This article is an exclusive contribution to ‘s 2017 in Review opinion series.
2017 was another gloriously miserable year for bitcoin.
As in 2016, gains in the price of bitcoin belie deep deficits in the cryptocurrency world. Bitcoin’s stock of social capital, the human institutions around this most important technology, remains woefully deficient, and the capacity of bitcoin to deliver anything other than wealth to “HODLers” has fallen precipitously.
Don’t get me wrong: wealth is great! But some of bitcoin’s greatest potential benefits — global financial inclusion, broad gains for financial privacy, a stable money supply for those without, and increased liberty — appear further away now than they did a year ago, or at any time in bitcoin’s history.
Big gains, bigger pond
Yes, bitcoin went up in price against fiat currencies this year. By a lot.
Increasingly recognized as an asset class uncorrelated to most others, bitcoin and crypto should be part of any smart investor’s portfolio. That bodes well both for bitcoin and for investors. But, bitcoin’s “market cap” is worth keeping in perspective.
Among the arguments for conservatism in bitcoin scaling this year was that there was $30 billion in value (then $60 billion, then $100 billion) at stake. Those are big numbers, until you consider that the “market cap” of the four largest currencies in circulation is about $22.5 trillion.
Bitcoin’s “size” is less than 1 percent of the mega-currencies, perhaps half that if you count all the rest. If it were possible to measure effects on humanity, bitcoin would probably rank even smaller than low tenths of a percent.
The pocket calculator has had a bigger influence on human progress than bitcoin. Velcro has improved human welfare more than cryptocurrency has.
Given its potential, that’s a damning indictment of bitcoin’s influence so far.
Bitcoin’s social capital
Every invention has the potential to change the world to some degree. Most of them don’t. That’s because they lack social capital.
Social capital is “everything else” around a business, technology or product: knowledge of it, adoption of it, supportive customs and laws, integration into existing human institutions, and so on. It was necessary at one time to construct social capital around bananas.
Bitcoin still has strikingly little social capital. Few people know about it. Fewer still think it’s beneficial or viable. Even fewer hold it, much less use it. The legal environment may be a tamed menace right now, but the broader lack of orientation toward bitcoin keeps that menace alive.
Perhaps those assertions sting, but don’t blame the messenger: Bitcoin has simply not reached the level of ingratiation into society that it could and should have by now. That means that when bitcoin’s price in fiat falls from whatever heights it reaches, it will plunge all the deeper and stay low all the longer.
There is a shallow reservoir of real institutions supporting our crypto future.
Scaling to low heights
The scaling debate is responsible for a good part of bitcoin’s present failure relative to potential, and it illustrates the lack of social capital in spades.
Again this year, disputes over how to grow bitcoin consumed a tremendous amount of energy that would otherwise have gone toward building bitcoin along other dimensions. The slow pace of scaling assuredly drags adoption down.
Now, adoption isn’t the only goal. But the scaling debate has been so acrimonious because neither Bitcoin Core, the project’s leading developer team, nor the backers of the major alternatives have been able to string together and communicate a clear philosophy that animates their goals for bitcoin.
They haven’t depicted in an accessible way how their technical decisions strike the proper balances among bitcoin community priorities. (Those things aren’t easy to do, of course.)
Instead, SegWit2x was a slugfest that has now been “suspended” in bitterness.
Politicking, then progress
But along the way, a path to progress emerged in bitcoin-land.
The weeks leading up to the highly anticipated 2x fork had all the feel of a political campaign. With every argument exhausted, there was nothing left but barnstorming.
The debate shifted inexorably to the personal. There was even an “October surprise” of a sort, with the news that SegWit2x lead developer Jeff Garzik was involved with a new cryptocurrency called Metronome. (As in political campaigns, that development was shocking or not shocking, depending on one’s pre-existing views of Garzik and SegWit2x.)
But while those political storms crashed, bitcoin cash was introduced to the world, almost as a side-note. That forked version of the bitcoin blockchain includes an 8 MB block size limit, and the SegWit modifications are stripped out. After a brief surge of interest, bitcoin cash began its long, slow surprise by continuing to exist.
Then, as part and parcel of the SegWit2x effort’s collapse, bitcoin cash became the major contender against Core for bitcoin leadership. Thus, a political campaign ended in a competition.
Bitcoin cash does not seek to change the software that miners and nodes run all at once, as SegWit2x did. It must work to gain market share: miners, nodes, and users that adopt this version of bitcoin.
That is a commercial challenge, with the vectors of competition including transaction fee, coin price, transaction speed, mining rewards and ubiquity, and network size, as well as censorship resistance and other essential dimensions of security.
Brand recognition is part of that. That is why “bcash” is a grave insult to bitcoin cash supporters.
In money, network effects are a dominant dimension of quality, if not the dominant dimension, and Core has got it. So, bitcoin cash has a very long and difficult challenge before it.
But the bet laid down by bitcoin cash supporters is that the value proposition of a rarely traded and expensive digital gold is lower than a widely-used money that maintains enough of the properties of a blockchain-based currency. Bitcoin Core is a bet on security above all else.
As we conclude this gloriously miserable year in bitcoin, we should give thanks and say good luck to all the competitors.
Their efforts to retain or seek the lead will strengthen bitcoin, and if they build up bitcoin’s social capital, they will strengthen bitcoin all the more.