First of all, congratulations to Bitcoin Core and all hodlers for reaching an epic milestone this week. (1 BTC > $10,000) Bitcoin Cash investors should be celebrating too, because BCH has actually been a better investment over the past 3 months, with a 400%+ ROI.
Nowadays you have these “Digital Cash” vs “Digital Gold” comparisons and discussions, but it’s a false dichotomy. The reason why Bitcoin Cash exists is that some people in Bitcoin Core convinced themselves and others that “Bitcoin can’t scale”… and that there has to be “trade offs”.
I think this is a HUGE mistake and ultimately will result in Bitcoin Cash being the more useful and valuable coin, as I will explain.
The Scaling Debate Has Become an Insane, Sad Joke
If you’re not familiar with the “Bitcoin Scaling Debate”, it has to do with the size of the “blocks”. In BTC, you get one 1MB block every 10 minutes, which allows 2–3 transactions per second.
This is not very much. So, it is no wonder that transaction fees have gotten huge while confirmation times have gotten long. The network is congested as users are all trying to compete to get their transactions in.
Paying large fees was never what Bitcoin was about, and certainly doesn’t make Bitcoin valuable. The dumbest part is that right now, blocks 1000 times bigger are being tested as safe.
But never mind 1000 times — the Core group fought tooth and nail to prevent even 2MB!
In addition to the gigablock testnet project that’s proving we can have 1GB blocks, I also noticed that home users have access to gigabit Internet speeds today.
Technology is Only Getting Better and Faster.
So, why does Core developer Greg Maxwell say that “There’s an inherent trade-off between scale and decentralization when you talk about transactions on the network”.
Maybe he’s right, but this so-called “trade-off” probably starts happening with blocks measured in the gigabytes, or 1000 times more transactions than we have today.
1000 times more.
The 1980s Are Calling. They Want Their 1MB Back.
1MB is a ridiculously tiny amount of data, and nothing less than absurd in 2018. Heck, the other day, I downloaded a 100 MB file in about 8 seconds.
Certain core developers (and their supporters) use sophistry and try to intellectually belittle those who question them. “If you can’t dazzle them with brilliance, baffle them with bullshit” is the order of the day.
They’ve Convinced Themselves the Trade-off is Real.
A great many people have been bamboozled into believing that Bitcoin can’t be both a great payment system and a great store of value, when in fact, most earlier Bitcoiners understood it to be both. And this is the very reason why people were so excited about Bitcoin in the early days and why it got to where it is today.
For example, the first Bitcoin lead developer (after Satoshi), Gavin Andresen:
Having convinced themselves and others that Bitcoin is going to be slow and expensive to use with a limited transaction capacity, the next mental gymnastics maneuver is believing that Bitcoin was never really supposed to be a payment system in the first place.
“We already have instant transactions with credit cards”, they rationalize. “It’s digital gold! It’s a store of value! That’s the main use-case.”
This is like the famous Aesop’s fable “The Fox and the Grapes”. The Fox, unable to reach the grapes high on the vine, tells himself “I didn’t really want them. They were sour anyway.”
Can Bitcoin Be a Great Store of Value Even if Its Not a Great Payment System?
To be honest, not long ago I would have said “No. Without the underlying payment system its just a greater fool’s game.”
However, I realize that Bitcoin still has some utility as a payment system, even if it is poor. And the reality is that Bitcoin can be a great store of value (an appreciating asset) as long as people believe it and invest in it.
The more people that do so, the stronger the network effect. That’s what we’re seeing right now with $10K BTC.
Bitcoin Faces Huge Competition from Bitcoin Cash
After 4 years of stalling, lies, censorship, and other nonsense, the Bitcoin community who really understood that Bitcoin was meant to be a Peer to Peer Electronic Cash System decided they had enough, and created Bitcoin Cash.
So here we are.
Perhaps Bitcoin will fill the niche of “store of value” while Bitcoin Cash fills the niche of “payment currency”. But here’s the problem for Bitcoin: While it has a huge network effect advantage right now, it’s potentially on unstable ground, fundamentally speaking.
A globally used currency and a globally used ‘digital asset investment’ are completely different things, and I believe that they have quite different network effects.
What is The Network Effect?
Network Effect is a principle that states that the value of a product or service increases according to the number of others using it.
An obvious example is Facebook. It’s one of the biggest and most successful companies in the world because it’s THE place to go to for social networking. Everyone’s on FB, and competitors have an incredibly hard time gaining the critical mass of users required to create something that has a similar experience.
Four Reasons Why a Global Currency Has a Stronger Network Effect Than a Global ‘Store of Value’
1. Currency is more essential than investing.
The first thing to ask when assessing the strength of a network effect is: “How essential is the main function?” Almost everyone has to use money, so a payment system/currency is one of the most essential functions possible.
Similarly, the network effect of language in society is extremely strong, since almost everyone has to speak and communicate.
By contrast, investing is non essential to much of the world. Large segments of the population do not have disposable income (or even a bank account), and others may choose not to actively invest at various times for various reasons.
2. Alternative investments are more accessible than alternative payment methods.
If you think about it, there’s not that many different ways we pay for things. Physical cash, check, money order, wire, Visa/Mastercard, and maybe a few others.
Yet there’s endless ways to invest money. From the thousands of stocks, mutual funds, bonds, to precious metals, real estate and cryptocurrency… it’s quite a long list.
Sure, you can say “there’s only 1 Bitcoin”, but there’s many, many other cryptocoins with substantial marketcaps. And, it is easy to trade one crypto asset for another and to re-balance one’s portfolio at any time.
Many investors have switched from Bitcoin to Ethereum, Dash, Litecoin, or Bitcoin Cash at various times, and will continue to do that.
Payment systems and currencies are a lot harder. Here in the USA, you pretty much pay with US dollars or go home. A ‘minority option’ is difficult to use. That’s the network effect here.
And if Bitcoin Cash is able to get enough traction as a widely accepted payment system, it is going to be incredibly strong.
3. Investment options have more competition than payment options.
Another related aspect (apart from the choice of consumers) is: how easy is it for competition to spring up? As I mentioned, a payment currency has a very strong network effect that is hard to unseat.
But investment vehicles are easy. Sure, there is still the network effect at work where Bitcoin is the largest and has momentum, but we see other coins pop up all the time, get some hype, and just take off out of nowhere.
4. An investment vehicle can ‘bleed’ users much more easily than an established currency.
Using the US dollar again as an example, its pretty hard for an American to just stop using it (even if you hate it). But its really easy to change what you invest in. Stated another way, Bitcoin might have a huge network effect that draws investors in, but its no problem to leave if you want.
To add to this, we should consider why Bitcoin has the network effect it does. It used to be because it was also a great payment system. But if you take that away and you’re just left with “well, because everyone believes it”, you’re on shaky ground.
What if everyone stops believing it? What if there’s a bear market? What if sentiment changes? What if the news cycles start putting out negative vibes? What if some really influential people stop backing it? What if the Core developers themselves stop promoting it?
If the network effect depends so much on faith and belief, it definitely seems a lot weaker than something based on commerce and business activity.
Don’t Worry, Bitcoin Isn’t Dead
I doubt Bitcoin is going anywhere, anytime soon. It will likely continue to appreciate as a digital asset, and may even appreciate greatly.
However, I believe that Bitcoin Cash offers a risk reward proposition that is far superior.