17/05/2021

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Understanding The Future Of Bitcoin As It Matures Over The Years

“The information asymmetry for Bitcoin is extremely high. The people that understand it really understand it, and the people that don’t are completely detached from the Bitcoin world,” says Terry Soh. The 34-year-old Malaysian has a degree in international business and economics and is a veteran stock market player. He is also a strong proponent of cryptocurrencies, to the extent that in 2017 he converted his entire portfolio into Bitcoin. “For the case of Bitcoin, it is a network protocol that is designed to store monetary value through its scarcity, monetary policy, and its inflation rate. And it does that very well,” he says.

Bitcoin is a recent invention, implemented in 2009 as the first cryptocurrency, and it was unlike anything the world had ever seen. It is therefore quite understandable for potential investors to be sceptical. After all, it would not be wholly inaccurate to describe Bitcoin as an anonymous, amorphous virtual currency network operating by its own rules. And, like any good science fiction thriller, it even has an inventor whose identity is shrouded in mystery.

Broadly, there are two aspects to the Bitcoin paradigm shift. The first is the technology behind it. Despite the enigmatic nature of its founder, known as Satoshi Nakamoto – a pseudonym behind which there could have been more than one person – the architecture underpinning Bitcoin is completely transparent. Known as blockchain, it is essentially an open digital database built on layers upon layers of self-verification, with copies stored on the thousands of computers that make up the network. This makes the system highly resistant to compromise – it is incredibly difficult to counterfeit, for example, because a hacker would have the unfeasible task of gaining control of a majority of those computers. Trust never comes into the equation, as the blockchain is auditable by anyone. The status of a particular bitcoin is an immutable public record and is as concrete as a number in a bank account – if not more so.

Soh has complete confidence in the Bitcoin network protocol, likening it to phone lines, email or the internet – systems that we have trusted for decades. “The difference is that you cannot invest directly in the [old protocols]. You can only invest in companies that build on top of that protocol,” Soh says. “In the case of Bitcoin…you get to invest directly in the protocol itself.”

The second aspect is more philosophical. The biggest difference between Bitcoin and conventional currencies is that Bitcoin is not governed by a central body. Rather, the network resides on thousands of computers – nodes, which store and validate the blockchain, and miners, which run the computations that add data to the blockchain. Anyone can set up a node or become a miner, and no single entity exercises more influence than another. 

One does not have to be a miner to partake in Bitcoin, however. Soh himself has no stake in mining, which is an extremely competitive scene. Mining has attracted a lot of attention, because Mining is incentivised through awards in bitcoins, effectively exchange computing power for cash. They are essentially minting currency, in accordance with the plan for Bitcoin that was laid out at the start. That plan also caps the number of bitcoins at 21 million; thanks to miners, there are now over 18 million in circulation, but because the rate at which bitcoins are mined slows over time, we will likely be well into the 22nd century before the ceiling is hit. Mining is very demanding on computing hardware and consumes enormous amounts of electricity, and those fully invested in the process have literal warehouses full of mining rigs. “Mining is mainly concentrated in China,” Soh says. “They have huge economies of scale, to be able to do that. Somewhere in the cold mountains, powered by dams with cheap electricity. The small guys cannot compete with that.”  

Mining also brings with it a certain amount of executive power. There is nothing stopping someone from setting up a mining rig that will affect the blockchain in a different way. Of course, if just a single miner did this, then the network would flag it as anomalous and invalidate it. But if enough miners collaborated to make the same change, then that would become the new network behaviour. In this way, miners are able to directly alter Bitcoin’s monetary policy themselves – if a majority of them agreed to do so. It is essentially a vote, and Bitcoin is beholden to no-one but its own.

 “The money that we’re using today is wholly based on us trusting the government. Which is fine, but we also gave them the power to define the monetary policy,” Soh explains. He notes that the decision-making process by central banks – whether to print money or lower inflation, like so many did last year – can be arbitrary. “This is not very predictable for us savers,” he says. “Whereas with Bitcoin, everything is predictable. The monetary policy, the inflation rate, the number of available bitcoins. It’s a good hedge.” Bitcoin’s transparency, and its innate resistance to fundamental change – it would require a broad consensus of people who already opted into the incumbent policies – carries fewer surprises. 

So what does one do with their bitcoins? As a modern digital product, it certainly has the potential to be a convenient medium of trade, though it has yet to have widespread consumer use. Rather, Bitcoin has of late seemingly found its niche as a safe haven – which is ironic, given its volatile, speculation-driven youth. After a year marked by COVID-19, depressed currencies, inflation, and low interest rates, investors seeking alternatives have flocked to Bitcoin. It has hit an all-time high at the start of 2021, nearly quadrupling its initial 2020 value.

Soh likens it to gold, but better. “Bitcoin is like gold on steroids, because you can send it like an email,” he says, noting that gold has practical issues such as difficulties in transportation and verification. “Gold has a recognised stored value, but you’re not going to take gold and shave off bits to pay for coffee. Bitcoin is mainly to store your value… it’s like a savings account. You save over time, it increases or maintains your purchasing power. You need it, you take it back to the real world, and spend your fiat currency.”

“For every asset class, you have to value them relative to each other,” Soh says. “So right now, the stock market is at an all-time high. The property market is at an all-time high. Interest rate is at zero per cent. If you are a millennial, in your 30s, there is literally no returns for you from each of these assets. The only way you can save, to get a decent return… your best risk-adjusted return in the ten years, is through Bitcoin and [the second-most significant cryptocurrency] Ethereum.” 

It is not just ambitious, rebellious individuals buying into Bitcoin either, as the number of institutional players is increasing. “They buy bitcoins, and they just put it aside as part of their portfolio. They don’t look at it, they don’t touch it,” Soh says. “This is one of the reasons Bitcoin has skyrocketed, because many of these institutional players buy it and just take it off the market.” Recognisable names such as Jack Dorsey, the founder of Twitter, have openly champion Bitcoin, and Tesla recently announced it had bought US$1.5 billion worth. Paypal has started allowing users in the United States to buy bitcoins directly.

“Bitcoin is going to change the world in this decade, just like how tech changed the world 10, 20 years ago,” Soh says. “Everyone should have invested in Apple, Amazon, Google, Netflix… it’s so obvious today. The same thing is going to happen.” For these dominant tech companies, he feels they each hit a point in their respective stories where they became too big to fail, and he believes that point is at the US$100 billion mark. The market capitalisation of Bitcoin is approaching US$700 billion. Soh is also not too worried about some governments being so sceptical as to consider banning it outright – the movement has gained enough traction that nobody would want to see so much capital fleeing the country.

Soh likens Bitcoin to Microsoft Windows. It is the first cryptocurrency that introduced the concept to the public, it is the most established and stable, and is hence opening the door for others in its wake. “In the whole space, there’s Bitcoin, there’s Ethereum, and there’s everything else,” he says. “Ethereum more like Apple in the early days. It’s confusing, but it does a lot more things than Bitcoin, but it’s not a finished product although it’s getting there.” Ethereum is also built on a blockchain platform but has a much different goal and a wider scope. It can facilitate smart contracts, automated payments, securities trading, and more. 

In fact, Soh’s position in Ethereum is currently double what it is in Bitcoin. He believes Ethereum is going to change the world, too. But that is another story.


Photos: Unsplash

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