'Digital Gold' Was Always a Bad Idea
Bitcoin was originally created to be a peer-to-peer payment network. But in May of 2019, a completely different narrative formed.
Yesterday my latest public piece for Seeking Alpha was published. In it, I explored the possibility of Ethereum’s new narrative; ‘The Flippening.’ The Flippening is the potential moment when Ethereum’s market capitalization is larger than Bitcoin’s. Advocates of Ethereum believe this is a certainty. Bitcoin proponents would probably prefer to not see it. I shared this chart a couple days ago, but when I started my research for the SA piece, I was blown away by how much wallet growth ETH has had compared to Bitcoin over the last several years.
Non-zero Bitcoin addresses are up about 55% since January 1st 2018. The same metric for Ethereum is up almost 900% over the same time frame. Staggering. And I don’t believe it is explained away by differing starting points for each network; meaning, I don’t think ETH is benefiting from faster growth because it came out several years after BTC did. The non-zero address figure now favors ETH by about 2 to 1. ETH isn’t benefiting from arbitrary starting points, it’s winning. Bitcoin is old and slow. Ethereum is new and exciting. ETH is tech. Bitcoin is Gold. Oops, I mean ‘Digital Gold.’
The Infamous Grayscale Campaign
On May 1st 2019, Grayscale launched the #DropGold campaign. You can watch the video above; this was the first ad in the campaign. Grayscale clearly positioned Bitcoin as an alternative to Gold. I have never liked this campaign and have always felt that it was damaging to Bitcoin for two reasons:
Bitcoin and Gold should be friends.
The broader investment community doesn’t actually like Gold.
Point one is pretty straightforward. The enemy of my enemy should be my friend. Bitcoin came out of the Great Financial Crisis. It was specifically a response to bank bailouts and central bank money printing. The ethos of Bitcoin’s origin story actually align very well with what Gold advocates believe. There’s a reason why there are actually people, like myself and Lawrence Lepard, who value both. As a result, Grayscale’s marketing campaign really rubbed me the wrong way because I felt Bitcoin and Gold should not actually be competing. They should be complimentary in the same way that Gold and Silver are complimentary. In 2019, I wrote this about the campaign on Seeking Alpha:
Don't sell me why the other guy is bad if you're trying to fill the same role as the other guy. Sell me why what you provide is better than what the other guy provides. The people at Grayscale think they did that. They did not. Why? Because Grayscale isn't really competing against gold. It is competing against bitcoin.
What? Competing with Bitcoin you say? How? Some commenters pressed. But it’s true. Bitcoin was literally created to be a self-custody asset. Grayscale’s Bitcoin funds shouldn’t even really need to exist.
This is where we get to the narrative changes that have plagued Bitcoin through the years. First it was a peer to peer payment vehicle. But Bitcoin’s TPS metrics proved the network isn’t scalable on the base layer. Also BTC held by Grayscale can’t be used in transactions. It is simply hoarded. Oops, I mean HODLed. Narrative change: Bitcoin then became “Digital Gold.” Because of that narrative shift, it was viewed by some as an inflation hedge. While it could absolutely be argued that Bitcoin actually did front-run the high inflation we’ve experienced over the last year and change very effectively, anyone who was buying BTC above $60k has not really seen the inflation hedge theory work for them.
For inquiring minds who are dying to know, this is how the prices of Bitcoin, Gold, Grayscale’s Fund (GBTC), and the SPDR Gold Trust (GLD) have performed since the #DropGold campaign launched:
As I said, Grayscale wasn’t competing with Gold, it was competing with Bitcoin. Has it beat Gold since the campaign launched? Sure. But that Grayscale fund has simply not done what it was supposed to do and it has performed much more like the Nasdaq than Bitcoin. But I want to get back to narratives for a moment.
If we can agree that Bitcoin was always supposed to be a peer-to-peer payment network, than I think we can argue Grayscale and the #DropGold campaign have actually been detrimental to Bitcoin’s adoption in some Austrian-economic circles. While I don’t want to put too much blame on any one group of people, I don’t think Maxis have been all that helpful either. You catch more flies with honey than with vinegar.
Bitcoin Maxis
I’ve talked about Bitcoin Maxis on this blog before. “Maxis,” or Maximalists, are notoriously pro-Bitcoin and against all other forms of crypto. They don’t like Ethereum. They don’t like Litecoin. They hate everything. They’re a lot of fun at dinner parties. I joke. I’ve never come across a Maxi at a dinner party. Now I want to differentiate Maxis from “Toxic Maxis.” I’m not talking about Toxic Maxis in this section. Toxic Maxis are exactly how they sound. They’re the worst kind of Maxi because they get personal and vengeful when someone who they perceive to be a Maxi turns out to not be one. We saw this just play out with Nic Carter a few months ago.
Anyway, normal Maxis can be cordial they just think every other crypto coin is junk. This is where the term shitcoin came from; a term I use sarcastically for what it’s worth. Here’s the wild thing though; in a lot of ways, I actually understand where Maxis are coming from. There is so much crap in the cryptocurrency space that it can be really challenging finding the assets that might actually have some value through some sort of network utility. Luckily, I’m here to help you sort it out with BlockChain Reaction. (*Shameless plug over*).
The problem is so many of the loudest pro-Bitcoin voices have been so busy calling everything else in crypto a scam that people can often become desensitized to the word. For instance, when those who don’t know better come across actual scams, there might be a bit of a boy who cried wolf scenario at play because they’ve been told everything is a scam and they know that isn’t true. I think Terra (LUNC-USD) is probably a decent example of this. Or maybe Hex (HEX-USD). Those appear to have been obvious scams with the benefit of hindsight. Something like Dash (DASH-USD) isn’t a scam. I offer all of this context because most Bitcoiners really don’t like Ethereum; a network that I think is obviously very far from perfect but now well positioned to be a far more important part of crypto.
Ethereum v Everything
While the Ethereum merge has undoubtedly been the biggest narrative trade in crypto over the last several weeks, the reality is that Ethereum’s successful merge to proof-of-stake is sort of vindicating public blockchain as an investment idea. Not only do I believe Ethereum will ultimately ‘flippen’ Bitcoin as the top crypto by market cap, but I think ETH will probably achieve a market cap several multiples higher than Bitcoin 10 to 20 years down the line.
The reason I hold that view is because of point number 2 that I made earlier in this article: the broader investment community doesn’t actually like Gold. Gold is expensive to produce and it doesn’t provide any “yield.” This is why investment fund managers generally don’t allocate to it. Fund managers typically gravitate to things like “growth” or income generating assets. Ethereum is now theoretically both. With the miners out of the picture, Ethereum is entirely internet-native. There is no GPU needed to bring the ETH into existence.
The opportunity for Ethereum is simple; IF (and this is a big if) it can survive the SEC, it will be positioned as the internet payment layer. This would be a huge deal since commerce is rapidly become more internet-based. The internet has been an incredible innovation. We all use it, probably daily if not hourly. Personally, my entire livelihood depends on it because I’m not printing my content on paper. As wonderful as the internet has been for eliminating barriers to entry in communication and commerce, there is still no native payment network for the internet. We still go through banking and payment processing middlemen layers.
Think about this for a moment; to subscribe to Heretic Speculator as a paid member, you probably used a Visa. And whether you realize it or not, you also used Stripe. For the privilege of convenience and integration with Substack, I’ve paid Stripe for something that I ultimately don’t need Stripe to do; transact with you. You give me $10 per month, I get a little over $8 of it before taxes. Substack takes most of that and Stripe gets the rest. Luckily, there isn’t any real overhead for my business. I work from home. I’m not producing physical widgets. I don’t need to worry about inventory, materials, or shipping costs. Even with the Stripe fee, running a content subscription business with no employees has ridiculously good margins.
But if I were selling merch on Esty or eBay instead, this relationship with my payment processor might be cutting into my margins quite a bit. Now imagine developers start building things like websites, games, or social applications on Ethereum (all things that are already happening); suddenly the Stripes and Visas of the world don’t seem as necessary. That value capture that middlemen finance firms currently enjoy disappears. Why forfeit a percent of revenue to processors when we can just send USDC to each other over an Ethereum scaling network like Polygon?
The only way to attempt to stop the finance middleman destruction is to just claim everything is a security. Precisely what the SEC is now trying to do. This brings us back to the Bitcoin vs Ethereum ‘flippening’ argument. Wall Street Bros hold the cards here, in my mind. If Wall Street wants Ethereum gone, it will be gone. If Wall Street wants to own Ethereum, it will own it. The shift to proof-of-stake makes it that much easier to take over the network and everything on Ethereum will be dEcENtRaliZeD rather than decentralized.
Some people in crypto won’t like this. But I’d wager most won’t realize it and many of those who do probably won’t care enough. For those who value decentralization, Bitcoin is still the best horse. But for those who want yield and growth, Ethereum is probably the better bet. It didn’t have to be this way. If Bitcoiners could have just gotten out of their own way, recognized the shortcomings of the network, prioritized the need for scaling solutions, and facilitated proper adoption through usage rather than from hoarding and saying “have fun staying poor,” there might be more non-zero balance BTC wallets than ETH wallets. We’ll never know.
And I say all this as someone who is very much rooting for Bitcoin to succeed. Not just for my own personal wealth but for humanity in general. Central banking has been immeasurably destructive and Bitcoin fixes this. Bitcoin can still be the payment network of the internet. One built with web-based platforms that offer scaling for permission-less micropayments while also backed by the security of a decentralized proof-of-work consensus network at the base layer. It’s not too late, but it’s probably a longer shot now than it was just a few months ago.
The difference between Goldbugs and Bitcoin Maxis
I’ve considered myself a Goldbug in the past. I believe Gold is money. Period. I have thousands of years of history and Article 1 Section 10 of the US Constitution backing that theory. Despite my belief that Gold is money, I also believe Silver is money. I think even Platinum can be money if we need it to be. What you’re probably not going to see me or other Goldbugs do though is dump on base metals because they aren’t also money. I don’t think Copper is a scam because its used in ways that Gold or Silver aren’t even though Copper has been used as money too. As has Nickel.
While most Goldbugs don’t have a lot of patience for the casino that is Wall Street, in my experience, there is a respect for the physical world, the value of time, and alternative assets as investments. I think they could have been allies if the messaging was done right. This is why I think the #DropGold campaign has ultimately been damaging to Bitcoin. It has almost certainly turned off Gold advocates from allocating to Bitcoin in addition to Gold.
The irony is there are also so many ways in which Goldbugs in Bitcoiners are similar that it was probably inevitable that these two groups would clash. But in hindsight, Grayscale and Bitcoiners may have been better off had they kept their eyes on the prize and just tried to foster adoption as a medium of exchange more similar to cash than Gold. Bitcoin isn’t Gold and it can never be Gold. Bitcoin is good at things that Gold isn’t good at; like being exchanged over the internet without a custodian. Gold is good at things Bitcoin isn’t good at; like existing in the physical world and being entirely free from reliance on electricity.
It’s almost like they are complimentary or something.
Disclosure: I’m not an investment advisor. I merely share what I do and why I do it. You shouldn’t take anything I say as investment advice and always do your own research when making investment decisions. Cryptocurrencies, tokens, STONKs, and digital trinkets could all go to zero. I have no job and I live in my wife’s basement. I’m the last person on the face of the earth who you should listen to for financial advice or life advice.