My audience for this piece are you, the children of crypto summer. There is nothing particularly new to the content here. Instead, these ideas are so old that you newer entrants never got a chance to hear it. You saw the emergence of DeFi, GameFi, and DAOs on Ethereum and other Turing-complete chains. You probably think of Bitcoin as crypto1.0, some meme coin that is passé. After all, Bitcoin can’t do DeFi, GameFi or DAOs very well at all. So then understandably, you should ask yourself, why the heck does this old coin have so much value?

To start, we should visit what the actual purpose of BTC is today. Whereas many once it was thought to be a cash replacement, the limitations on transactions per second (currently around ~10) meant it could never compete with Visa (around ~40,000). As of this writing, the narrative for Bitcoin has instead solidified around the idea of the “store of value.” Gold has historically held this role in society because it is both appropriately scarce and shiny. You use a store of value when you think that the market is over-valuing stocks and that a crash will be met with quantitative easing. Think of it this way: if the market is going to collapse, you should hold cash. Except! The government will print cash to help bolster a collapsing economy, which means the cash you are holding is also dropping in value. Bitcoin offers you an exit. Instead of buying stocks or holding cash, you hold Bitcoin or a commodity like gold. 

Most people immediately counter here with the fact that gold is “useful.” It has some inherent properties that make people want to incorporate it into their jewelry or computer circuits. The problem though is that these use cases are actually annoying. While you were trying to store your value, let’s say the global demand for computer chips and jewelry goes down, then your fundamental use case drags gold down with it. Bitcoin on the other hand, is fundamentally useless outside of a store of value. This in turn makes it easier to reason about.

But there is more. Bitcoin is 10x more useful than gold is as a store of value. For one, it is easy to send 100m$ of it around the world in 10 minutes. That task costs about 1$ in fees. Moving the same amount of gold is way harder obviously. It is also easier to seize gold. It is also easier to fake gold (in 2020, over a billion dollars of it was discovered to be gilded copper). Finally, it is easier to stop the sale of gold. Because Bitcoin operates on a decentralized and game-theoretically sound immutable ledger, its movements cannot be inhibited. 

At this point, the Etherean will stop and argue that Ether can do all of those 10x better things, but also more. It is a store of value that can operate in a decentralized financial market. And even if that gives our store of value a use case, which means it is once again harder to reason about its value (e.g. what if for instance the use cases go down is users?), the odds of the use cases going down is very low. After all, it is a Turing-complete money.

And the thing is, the Etherean is almost right. But while I hold Ether for exactly this reason (i.e. I believe the demand to use Turing-complete money will go up), I also hold BTC. Recall my earlier statement: “Bitcoin operates on a decentralized and game-theoretically sound immutable ledger”. That was a lie. We actually cannot know that Bitcoin is game-theoretically sound because it is too complicated to think about holistically. However, we have way more certainty of its soundness relative to Ethereum. This is because Ether is on a Turing-complete chain. The amount of things that can go wrong are unbounded.

And I am not talking about the billions of dollars lost to bugs last year alone. Those can be patched over time and it was not Ethereum’s fault, it was poorly managed smart contracts. No, the worry I have is that Ethereum will destroy itself. To explain this, I am going to turn to Basketball as an analogy.

You may not know this, but Basketball has been broken many times. In 1944, the extremely tall 

George Mikan (6ft10in, which is actually not that tall by today’s standards) began what is now known as “goaltending”. Basically, Mikan would stop the ball from going in the basket by jumping high enough to cover the net. A new rule had to be introduced to prevent the defense from touching a ball on “its downward arc” or while it was in the “imaginary cylinder” above the net. Basketball broke once more in 1947 when it was determined that zone defense was too powerful a strategy. This mode of play was clogging up the area in front of the net, ruining the pleasure of watching the game. And before 1954, there was no shot clock, meaning you could hold onto the ball as long as you wanted. To force a turn-over, you would need to physically strip the ball from your opponent. If you were in the lead, your team could simply form a fortress of bodies around your possessed ball. The league had to introduce the shot clock (forcing change of possession after 24 seconds). Nearly a half-dozen times, the dominant strategy of Basketball deteriorated spectatorship, by forcing the game into becoming dull to watch. 

Long story short, it took decades to iron out the kinks in Basketball and the rules continue to be altered today as players reimagine how to play it optimally. And the thing is, we might one day face an irreparable Basketball game. What makes Basketball fun to watch may one day be destroyed by some new dominant strategy that we cannot nerf without lowering the overall excitement of the game. (Soccer for instance is dangerously close to this point with its fake injuries.)

Bitcoin, like basketball, is a protocol. It is played for money, you follow the rules, and if you are good at it, you make money. Whereas Basketball’s protocol is meant to generate a spectacle, Bitcoin’s rules generate an uncensorable ledger that can process 10 transactions per second.

There have been papers that argue the rules of Bitcoin may also fail one day. Pool Cannibalism was a favorite of mine at one time. Basically, large pools make more money than small ones because they can save on operational expenses. Except, in a situation where there are two or three very large pools, they become incentivized to send their miners to their competing pools. Those miners provide valid hashes, but withhold hashes that meet the protocol’s target difficulty. The math shakes out where anyone who isn’t in a pool or who is in a private pool makes money. But it seems that it ends in an uncertain Nash equilibrium that doesn’t seem to destroy Bitcoin (but it could have!).

Of the other prospective problems, I can name two more fun ones. As you may have already heard, Bitcoin will one day stop emitting the coinbase reward and the incentives to protect the network will be entirely dependent on the transaction fees. Most people stop there and go womp womp the chain will die because there isn’t enough incentive to mine it. That’s smol brain complaining. The gigabrain’s complaint is that even if these fees are sufficiently high, there may be instances where miners would prefer to re-organize the chain so that they can cash in on a juicy transaction fee rather than mine a new low-fee block. And yeah, that would be pretty bad.

Another bad outcome results from “Selfish Mining”. It is possible that given a large enough stake in the network (maybe 5-20%) a miner could purposefully withhold blocks, creating a private chain. If they are lucky, they may mine three blocks in a row and create an awkward situation where they invalidate the work of 80% of the network by leaking two blocks at a time. This gives them a weirdly unfair advantage and makes them more profitable. This is bad. If a miner is more profitable than any other, over time it will gain increased hashing power relative to its competitors. In that instance, it will reach a point where it controls 51% of the chain and can monopolize all future block rewards entirely. That is very bad.

Those are almost all the bad things that we think can happen to Bitcoin. This is because it is an incredibly simple system to think about. And what is more, these bad things are either very unlikely to happen or far away in time.

The problem with Ethereum is just like 1930s basketball was unable to imagine a 1940s 6’10’’ Mikan, we are unable to imagine the next pool cannibals or selfish miners. That risk alone gives BTC a fighting chance over Ethereum. So, if you are conservatively trying to store the value of your capital and are not interested in speculating on the future demand of a “world computer,” Bitcoin is your obvious pick. It is just a de-risked Ether.

Let me give you one example, which I hope to write about in a later post. On Ethereum, I can create a contract that pays miners to censor users. Because there are lots of ways to compete over money in DeFi, it is possible that miner extracted value (MEV) can get A LOT worse.

Finally, the Etherean asks: okay, but why Bitcoin and not Bitcoin Cash or Bitcoin SV or Litcoin or Dogecoin… There are lots of Turing-incomplete blockchains out there. To that the answer is pretty simple. Bitcoin was the first. Switching from Bitcoin to something else breaks the spell of “store of value.” Building a Schelling point around a store of value is very hard. Changing a Schelling point is even harder (see the move from gold to Bitcoin as an example). It’s like why you should avoid looking for a partner amongst married people. Their willingness to leave is a sign that they may leave you too. And because Bitcoin was the first, it attracted some of the smarter builders and developers in the world, who understood the power of it as a Schelling point, and dedicated their lives to improving it cautiously and conservatively. 

Ultimately, what this means is that BTC appears to have a monopoly and little chance of failure. Ethereum is quite a bit more useful, but has a lot of competition and an unknowable amount of obstacles to overcome. Both deserve a lot of your respect.