The Evolution Of Money

Forget Everything You Think You Know About Crypto

(It’s mostly wrong anyway)

by Dorian Duffy & P.E. Kelley

Mr. Duffy is a contributing correspondent for technology/cryptocurrency, and an advocate for the humanitarian use of Bitcoin. Connect with him at [email protected]
Mr. Kelley is managing editor of Advisor Magazine. Connect with him at [email protected]

This year’s Bitcoin 2022 Convention gathered in Miami Beach in early April with 35,000 registered attendees. The conference presented a roster of innovators, including Pay-Pal co-founder Peter Thiel, Crypto-friendly senator Cynthia Loomis and new crypto-entrepreneur Serena Williams to name a few. Nayib Bukele, the president of El Salvador, addressed the audience via video. El Salvador has become the first country (and now case study) to adopt Bitcoin as legal tender. The event was largely sponsored by Block’s Cash App. Block’s CEO, Jack Dorsey recently stepped down as CEO of Twitter to devote his full attention to Bitcoin.

Keynotes addressed a range of topics, including individual sovereignty, security, software development, geo-political concerns, regulation, and humanitarian relief. Dozens of exhibitors set up shop to spread the word: techno-innovators showcasing the latest hardware wallets; hydro-cooled mining systems; Bitcoin ATMs; and blueprints for a Bitcoin standardized energy grid. Even some expatriates of Wall Street, who see a future in crypto-backed ETFs, were there as well.

While walking through this melange of esoteric technological innovation, it was clear that an entire infrastructure is being conceived and built to support a phenomenon whose promise and utility is only now starting to gain meaningful traction. The ascendancy of cryptocurrency, with Bitcoin by far the clear leader, is still rising, while the city around it is being constructed ‘on spec’… and the faithful gathered in Miami to bear witness to this truth.

A New Sovereignty

The concept of ‘digital currencies’ is nothing new, dating as far back to the cypherpunk movement of the 80’s. But up until recently, the technology required to enable these ideas to function had not yet been developed. It was the advent of the internet and mobile phones, set against the aftermath of the 2007 financial crisis, that Bitcoin was conceived. It’s DNA was constructed by accumulating the most promising advancements from its earlier, though often futile digital-cash predecessors. Bitcoin’s visionary, Satoshi Nakamoto, who to this day remains anonymous (and may actually be more than one person) delivered a manifesto, a white-paper in response to the failure of our financial systems to protect the wealth of it constituents. In it, Nakamoto imagined a supply capped monetary system that would be fully decentralized and incorruptible. Moreover, it would operate on peer-to-peer transactions, eliminating the need for third party providers, as well as any central banking structure.

This is a truly disruptive technology, which challenges the fundamentals of our existing monetary system. But as cryptocurrencies continue to evolve, lawmakers and regulators are beginning to engage the conversation. Fully utilizing Bitcoin’s decentralized nature will shift any conversation from what can or cannot be regulated, differing from the guard rails required for participants of traditional centralized financial systems. The adoption of “know your customer” (KYC) guidelines, for example, can be looked at as progress, although others would consider these motives to be contrary to the vision of true anonymity, self custody and protection of ones identities on the internet.

And common misperceptions run the gamut: that Bitcoin is used by drug smugglers, organized crime and sanctioned individuals to shield profits from the government; that it represents an anarchist’s dream to derail government intrusion; or that it is just so volatile that whatever value you might hold at a given point in time can evaporate in a nano-second. In truth, for the first time since the conception of currency itself, Bitcoin allows any person with access to the internet and a mobile phone the ability to bank themselves and participate in an ever growing global digital marketplace. Furthermore, in a highly politicized era, Bitcoin remains neutral.

The implementation of cryptocurrencies, enabled by new and diverse technologies, is already moving rapidly into the mainstream. It has taken visionaries willing to invest in its early promise to get it to where it is today. Think of Apple’s launch of the Mac in 1984, the creation of the digital-coding format MP3 in 1991 or how everyone scratched their heads in 1998 and asked ‘What the hell is a Google’? As Nakamoto said: “Writing a description for this thing is bloody hard. There’s nothing to relate it to.”

Here again, Bitcoin’s vast structure and versatile use has changed the conversation. Asking “how do you use it” is no longer a hypothetical question. So far, it has been used predominately as a store of value, but rapid advancements in technologies now enable it to be used as a superior tool for sending micro-payments through the internet. As such, Bitcoin maximalist and MicroStrategy founder Michael Saylor implored the Miami audience to “never sell your Bitcoin… but do borrow against it.”

Security, Transparency & Blockchain

Clearly, the narrative is beginning to shift within the financial world. Investors, including institutional money managers, recognize a maturity in crypto as an asset class...

Transaction receipts on the Bitcoin network exist in digital-constructs called Blocks. Archived together, these make up an immutable public ledger called a Blockchain. Once verified, these cash transactions cannot be undone, only redone on the next block. Bitcoin utilizes a physical network of “miners”and “nodes” that serve as validators. One CPU is essentially given one “vote” and miners compete for a chance to use this “vote” by solving a Hash algorithm. In turn, miners are rewarded Bitcoin as incentive. It is this process, known as proof-of-work, that fundamentally separates Bitcoin from other cryptocurrencies.

Asset “coins” remain on the blockchain, while access to them is allotted to a private 12 or 24-character “key” or “passphrase”. Keys can be stored in custodial or non-custodial wallets. Most online exchanges and “hot wallets” are custodial and store users keys online. Physical hardware “cold” wallets are non custodial which enable users self custody of their private keys and the ability to store them securely offline. Should anything happen to the physical device itself, funds can be recovered using the passphrase, ideally etched in steel and stored in a safe location (or memorized). This holds tremendous promise of mobility for those oppressed by war and authoritarianism.

A Viable Hedge

Should you choose to spend your Bitcoin, how could you do so? Many of the vendors in Miami presented technology focused on this, like CheckSig, which offers a ‘publicly transparent custody protocol’; Moon, which has a Pay-With-Bitcoin protocol offering the purchase of one-time-use, virtual Visa cards for checkout; or Bitstamp, an industrial grade crypto-exchange.

Jack Mallers, CEO founder and of Zap, a bitcoin investment and payments company, created the Bitcoin payment software Strike, which allows users to send and receive Bitcoin or US Dollars anywhere in the world, instantly, for no additional fees. Built on the layer-2 lightning network, Apps like Strike allow users to benefit from using Bitcoin “under the hood” so to speak, without having to hold the volatile asset. During his presentation, Mallers announced Strike’s partnerships with Blackhawk and NCR, who together will facilitate bringing Bitcoin payment systems to mainstream retailers. Merchants will benefit from cutting the cost normally associated with credit card service fees. Those who need to send fast and secure cross border payments, now have an alternative to services like Western Union.

Peter Thiel, co-founder of PayPal, opened his keynote by replaying a video of himself from 20 years ago, validating his prediction that transactions would predominately be made on mobile phones. The thrust of his presentation was to elevate bitcoin beyond competition within cryptocurrencies and into direct competition with equities. The real competitor for Bitcoin, he implied, is not Ethereum, and it is not even gold; it is more something like the S&P 500, and the stock market as a whole. It begs the question: shouldn’t Bitcoin find parity with equities?

Now Into The Mainstream…

Anyone who bought Bitcoin in march of 2017, when it debuted on the global financial system, paid about $960. The price at the moment, according to the NASDAQ daily ticker, is about $40,437 (@ 4/13/22). Along the way, there have been some precipitous drops in value, notably in July of 2021, when the price plummeted from $60,000 to about $30,000 before shooting back up to near $55,000. It hit an all time high of $68,044 @11/10/21.

So far, a small list of countries including China, Russia and Turkey have banned the use of cryptocurrency transactions and mining. In response to Russia’s recent invasion of Ukraine and the sanctions that followed – Ukraine legalized and sought donations in crypto, while Russia reversed its ban.

Clearly, the narrative is beginning to shift within the financial world. Investors, including institutional money managers, recognize a maturity in crypto as an asset class. According to Candace Browning, head of Global Research for Bank Of America, speaking in October 2021, the entire spectrum of digital assets “is creating a whole ecosystem of new companies, new opportunities and new applications.” Her company’s research concludes that, with a $2 trillion market value and some 200 million users, it is simply too large to ignore and can realistically form an entirely new asset class.

In March, the Biden administration issued an executive order to come up with a plan to regulate cryptocurrencies, attesting to the fact that, at the very least, it has the full attention of the U.S. government. While the more insurgent members of the crypto-world may chafe at this, others recognize distinct and attractive possibilities for collaboration to make the U.S. a world leader.

Only time will tell, but for now, innovation proceeds and multiplies unabated, as cryptocurrency reaches toward its own critical mass.

 

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