Hijacking Bitcoin, narratives, and the nature of truth in cryptocurrency

Posted by under Blog, Valuation Framework

As the first industry to operate in a truly free market, cryptocurrency is by nature the most competitive industry in the world.

There are many competing implementations of the idea of cryptocurrencies, and even more ideas on how cryptocurrencies should and even do operate.

How does one discern truth among all the competing claims?

Everyone on Earth has frameworks, worldviews, lenses through which they see and interpret events.

In crypto, we call these narratives.

Narratives are helpful in contextualizing and integrating information, but when relied upon too heavily, they obscure truth and exclude data from consideration.

Predictive capability

No narrative is perfectly correct; all lack some nuance. Yet narratives are necessary for human comprehension. The key is finding the right one.

But how does one know the narrative they subscribe to is correct?

In statistics, models are judged as useful or “true” according to their predictive ability.

Narratives in line with reality facilitate the correct prediction of future events.

Weekly Newsletter topics

This week, a number of things happened which destroyed the dominant narratives.

These events were explicitly predicted by several of cryptocurrency’s best and brightest.

  • Sept. 30th – The BakktFlop
    • We’ve been saying this investment thesis is just a poorly disguised subscription to the Greater Fool Theory.
    • The narrative here was encapsulated in the meme “Institutional [money] is coming.” Bitcoin speculators have based much of their optimism in the perpetuation of the BTC pyramid scheme on the eventual buy-in of institutions.
    • The Bakkt network – a creation of the Intercontinental Exchange, owner of the NYSE – disappointed investors so hard that JP Morgan said it caused a 25% drop in the price of Bitcoin (BTC).
  • Sept. 28th – Lightning bug
    • Another of BTC speculators’ theories is that the Lightning Network – an perpetually unfinished work – will soon scale and solve all of Bitcoin’s usability issues which were brought on by developers’ refusal to increase the block size limit.
    • A critical bug was “discovered” in the Lightning Network which allowed users to spend bitcoins that didn’t exist. Calling this bug critical is an understatement.
    • There’s nothing wrong with expecting technological advances to solve problems (see Moore’s Law). The issue with the Lightning Network is that a) evidence has been to the contrary since its inception, and b) basically all of BTC’s hopes of scaling in a decentralized manner were gambled on Lightning, which has perpetually fallen short of expectations.
    • In anticipation of this, a few developers created Bitcoin Cash, which is the continuation of Bitcoin as it used to be – fast, reliable, and cheap to use. The Bitcoin Cash community – mostly made up of long-time Bitcoin supporters – has also been predicting very underwhelming institutional interest in BTC.
  • Oct. 1 – UK Crypto regulations
    • As the Bakkt flop showed, “institutional” is probably not coming. Neither is it desirable. With institutions come regulations. This week, CoinShares sent out a request for comments on the UK Financial Conduct Authority’s intent to ban retail access to cryptocurrency derivatives.
    • In short, a healthy derivatives market allows more participants by making it less risky for smaller players. The only reason to ban these is that derivatives would make cryptocurrencies more stable.
    • Retail access to cryptocurrency derivatives is already extremely limited; as the non-events of Bakkt show, the institutional interest barely even exists. Governments are seeking to prevent the creation of such an ecosystem. If cryptocurrencies become stable, government-mandated fiat currencies lose their appeal, and then governments lose their hold on people.
    • This move will confuse those whose narrative suggests that governments will support the growth of the cryptocurrency ecosystem. With few exceptions, the broad swath of politicians and agencies are vehemently opposed to cryptocurrency adoption.

The narrative that’s predicted this holds that governments and other major players in the “money industry” want to shut cryptocurrencies down.

This view is held by a minority in crypto.

Due to their preconceptions, the majority of the cryptocurrency community believes that BTC is the frontrunner for bringing financial freedom, or long-term success to the crypto space.

They’ve missed the obvious:

Conclusion

Bitcoin’s opponents attempt to stop it by twisting the narrative of its supporters.

First, they introduce a perversion of an accepted narrative (e.g. Bitcoin as digital gold rather than electronic cash). Then, they change the protocol once the narrative gains critical momentum.

Luckily, narratives which are out of touch with reality doom those who operate by them to failure.

The expected value of a flawed model is false conclusions.

A subset of people in cryptocurrrency have a staggering history of correct predictions, and it’s these people we subscribe to. Through earnest reflection and examination of ideas, we hope to create more of them.