I have a rule of thumb when I go grocery shopping: I look at the ingredients list, and if I can’t pronounce any of the words or don’t know what they are, I’m not putting that stuff in my body. When I buy salt, the only ingredient should be “salt” not “potassium chloride, fumaric acid, monocalcium phosphate and silicone dioxide”. Unless it just says “salt” it’s not coming home with me.
That rule stems from a deeper personal philosophy about my diet and health. I think about what people would have eaten pre-civilization, before farming when humans were hunter-gatherers. Their diet would have mostly been meat along with fruit when it was in season and nuts as well. So that’s what I eat, though I don’t eat much fruit at all anymore because the fruit today has been genetically engineered to contain far more sugar than the fruit our ancestors would have eaten. Carbs are not considered a macro nutrient (that is, they’re not necessary for life), so I avoid them as much as possible.
I subscribe to Occam’s Razor for most things, including what I eat. Occam’s Razor is the idea that, if all things are equal, the simplest solution is probably the best one. Put in the vernacular, it means “Keep it simple, stupid.” I find decision making to be much easier and more successful when I think about things in this way.
I apply that same kind of reasoning to Bitcoin and cryptocurrencies. Bitcoin is like the salt that only includes a single ingredient. Although an incredible feat of technical achievement that compiled decades of research and understanding into a single monetary asset, it’s not hard to understand Bitcoin’s purpose or it’s value.
Fiat money is unsound, meaning it can be printed out of thin air, diluting the value of the rest of the money, effectively robbing anyone who holds it of value. Bitcoin cannot be printed. Fiat is in the control of people that you have to trust not to debase its value (a trust that has never been earned). Bitcoin does not require you to trust anyone, because no single entity controls it. Fiat, while easily transferrable over distance, is not backed by anything but the word of an untrustworthy State. Bitcoin is also easily transferrable across distance but is backed by “three earths worth of power” (in the words of Michael Saylor at the Pacific Bitcoin conference in 2022). Because fiat is controlled by the State, you need their permission to use it and to keep it. It can be taken from you any time the State so desires and for any reason, whether just or not. Bitcoin is permissionless, and it cannot be taken from you in this way.
Sound, trustless, permissionless, easily transferable money. That’s what Bitcoin is, and those concepts aren’t hard to understand. It only took one paragraph to clearly demonstrate Bitcoin’s value and superiority. The label on the back of the box can be understood by anyone.
Now compare that to the 22,000 or so cryptocurrencies out there. For the vast majority of them, it’s not at all clear what they’re for or how they’re superior to any existing system. That’s why they come and go, most of them being pump and dump schemes from venture capitalists looking to make a quick buck and pull the rug on unsuspecting retail buyers.
Does the cryptocurrency have a fixed supply? If not, more can be created out of thin air, which makes it no better than fiat. In that case, you may as well just stick to fiat, which is at least accepted by people you need to buy from and whose value, while deteriorating, doesn’t drop 95% in a matter of months when the bear market hits.
Do a few people own the lion’s share of the supply? If so, you may as well stick to fiat, which is also concentrated in the hands of the uber wealthy but – again – at least has some value for purchasing and isn’t nearly as volatile.
Is the cryptocurrency centralized? For instance, is it a token created and used by a single exchange? Once again, you may as well use the fiat currency of your country for all the reasons stated.
Can the crypto be censored? Ethereum, the largest of the alt coins by market cap, now has the majority of its nodes complying with government censorship requirements. If your money can be censored or your transactions reversed or blocked, you may as well be using fiat currency.
“But it’s programmable!” say the advocates of various cryptocurrencies. That would be great if it was permissionless, but since these cryptos are not permissionless, that’s a con, not a pro. With a centralized supply in the control of a few, the code that’s likely to be written will not be for anyone’s benefit but the ones controlling it. Soon enough fiat currency will be using Central Bank Digital Currencies (CBDCs) to also be programmable, which leads us right back to there being no point to using the crypto when fiat at least has some real-world value.
“But it’s more efficient than Bitcoin!” reply the crypto believers. Yes, that’s true, but that’s also a con, not a pro. Bitcoin is backed by monumental amounts of power due to its Proof of Work system. Work must be done to produce it, which allows those who hold and use it to trust in its value because it can’t be created out of thin air. What’s backing the value of these cryptocurrencies if they’re not using Proof of Work? Ah, yes, you have to trust the people who control it. How well has that worked for all of the other fiat currencies of the world?
The bottom line is that cryptocurrencies are just less valuable fiat currencies. They’re unsound, centralized, censorable and unsupported by almost any real-world establishment that might make them marginally useful for holding onto.
But what about the handful that aren’t those things? What if a crypto has a fixed supply, was decentralized and permissionless? Even if not backed by Proof of Work, wouldn’t that make it at least somewhat valuable? Yes, but only in the same way that a boxed frozen dinner is somewhat healthier than a bag of potato chips. If the best you can say is, “it’s not as bad as the other thing”, that doesn’t mean it’s something you should consume. Besides, why would you buy a frozen dinner when you have access to steak?
While the labels on the back of cryptocurrencies may not be quite as long or have quite as many unpronounceable, scientificy-sounding words as most of the world’s fiat currencies do, they aren’t pure, clear or simple. These other systems are building on top of the ponzi fiat economy, not seeking to replace it with something pure – and anything built on top of a ponzi is a ponzi. You can’t fix a ponzi, you just have to let it die out and replace it with something that has real value.
Just like with physical food, when it comes to digital food you need to pay attention to the labels. If you don’t understand it and can’t explain what it’s for or how it’s a superior solution in simple, clear terms, the only conclusion is that it’s bad for your financial health and should not be consumed. If the people trying to sell you on it can’t make it clear and easy for you to understand, they’re probably hoping you’ll be their ponzi in a game of Greater Fool. Keep it simple and cut your Bitcoin steak with Occam’s Razor by hodling on.