This question was almost irrelevant before the resounding bankruptcies of Luna and FTX in 2022.
What seemed obvious to an ultra-minority of geeks and bitcoin maximalists did not interest the crypto mainstream, too busy earning billions on the backs of underinformed investors.
Despite the proliferation of cryptocurrencies since the inception of Bitcoin in 2009, and even though Bitcoin is sometimes grouped with the "cryptocurrency sector," it is anything but.
It's critical that we all agree on the meanings of the most crucial terms we're discussing to comprehend the full value of the Bitcoin blockchain and its possible uses. Therefore, the dreaded "cryptocurrency" is the first concept to be clarified.
Cryptography applied to transparency.
Although Bitcoin employs the same algorithms as cryptocurrencies, it is not itself a cryptocurrency.
Let's develop this paradox: Bitcoin was the first digital currency that, from a technological point of view, solved the double spending problem and achieved Absolute Digital Scarcity (ADS) using a revolutionary consensus mechanism: proof-of-Work (PoW). If you are new to Bitcoin, let’s quickly explain this gobbledygook.
In the word “cryptocurrency”, you find the prefix “crypto”, which comes from cryptography. In a nutshell, cryptography is mathematical magic used to encrypt messages. Imagine you are a general fighting a war, you need to send messages to other generals to coordinate a deadly attack against the enemy. You must be sure that none of your messengers will be intercepted. And even if they are, you must make sure that none of the messages they carry will be deciphered.
This is what bitcoin is made of.
A cryptographic algorithm encrypts transactions (For instance, me sending one bitcoin to you) before being deposited permanently inside the blockchain. In other words, cryptography makes sure that the stored data you put in the blockchain can’t be tampered with.
If you add to it several level of security (One of them is: proof-of-Work), you get: Absolute Digital Scarcity, a network which is thermodynamically sound. That is to say that it is 100% built and guaranteed against leaks and hackers. Thus, a scarce value deposited inside this thermodynamic network will grow exponentially forever.
Bitcoin is an immutable, transparent, and regulatory compliant digital record-keeping system. It’s a public ledger where anyone can see all the transactions stored in the blockchain since the very beginning (Transparency). Because the security level is paramount, we also say that bitcoin’s blockchain is immutable; it can’t be hacked. Regulatory compliant means that anyone in the world can audit it in real time as the real point of bitcoin’s blockchain is to locate and count in real time all the bitcoins produced (minted) since day one by the network. Let’s say that today 19 million bitcoins are in circulation; it is possible to check in real time where each one of them is stored. We don’t know anything about the owners, but we are able to see in which wallet these bitcoins are stored. A public ledger is essentially what bitcoin is. It is a chain of evidence that is encrypted and PoW-protected.
Opposite kind of digital records networks
Take private or semi-private centralised ledgers as an illustration of the opposite type of digital records system such as bitcoin. A national health database, a company's financial accounts, a bank and the fiat monetary system as a whole, come to mind.
The access to the data creation by third parties, including big fish like CEOs, politicians and the President of the Central bank, determines the integrity of the system's data in each situation. These private, centralized networks are permissioned. That is to say that the participants are known by all the other players. These blockchains are not transparent nor immutable and the participants could agree or collude and change, retroactively the data stored in the blockchain. In other words, permissioned blockchains can’t be trusted as they can be tampered with by the very people who control them. More than 99.99% of cryptocurrencies are, at some point, centralized and controlled by third parties, thus they can’t be trusted and if you put your money in this kind of networks you might end up bankrupted like the owners of Luna or FTT.
FTX & FTT use case.
FTX, a well-known cryptocurrency exchange, went bankrupt in 2022. It supposedly burst into flames in the biggest money-related swindle in recorded history. Billions of dollars vanished overnight, and that collapse caused many people to doubt the entire idea of cryptocurrencies, including Bitcoin.
Sam Backman-Fried, its CEO, established his own currency token called FTT and was able to do so without interference or connection to anything that would give it any worth. He is not alone; many individuals produce these so-called “Alt coins” AKA scam coins. The entire cryptocurrency market has been the victim of this swindle.
How do these Alt coins get their value? All coins are produced, listed on each other's exchanges, and then purchased from one another to establish a price. Then, people like Sam Backman-Fried, use the increased price, which is now perceived by investors as a collateral value, to buy some property in some fancy places. It resembles a huge Ponzi scheme. They create money out of thin air.
The closest comparison would be to the financial catastrophe of 2008, when Wall Street banks produced mortgage-backed securities and derivatives. They were using digital financial alchemy to take mortgages, re-hypothecate them, repackage them, and create something that was worthless but had a quotable value, then use that as collateral to float more derivatives.
After Bitcoin was created, a lot of people decided that they could come up with digital currencies and tokens that are being created now in the billions. Their purpose is solely to be picked up by the crypto cartel, who are involved in a collusion in racketeering by boosting the price of worthless tokens on each other's exchanges and then using that token as collateral to fund things like wars, elections campaigns, which we now know are highly influenced by money.
Bitcoin is pure market driven.
Nobody has power over bitcoin. Its creation is not influenced by centralized third parties. It is completely market-driven, and people's willingness to have, want, or need to have an unconfiscatable, uncensorable way to own property outside of a seriously corrupt system is what determines the price of Bitcoin and its value. The other parameter that determines its price is from a purely technological aspect: the implementation of Proof-of-Work (PoW) which, in a nutshell, transforms electricity into value. Alt coins get their value from speculation whereas bitcoin gets it from a mining process backed by energy transformed into a sort of “digital gold” that is then embodied in bitcoin.
All of Alt coins are securities.
Rostin Behnam, chairman of the Commodities Futures Trading Commission (CFTC), said in an article that he thinks Bitcoin, the leading cryptocurrency, is the only commodity on the crypto market. Michael Saylor, the CEO of MicroStrategy, one of the most fervent and powerful bitcoiners in the US agree with Behman.
The CFTC chair also spoke at a cryptocurrency event at Princeton University. He raised grave concerns about the absence of regulation on the cryptocurrency market and used the recent FTX collapse as an example of what the consequences could be. He exhorted lawmakers to act as soon as possible in this area, stating that neither market participants nor regulators have "the luxury of waiting."
The rationale behind Behman and Saylor’s statements is quite simple. Consider a management team designing a token. The token is either being given to itself or being sold to an investor. Either way, this is equity, which is, as far as we know, a type of security. They must be regulated.
Most of the companies launching these tokens use Proof-of Stake (PoS) or some consensus similar to it. They don’t use proof-of-Work (PoW). Most of the proof of stake networks, are all private companies. They look like technology Ventures, all on Instagram or SnapChat, etc. Nothing compared to bitcoin which is a commodity and a store of value. If you decide to trust the people behind these technology Ventures, you are engaged in speculation. Nothing wrong with that. You just must know that you are putting your money in a risky business, that’s all. Just keep your eyes open about what the risks are. Most of them currently do not comply with the Security & Exchange Commission (SEC), but when they first began operations, Uber and Airbnb did not either. In 50% of the locations where they operate, Airbnb and Uber are still banned.
So, when talking about centralized cryptocurrencies and technology ventures, the most important thing you must consider is the regulatory risk.
Coming back to bitcoin, if you're going to move money around, use BTC and the lightning network because the use case is property, not security.
Bitcoin and the regulated world of commodities
Now is the time to speak clearly to people who want to invest in cryptocurrencies. It's not about accusing anyone. Alt coins are securities and as such must be regulated to avoid scams and tragedies such as the bankruptcy of Luna & FTX. Cryptocurrencies are highly dangerous for an inexperienced investor because they are centralized and very much like capitalists’ ventures.
Bitcoin is different because it is totally decentralized, uses Proof-of-Work and acts as a commodity. It’s the safest asset in the market nowadays. Both crypto and bitcoin use cryptography and, in some cases, might even share the same algorithms but they are completely different.
As private endeavors, cryptos have a life expectancy similar to start-ups. If one of them is lucky enough to become as big as "Google" or Ethereum, investors will be recognized as geniuses. But it is probable that their value will fall to zero in the medium term unless they become a registered security and are regulated as such.