In a recent essay titled “The Case for a Small Allocation to Bitcoin” Wences Casares makes a convincing argument for responsible investestment in the Bitcoin “experiment”. Mr. Casares has not only served on Paypal’s board of directors from January 2016 to the present, but has also ventured into the world of blockchain with the release of his Bitcoin wallet Xapo. He is a prime example of the brain drain traditional finance is experiencing as the industry’s brightest defect to the dark side. However, for someone who has “dedicated the rest of [his] career, [his] capital and [his] reputation to help Bitcoin succeed”, he paints a conflicted picture.
Mr. Casares projects Bitcoin chances of complete failure at 20%. The Bitcoin blockchain has proven resistant toward censorship and attack in its ten year life-span, but that does not mean it won’t fall to coordinated attacks in the future--whether from “more and more resourceful bad actors, coalitions of bad actors or even from nation states eventually. ” It is true that a critical failure or vulnerability in the Bitcoin blockchain may yet be exploited, but the most imminent danger is not a malicious attack.
Mr. Casares states “Because Bitcoin does not have any intrinsic value, and because it’s value depends on a social consensus which is a sort of collective delusion, in my opinion, the most likely way in which Bitcoin could fail is a price panic. If we all decide at the same time that we think Bitcoin is worthless, then it will be worthless.” He is referencing Bitcoin’s intrinsic momentum, where a decrease in price reduces the profitability of mining, which, in turn, reduces the number of miners willing to secure the network. A less secure network will erode confidence in the immutability of the Bitcoin blockchain, leading to further price decline. The slow suffocation of Bitcoin as miners jump ship is a distinct possibility.
He continues, “Bitcoin is simply money and most forms of good money have no intrinsic value. Gold, the US dollar and national currencies do not have any intrinsic value either but because they have had a monetary value for a long time most people perceive them as being intrinsically valuable, which is a big advantage.”
The US dollar and gold retain value because we all agree that they retain value, so why should we add Bitcoin to our collection of delusions? Why should we imbue it with value? The fact of the matter is that Bitcoin is more than a technology, it is a philosophy. The value of the Bitcoin blockchain depends on the acceptance of the idea that it is built on, and Mr. Casares puts the chances of that idea fizzling out at 20%.
It is worth noting however, that the Bitcoin philosophy must have some merit since finance executives like Mr. Casares continue drop everything to pivot into the space. The Bitcoin philosophy is powerful. Mr. Casares captures its essence saying “Imagine an open platform where any individual, corporation, or government could settle with any other individual, corporation, or government anywhere in the world, in real time and for free, 24/7 and 365 days of the year. This would do for money what the Internet did for information.”
The cypherpunks, anarchists, and developers that stumbled across Bitcoin in 2009 did not support it because it was an open platform. They did because it offered censorship resistant, immutable transactions secured through cryptographic proofs, rather than trust in others. Those who doubt Bitcoin’s security are welcome to raise the hundreds of thousands of dollars necessary to control the network for a single hour, but barring an unlikely attack, Bitcoin promises to deliver us into the first truly global economy. If any person, business, or government can transact with any other global entity, how would that affect the global economy? Borders would fade into insignificance as developed and emerging economies are introduced to a global scale of competition and opportunity. A pipe dream perhaps, but Mr Casares believes the chances of Bitcoin succeeding, and becoming a global reserve currency at 50%.
He expresses cautious optimism saying “It would be irresponsible to have an exposure to Bitcoin that one cannot afford to lose because the risk of losing the principal is very real. But it would be almost as irresponsible to not have any exposure at all. I suggest that a $10 million portfolio should invest at most $100,000 or 1% of its value over 3 to 5 years, which most portfolios can bear.” The time is fast approaching where venture capitalists must consider the cost of not investing into Bitcoin.
Although his essay seems quite rational, there are a few points I disagree with. Mr. Casares writes off thousands of sovereign blockchain platforms: “Claims that the Blockchain can solve property titles, securities settlement, supply chain management, the authenticity of works of art and many other similar cases are misplaced. It is true that the systems that we are using today in all of those cases are old, antiquated and inefficient, but those problems would be better solved if [they] to use open standards and if they use better technology.” It seems that Mr. Casares believes that blockchain technology may be a square peg forced through a round hole, and in some cases he is right. Standardization between institutions can solve many problems that blockchain is seeking to rectify.
I would argue that blockchain is the standard. Using a blockchain makes sense when there are multiple parties handling a medium that is sufficiently valuable to justify the energy and monetary cost of broadcasting moves to a sovereign and immutable ledger. When something important is changing hands repeatedly, it is sometimes imperative to know where it has been and for how long. This is the case in the mortgage industry, where considerable effort is spent tracking mortgages and legal documents being traded constantly. Platforms such as Factom that are already in operation can simplify the process for a low overhead cost.
Supply chain management also strikes me as blockchain’s most important use case. Often, when there are multiple third parties providing food to a company, it can be difficult to know exactly where a specific product came from. Chipotle encountered this example in 2015 when an E. coli outbreak from one of it’s restaurants left 55 customers sick. Management could not find the source of the outbreak due to the company’s reliance on multiple third party beef suppliers. After five months they could only postulate that the source of contamination “most likely” was an Australian beef supplier . Their stock price plummeted 42% as a result. A blockchain that records the location of products with cryptographically timestamped entries will provide an accurate map of all product movement through the entire supply chain. This is essential for product recall in the event of product contamination and can also identify operational bottlenecks in the process. Platforms such as OriginTrail that promote standardization and interoperability between third party suppliers will be the future of supply chain management.
Although we may disagree on the fate of blockchain platforms besides Bitcoin, we can both agree it’s a good idea to buy more. It’s time to decide if the cost of believing in the Bitcoin philosophy is greater than the cost of being on the wrong side of history.
 “The Truth Machine: The Blockchain and the Future of Everything”. Casey, Michael.
Vigna, Paul. St. Martin’s Press, New York. 2018