoritarianism, the mining industry is difficult to eradicate. Other energy-rich countries such as Canada and Russia have large-scale mining infrastructure, and dozens of countries also have small-scale mining operations.

Mining companies typically allocate their computing power to mining pools. Mining pools are currently quite centralized, with two mining pools collectively controlling about half of transaction processing, and the top ten mining pools controlling almost all transaction processing. I think this is an area for improvement:

Source: Blockchain.com

However, there are some important considerations. First, mining pools do not host mining machines, which is a key difference. If there is a problem with one mining pool, miners can easily switch to another mining pool. Therefore, while several mining pools can jointly conduct a short-lived 51% attack on the network, their ability to sustain such an attack is likely to be very weak. Second, Stratum V2 has recently been launched, which gives miners more control over the block building process rather than just letting mining pools do all the work.

The physical mining supply chain is also quite concentrated. Taiwan Semiconductor Manufacturing Company (TSM) and a handful of other foundries around the world are key bottlenecks in the production of most types of chips, including specialized chips used by Bitcoin miners. In fact, I would go so far as to say that mining pool centralization is an overrated risk and semiconductor foundry centralization is an underrated risk.

Overall, ownership of active miners is very fragmented, but the fact that some countries have large numbers of miners, certain mining pools have large amounts of mining power directed against them, and the mining supply chain has some centralized aspects weakens the Decentralization of the mining industry. I think mining is an area that could benefit from more development and attention, luckily the most important variables (ownership and physical distribution of miners) are very decentralized.

user experience

If Bitcoin is technically difficult to use, it will be limited to programmers, engineers, theorists, and power users who are willing to take the time to learn. On the other hand, if its nearly effortless to use, it can be more easily spread to the average person.

When I look back at cryptocurrency exchanges from 2013-2015, they look very sketchy. Today, its generally easier to buy Bitcoin at reputable exchanges and brokers, with simple interfaces. In the early days, there were no dedicated Bitcoin hardware wallets; people usually had to figure out how to manage the keys on their own computers. Most of the lost Bitcoins you hear about in the media are from earlier eras, when Bitcoin wasnt valuable enough for people to pay close attention and the keys were harder to manage.

Over the past decade, hardware wallets have become more common and easier to use. The software wallet and interface have also been greatly improved.

One of my favorite combos lately is Nunchuk+Tapsigner, which works great for small amounts of Bitcoin. Tapsigner is a $30 NFC wallet that can cheaply store private keys offline, while Nunchuk is a mobile and desktop wallet that works with a variety of hardware wallet types, including one for moderate amounts of Bitcoin. Tapsigner or a full-featured hardware wallet for larger amounts of Bitcoin.

A few decades ago, learning to use a checkbook was an important skill. Today, many people get a Bitcoin/crypto wallet before they get a bank account. Managing public/private key pairs may become a more regular part of life, both for managing funds and for signing to distinguish real social content from fake content. Its easy to learn, and many people grow up with the technology around them.

According to Statista, the number of Bitcoin ATMs worldwide has also increased more than 100 times from 2015 to 2022:

In addition to ATMs, there has also been an increase in coupon purchasing methods, which I believe is one of the reasons why the number of ATMs has started to level off recently. Azteco was founded in 2019 and raised $6 million in seed capital in 2023 in a round led by Jack Dorsey. Azteco vouchers can be purchased for cash at hundreds of thousands of retail and online platforms, especially in developing countries, and then exchanged for Bitcoin.

The Lightning Network has continued to grow over the past six years, reaching very respectable liquidity levels by the end of 2020.

Websites such as Stacker News and communication protocols such as Nostr also integrate the Lightning Network, ultimately merging value delivery with information delivery. Novel browser plugins like Alby make it easy to use Lightning on multiple websites from a single wallet, and can replace username/password as the signing method in many scenarios.

Overall, the Bitcoin network has become easier and more intuitive to use over time, and from what Ive seen as a venture capitalist in this space, this will continue to be the case in the coming years.

Legal acceptance and global recognition

“But what if the government bans it?” Bitcoin has been something people have generally opposed since its inception. After all, governments do enjoy a monopoly on state-issued currency and the power to control capital.

However, in answering this question, we need to ask: Which governments? There are about 200. The game theory is that if one country bans it, the other country can get new business by inviting people to build it together. El Salvador now even recognizes Bitcoin as legal tender, and several other countries are using money from their sovereign wealth funds for Bitcoin mining.

And, some things are really hard to stop. Back in the early 1990s, Phil Zimmerman created Pretty Good Privacy (PGP), an open source encryption program. It allows people to send private information to each other over the Internet, something most governments dont like. After his open source code leaked outside the United States, the U.S. federal government launched a criminal investigation into Zimmerman for unauthorized export of arms.

In response, Zimmerman released his complete open source code in a book, protected by the First Amendment. After all, it is just a collection of words and numbers that he chooses to express to others. Some, including Adam Back (the creator of Hashcash, which was eventually used as the proof-of-work mechanism in Bitcoin), even started printing various cryptographic codes on T-shirts with the warning, “This shirt is classified are arms and are therefore illegal to export or display to foreigners.

The federal government did drop its criminal investigation into Zimmerman and made changes to encryption regulations. Encryption becomes a critical part of e-commerce because online payments require secure encryption, so if the U.S. federal government attempts to overreach, much economic value could be delayed or transferred to other countries.

In other words, these types of protests are successful and use the rule of law to oppose government overreach, but also point out the absurdity and unworkability of trying to limit such concise and easily disseminated information. Open source code is just information, and information is irrepressible.

Likewise, Bitcoin is free and open source, which makes it difficult to destroy. Even limiting the hardware aspect is difficult, China banned Bitcoin mining in 2021, but China is still the second largest mining jurisdiction and it is obviously not easy to ban it. The software side is stickier than that.

Many countries have been erratic in banning Bitcoin or are stuck in their own divisions of law and authority. In relatively free countries, governments are not monolithic. Some government officials or representatives like Bitcoin, while others dont.

In 2018, the Reserve Bank of India banned banks from engaging in cryptocurrency-related business and lobbied the government to ban the use of cryptocurrencies entirely. But in 2020, Indias Supreme Court ruled against the case and restored the private sectors right to innovate using the technology.

In early 2021, amid a decade of double-digit inflation in the national currency, Nigeria’s central bank banned banks from interacting with cryptocurrencies, although they made no attempt to outlaw it among the public because it would be really difficult to enforce. Instead, they launched the eNaira central bank digital currency and restricted physical cash with stricter withdrawal limits in an attempt to bring people into their centralized digital payments system. During the ban, Chainaanalysis assessed that Nigeria had the second-highest cryptocurrency adoption in the world (primarily stablecoins and Bitcoin) and specifically had the highest peer-to-peer transaction volume in the world, which is how they bypassed the bank blockade . In late 2023, after nearly three years of ineffective bans, Nigeria’s central bank reversed its decision and allowed banks to interact with cryptocurrencies in compliance with regulations.

In 2022, as Argentinian public demand for cryptocurrencies is strong to combat triple-digit inflation, some major banks are stepping up efforts to offer cryptocurrencies to customers, but the Argentine government prohibits banks from providing such services to customers. They cited typical reasons such as volatility, cybersecurity and money laundering, but in reality it was about slowing the flight of their own currencies. Then in 2023, they went a step further and banned fintech payment apps from offering digital assets to customers. But this started to reverse after Javier Milei was elected president, supporting Bitcoin and the market deciding what it wanted to use as currency. During Milei’s campaign, economist Diani Mondino (currently Argentina’s foreign minister) wrote that “Argentina will soon become a Bitcoin haven.”

The U.S. Securities and Exchange Commission has suppressed Bitcoin spot ETFs for years. There are no issues with spot Bitcoin ETFs in other countries, with the Commodity Futures Trading Commission allowing Bitcoin futures trading and the U.S. Securities and Exchange Commission allowing futures-based ETFs. The SEC has even allowed the launch of a leveraged futures Bitcoin ETF. But they have repeatedly blocked all spot ETFs, which are the simplest type and what the market wants. In 2023, the D.C. Circuit Court of Appeals found that the SEC’s decision to allow a Bitcoin futures ETF but not a spot ETF was “arbitrary and capricious” and not based on a sound and coherent argument. By early 2024, multiple spot Bitcoin ETFs began trading.

There are approximately 160 currencies in the world, and there is a kind of financial blood-brain barrier surrounding them. They can control how much physical currency (such as cash and gold) passes through ports of entry with tight limits, they can control which currencies banks operate in, which domestic and foreign bank wire transfers can be made, and which currency accounts can be offered to customers.

Even if developing market jurisdictions do allow access to U.S. dollar accounts, they can be dangerous for holders. They are fractional reserves and are not FDIC insured, backed by the U.S. government and the U.S. Central Bank. In other words, the dollar deposits of foreign banks in developing countries are basically junk-rated and uninsured leveraged bond funds. In times of currency shortages, U.S. dollar accounts can be forced to convert to local currency at fake exchange rates or blocked from withdrawals. If someone holds dollars in a domestic bank account in a country experiencing hyperinflation, they are unlikely to get back most or any of them.

These 160 different fiat currencies can be a real problem for many people. There are more than 30 currencies in Latin America and more than 40 currencies in Africa. There are trade frictions at all these financial borders, and all these financial borders keep people partially locked into rapidly depreciating currency units.

In other words, if I want to pay a graphic designer from a developing country using various traditional payment methods, and they want to receive U.S. dollars instead of their local, rapidly depreciating currency, their government and banking systems can block the transfer and let They receive local currency expressed in a variety of ways. They can also set artificial exchange rates. Finance is tightly controlled:

But if the designer chooses to be paid in Bitcoin or USD stablecoins, I can send them the QR code over a video call, or via private message or email, and it will propagate through their banking system. I wouldnt send it to a sanctioned country for legal reasons (its too risky for me), but if theyre in a country that legally allows Americans to send money, Id be happy to do that, the main friction is in On their side, they represent the vast majority of countries.

Additionally, someone can carry unlimited amounts of Bitcoin and stablecoins around the world as long as they have the private keys. They can write it in their luggage, store it on their device, remember the twelve words that represent the key, or temporarily paste it in a password-protected, encrypted cloud file, bringing unlimited value density through any portal .

I saw a sign at the airport that said No cash over $10,000 and I chuckled to myself because they had no way of knowing who in the line had $10 million or any other value in Bitcoin or Stable currency.

With this technology, the 160 financial boundaries between us are becoming increasingly loose. Trying to wipe out Bitcoin or stablecoins or anything like that is like trying to build a wall of sand to hold back the tide. The ability to move money between banks, and between any party connected to the internet, opens up global competition among currencies.

This is a good thing for most people. This is bad for those who seek rent from the top down, constantly diluting people’s savings and wages, channeling this value to themselves and their cronies, and relying on obfuscation rather than transparency to finance themselves. Capital naturally flows to places with good legal protections and the rule of law, and technology makes this process faster and smoother, and makes capital accessible to the working class and middle class, not just the wealthy.

Holding and using Bitcoin would put governments in an awkward position if they tried to ban it, especially those with a semblance of a rule of law. They have to argue that it is a bad thing to have a currency that cannot be devalued and that people can hold for themselves and send to others. In other words, they must prove that decentralized spreadsheets pose a threat to national security, and such dangerous things must be banned under threat of imprisonment.

Instead, the biggest legal challenges facing the Bitcoin network in the future may come from the area of ​​privacy, and from major governments such as the United States. The government really doesnt want people to have any kind of financial privacy, especially on a large scale. For much of history, financial privacy was the default, but in recent decades, that has become increasingly different.

Their reasoning is that in order to prevent the 1% of bad guys from doing terrorist financing or human trafficking or other bad things, 100% of people must give up their right to financial privacy and let the government monitor transactions between all parties. Furthermore, the government already generates most of its revenue from income taxes, whose enforcement relies on ubiquitous monitoring of all payment streams. But of course, something like this could lead to massive overreach, with serious consequences.

Furthermore, we live in an age of surveillance capitalism. If we gave up our digital soul, all our data, companies would offer us countless free services. What we see and consume is very valuable business information. The government reinforces this and helps make it the norm because they also step in on the back end and collect this data. Sometimes it may be for national security reasons, sometimes it may be an attempt to control an entire population.

However, the ability for people to keep their own money and send it to others in a way that companies cant monitor, governments cant monitor or devalue is an important check on power. For businesses, there are many reasons not to want them spying on us, especially since they are frequently hacked and data leaked onto the dark web. For governments, this type of technology does not work in their favor to comprehensively monitor and freeze funds without reasonable justification, but rather forces them to have reasonable grounds before using targeted enforcement, which brings Comes with costs and legal proceedings.

In the 19th century and before, financial privacy was the norm, as most transactions were conducted through physical cash, and there wasnt any significant technology to monitor this. The idea of ​​monitoring everyones transactions is science fiction. Beginning in the late 19th century, and especially throughout the 20th century, people increasingly used banks for savings and payments, and these banks became increasingly centralized and subject to government surveillance. The age of telecommunications and the modern banking age it enabled has made ubiquitous financial surveillance the norm. Governments mostly dont have to enforce privacy controls on individuals, they mostly just have to enforce them on banks, which is easy and happens behind the scenes. The rise of factories and companies allowed people to leave the farms and enter the cities, where they earned their salaries in bank accounts, taxes were automatically withdrawn, and all their financial activities were easily monitored.

However, as computer processing, encryption, and telecommunications technology continued to improve, eventually Bitcoin was created and allowed peer-to-peer anonymous transfers of value. The more widespread Bitcoin and related technologies become, especially the privacy layers and methods on top of them, the less tenable it becomes for governments to maintain the existing centralized surveillance situation. People can start to opt out, but the government wont give up easily. They are now trying to impose bank-style surveillance and reporting requirements on individuals, which are orders of magnitude more difficult to enforce on institutions.

I suspect there will be more Zimmerman-like conflicts in the coming years, but this time over financial privacy. Governments will increasingly create friction over the use of various privacy protection methods, even including attempts to criminalize these methods, and the defense of this privacy is that many of them are open source and they are just information. In order to limit creation and use by those who have not committed a crime, the use of words and numbers needs to be criminalized in a certain order. This is difficult to justify legally in free speech jurisdictions, and difficult to enforce in practice since open source code is easily disseminated. In the United States and certain other jurisdictions, well-funded litigation can overturn these laws as unconstitutional. So, I expect that period to be chaotic.

Final grade: A-

Grading the Bitcoin network is a bit of a joke because its not really quantifiable, but basically most aspects of the network have either gotten better or stayed roughly the same.

Areas where we could subtract the score to bring it down to an A- rather than an A or A+ are that miner decentralization could be better (especially in terms of mining pools and ASIC production), and overall user experience and Layer 2 applications The development of the program/ecosystem may be even further than it is now. For the second item, Id like to see more and better wallets, more seamless use of higher-level networks, more adoption of built-in privacy features, etc.

If Bitcoin enters a period of sustained high fees, as it has recently, then I think Layer 2 development will accelerate. When fees are low, people are more likely to use the base layer and have less reason to use higher-tier solutions. When fees are high, various existing use cases are stress-tested, and users and capital gravitate toward what works or is in demand.

Furthermore, governments are usually forced to accept it to some extent, sometimes voluntarily, sometimes passively. However, the battle ahead may be over privacy, and in my opinion, this battle is far from over.

Overall, I still think the Bitcoin network has high investment value, both directly as an asset and as equity in companies built on top of the network.

Risks remain, but they represent areas of potential improvement and contribution. Part of what makes the Bitcoin network powerful is that its open source allows anyone to review the code and suggest improvements, anyone can build additional layers on top of it, and anyone can build interactive applications and continually improve it. .