Bitcoin is on pace to end the year up at least 60%, defying several stomach-churning bouts of volatility. It bears mentioning that in the decade from 2010 to 2020, Bitcoin gained a staggering nine million per cent, making it the best investment of any asset class.
The outperformance demonstrates how, over the long run, demand growth for Bitcoin has been secular. From the onset, the main driver of Bitcoin’s returns was rising distrust in fiat currencies and the traditional financial system. Bitcoin was created to replace trust in central authority, but it was also designed to resist monetary inflation.
A decade after Bitcoin’s invention, this seems remarkably prescient. Between December 2019 and August 2021, US money supply rose US$5.5 trillion, a 36% increase. Other major central banks have also printed vast sums of cash, hoping to keep their economies afloat. While necessary at times, unprecedented money printing has further diminished confidence in national currencies, driving more investors down the Bitcoin rabbit hole.
A big story this year was El Salvador’s decision to accept Bitcoin as legal tender — a world first. Politicians across the rest of Central America have vowed to make this happen in their nations. A recent YouGov survey found that 27% of US residents supported making Bitcoin a legal tender. And 80% of those who supported the idea were aged 18 to 44, signifying the pull Bitcoin enjoys among the digital generation.
Despite its tiny size relative to global finance, Bitcoin is winning the battle for relevance. And its initial success is catalysing innovation in the broader crypto space.
Ethereum, the second biggest crypto project, today serves as the base layer for much of decentralised finance (DeFi), an alternative financial system built around open-source code and online communities. MetaMask, a gateway for users to access DeFi apps, reported having 21 million monthly active users in November — up almost fortyfold from 2020.
Interestingly, among Metamask’s biggest backers is JPMorgan Chase. The bank owns a 10% stake in ConsenSys, the developer behind MetaMask, according to a Coindesk report. Other Consensys backers include UBS and HSBC, two prominent names in high finance.
Up until very recently, most banks appeared to be sceptical, even dismissive, about the role crypto assets would play in the financial system. But as investors, developers, governments — and even companies — pile into crypto, bankers are switching their tone.
“I am not a buyer of Bitcoin. I think if you borrow money to buy Bitcoin, you’re a fool,” said Jamie Dimon, JPMorgan’s chief executive, in a September interview. But, Dimon added later, “That does not mean it can’t go 10 times in price in the next five years.”
The blue pill takes on the red pill
In the 1999 sci-fi thriller The Matrix, rebel leader Morpheus confronts Keanu Reeves’ character, Neo, with the choice of a red pill or a blue pill.
“You take the blue pill, the story ends,” says Morpheus. “You wake up in your bed and believe whatever you want to believe. You take the red pill, you stay in Wonderland and I show you how deep the rabbit hole goes.”
The dystopian, cypherpunk world of The Matrix was probably not on Mark Zuckerberg’s mind last month when he presented his vision for the future of computing. Facebook (now called Meta) wants to build an immersive, fantasy-like virtual world where digital avatars float from room to room, playing games and meeting colleagues. Zuckerberg, of course, hopes users will don Meta’s Oculus virtual reality headsets, skipping Apple or Alphabet’s mobile operating systems altogether.
Yet Meta’s biggest threat may not be Apple, Alphabet or Microsoft. Talent (and by extension, capital) is flowing into the crypto world — including from within Meta’s own ranks.
This month, a group of former leading Meta engineers announced they had left the company’s crypto research and development division, forming Mysten Labs — a blockchain start-up. Among other things, Mysten’s founders were reportedly responsible for developing the technology powering Diem, a Bitcoin rival seen as central to Meta’s ambitions. It was Diem that shocked central banks into action two years ago, igniting a push to develop government-backed digital currencies.
“But as many others have discovered, it’s impossible to work in the crypto space for long without getting ‘red-pilled’ by the amazing potential of building for and with the groundbreaking Web3 community,” Mysten said in a statement.
With “Web3”, Mysten was using a catch-all phrase for what some hope will be the next internet, the connective tissue of the Metaverse.
In the Utopian world of Web3, intermediaries such as banks and social media platforms are mostly replaced by software and networks operated by users. Data is owned by users, not concentrated in the hands of a few platforms. This could eliminate concerns over privacy and security — particularly in the Metaverse, where avatars will generate data 24/7.
“We believe true asset self-sovereignty will be the foundation of economics in the Metaverse,” Mysten said. Mysten plans to launch a platform based on a new blockchain design next year, enabling users to move non-fungible token (NFT) assets — such as virtual items — across different digital worlds while maintaining their functionality and history.
The question is why such a seminal project could not have been developed at Meta, which has vast talent and capital at its disposal.
To this, Web3’s devotees will argue that Meta — along with today’s tech titans — represents the antithesis of what the internet was meant to be: a democratic playground of creation, information and connection. For them, the blue pill represents the status quo, a continuity of a digital world increasingly dominated by Big Tech.
Even dominance may be an understatement. Nearly half of every digital advertising dollar goes to Alphabet and Meta, driving the bulk of their revenue. Amazon, Microsoft, Alibaba and Alphabet have a combined 67% share of the market for cloud infrastructure services, according to Synergy Research Group.
Years ago, Shoshana Zuboff, a professor emerita at Harvard Business School, sounded the alarm over what she describes as “surveillance capitalism”, the business model that turns our data into one of the world’s biggest cash flow machines. Once dismissed as a conspiracy theory, surveillance capitalism now serves as cannon fodder for Netflix documentaries like The Social Dilemma, antitrust regulators seeking to rein in Big Tech, and ammunition for Web3’s advocates.
“Every survey of internet users has shown that once people become aware of surveillance capitalists’ backstage practices, they reject them,” says Zuboff. This, she says, has created a “historic opportunity to create an alternative ecosystem — one that returns us to the earlier promise of the digital age as an era of empowerment and the democratisation of knowledge”.
This is where crypto comes in. The multi-trillion market capitalisation of crypto assets provides a massive financial incentive for technologists to build the most advanced Web3 protocols on blockchains.
Cryptoeconomics — the fusion of cryptography and economic incentives — is now reaching far beyond Bitcoin, injected into everything from data storage to financial markets and virtual worlds.
The crypto world has bootstrapped itself as a hub for technology innovation. It has enough investors that it is benefitting from a positive feedback loop: the more capital it gets, the more talent it gets, opening the door for new applications and more users. The more users it gets, the more capital it gets. This virtuous circle will power the growth of crypto assets into 2022 and beyond.
Andrew Vong is chief future officer of EquitiesTracker Holdings Bhd