To respond to this, it is important to first understand how society developed, why we began to own things, and why a store of value was initially required.
Human civilization has developed from a hunter-gatherer community to an agrarian society to a monarchy to a democracy. In the first half of this history, a hunter-gatherer society predominated, which predominantly had a surviving mental model. Over time, people progressively moved away from this way of life to adopt different ideas, such as an agrarian society with a developing mental model, where production was higher than it was in the earlier civilization.
People who first settled owned a sizable portion of the land, which marked the transition from a hunter-gatherer society where they owned nothing (other than perhaps sticks and stones) to an agrarian society (owned land and livestock). This signaled that they had secured their future. In the settlement, people used the barter system to exchange value for value through commodities, even though it had many limitations because they had the time to cultivate and produce not only for themselves but also for others with the same amount of resources.
As the system matured, people found the barter system to be challenging. As a result, they began to use gold or other materials that were difficult to produce locally as a medium of exchange since they posed fewer restrictions on successful commerce than the barter system did. This led to innovation and increased trade efficiency. More value was added to the economy through innovation and improved commerce, which led to the introduction of paper money that was first backed by gold but later evolved into a fiat currency.
From first possession (taking something before someone else), to communal ownership (the entire tribe owns), to ordered ownership (the king or the state owns), to named ownership (a physical deed), to NFTs (Digital deed), and how people own things has evolved. You could see that the resource issue had changed from being a more violent, higher-level problem from left to right on this ownership spectrum, to being handled peacefully.
As society transitioned from a state of survival to one of progress, individuals desired prosperity or more money. Real estate, commodities (gold, silver), stocks, other sophisticated instruments (such bonds, derivates, etc.), and cryptocurrencies are the most common asset instruments that people employ to hold value and protect their money.
The oldest asset instrument we now own is real estate, which has been through several ownership incarnations, from first possession to named ownership. Since the beginning of the agrarian culture, we have been using land as a store of value for about 10,000 years. For more than three thousand years, metals like gold have been utilized as a store of wealth. Since the Dutch East India Company began trading publicly in 1611, stocks have been utilized as a store of value for the previous 410 years. This practice later sparked the development of sophisticated instruments like ETFs and derivatives, among other things.
If you contrast the ownership distribution and output of products and services, along with real estate, gold, and stocks employed as a store of value across time. It may be clear to you now that, despite a few edge instances, it has progressed from low productivity and liquidity to high productivity and liquidity, And moved from a restricted trade environment to a globalized environment.
Gold, stocks, and real estate. Compared to liquidating the value held in gold or stocks, it is more difficult to convert real estate's worth into a form of cash. When addressing various asset classes, there are a number of other considerations to make in addition to liquidity and productivity, some of which are particular to the class. But let's not get into that now.
Since there was no such thing as digital money before the Internet, Sending money across the globe was expensive and time-consuming.
Many people attempted to address that issue in one of two ways:
- Creating infrastructure for online transfers of government-backed currency.
- Building Internet money with no trusted third party.
Many have attempted to develop reliable currency without the help of a reliable third-party, so that people can exchange value for value rather than for something that the government determines to be valuable. Internet money creation was attempted in the 1990s by a few initiatives including B-Money. Since the early 1990s, there have been numerous initiatives to develop dependable online money, but none of them have been successful.
The Bitcoin whitepaper was published by Satoshi Nakamoto on October 31st, 2008, and the Genesis block of bitcoin was mined on January 8th, 2009, making Bitcoin the first trustworthy online currency without a third party to actually function. Even though it possessed sound money qualities to be an exchange of value over the internet, people began treating it as an asset instrument because of its scarcity.
Cryptocurrencies are decentralized, permissionless, and operate without a trusted third party to deliver value on the internet, in contrast to real estate, gold, and stocks where you require a third party to facilitate transactions for you. Cryptocurrencies have been around for 14 years and they are permissionless and Internet-native. Real estate has been around for 10,000 years, gold has been there for 3,000 years, and the stock market has been around for 410 years. All of these asset instruments have now gone digital, but they are still innately paper-based and require a third party to complete a transaction. Bitcoin and other cryptocurrencies are a unique asset class because no such innovation of this kind has ever been implemented in the known past.
Due to the age ratio of land, gold, stocks, and cryptocurrencies:
That is 100 : 30 : 4.1 : 0.14 , This is why you shouldn't anticipate market stability in the cryptocurrency space. You cannot expect a newborn who is two months old to speak like a person who is thirty years old, despite the fact that they have similarities.
People in the general public who oppose Bitcoin and other cryptocurrencies compare them to other asset instruments and assert that they are just speculative bubbles. Because of this prejudice, They are unable to comprehend what it accomplishes in reality. Bitcoin is open-source software that reflects the worth of the computational power utilized in conjunction with the scarcity, While Ethereum is open-source software that powers a Turing-complete global computer. Gold is a tangible representation of its worth, labor, and metal scarcity. A gram of gold may cost more or less in a given country's currency, but it always retains the same value. The same is true for Bitcoin, Ethereum, and other cryptocurrencies.
1 BTC = 1 BTC, 1 ETH = 1 ETH
The exchange rate might fluctuate but it retains its value.
People are greedy and they lose money, but when they lose it outside of their home country, it harms the economy of that nation more than it hurts the individuals when the volume is high. The move by governments to try and outlaw cryptocurrencies could be interpreted as an attempt to stop the potential future capital outflow.
Cryptocurrencies pose a challenge to the monetary sovereignty, or control over the economy, that states once held. A citizen can now choose to save in bitcoin rather than the national currency and use it as collateral to get a loan without a third party being involved. However, outright prohibiting it would be more costly to the nation in the long run. Consider the loss of value created by businesses like Meta, Google, and other entrepreneurs if the United States had banned the internet because it had encryption.
Governments can only shut down financial circuits that use fiat currency; at best, some may raise the entry hurdle, as with India's 30% tax rate, and a few nations may outright outlaw it, as with China. The entire telecommunications network must be shut down in order to outlaw bitcoin or any other cryptocurrency, which will have a greater negative impact on the economy than the amount of money lost in crypto. There are benefits and drawbacks to every asset class, and cryptocurrencies are no different.
Unknowingly, some people expect the government to operate like a business, which involves acting quickly and taking risks to create value. They also expect legislators to enact fair regulations and turn Bitcoin into legal tender. This won't occur in nations where a party holds office for four or five years since politicians are compelled to uphold the current system and postpone the repercussions rather than innovating, Many nations will delegate regulation to those like the United States in the near future and adopt their policies, but some like El Salvador are an exception.
There are many businesses that benefit the economy and consumers around the world, but there are some companies that also serve as money laundering shell firms. For a wide range of populations, physical money is useful, but there is also counterfeiting. Many startups fail, while others grow to be billion-dollar corporations. The same thing happens in cryptocurrency and the chances of common people losing money are higher, but unlike other forms, it does not exist in a protected environment, which means there is no regulation and no investor protection resulting in higher volatility. Desperate optimism will only result in loss and money outflow.
The prevalent feeling among individuals is that they lost money on an opportunity that they didn't spot. For example, when a stock increases 30% in a week, people often think, "Damn, I wish I had bought that earlier." This is a by-product of FOMO and greed, which draws people to it, but like any trader, they learn after losing money.
The regulation will only increase institutional investment, which will eventually increase liquidity and productivity because cryptocurrency is already globally distributed by default.
With startups, traditionally only the founder and team members are motivated to find product-market fit. However, with cryptocurrencies; founders, investors, teams, and users may align themselves to what's beneficial for the product or the DAO (decentralized company) that can cause exponential growth. One such example would be Uniswap, a decentralized exchange that has a TVL of 4.2 billion dollars and an average monthly trading volume of 20 billion dollars within four years of the company's launch.
People have already begun to associate their identities with cryptocurrencies and to brand themselves as Bitcoiners or with an NFT pfp, Which makes crypto much more difficult to eradicate from the world.
N number of justifications for the necessity of crypto can be given, but the strongest one would be that ’To progress, we have to be more optimistic. Skepticism towards innovation leads to widespread adoption’
When the internet first became widely used in the 1990s, there was a lot of excitement and hype around the potential for new online businesses. This led to a lot of investment in dotcom companies, many of which turned out to be scams. The most famous example is probably Pets.com, which raised millions of dollars in investment but quickly went bankrupt.
Similarly, there is a lot of hype and excitement around web3 technologies such as blockchain and cryptocurrency. These technologies are still in their early stages and there are a lot of scams and fraudulent projects. However, this does not mean that web3 technologies are a scam. Just like with the dotcom bubble, there will be some scams and failures, but there will also be some successful projects.
Web3 technologies have the potential to revolutionize the internet and create a new wave of innovative businesses. The key difference is that this time around, we know a lot more about what we're investing in. So while there is still some risk, there is also a lot of potential for reward.