Thread by @ericyakes

Adoption is good for bitcoin – but can it be bad?

What drives the price of bitcoin upward today may limit price appreciation tomorrow.

Is there a different market cap for bitcoin if it was 100% custodial vs. 100% non-custodial?

A thread on adoption that's bad for #bitcoin

Depending on HOW bitcoin is adopted will ultimately determine whether bitcoin becomes a neutral global monetary system, digital gold, or somewhere in between.

If bitcoin is used as the base protocol for a global monetary system, it will have achieved its full market potential

Whereas if it only is used as digital gold for its scarcity much of it’s potential will have been lost and it will certainly not be freedom money – it will be another financial product sold by Wall Street.

Another way of thinking about this is that the more bitcoin is used for the different functions of money, the more valuable it becomes as money, the larger its market size will be, and the higher its price will go.

If bitcoin is just used as digital gold, then it’s fulfilling only 1 of 3 monetary functions as a store of value.

If bitcoin is leveraged as the base protocol for an entirely new monetary system, then it will have achieved all 3 functions shown below in purple:

The more functions bitcoin fulfills, the larger its market, the more valuable it will be.

Various assets are used today to store value with various market sizes. An example market size would be store of value assets broadly – estimated by @Croesus_BTC:

@Croesus_BTC Now, if bitcoin becomes an asset used BEYOND just storing value but also as a medium of exchange AND unit of account then things get much more interesting. Maybe it reaches a value close to global assets estimated at ~$700T.

@Croesus_BTC However, if bitcoin achieves this market size, then hyperinflation of competing systems would result and thus there would be no dollar value to even apply to it as bitcoin would simply become the new unit of account globally.

@Croesus_BTC This all seems simple enough – various methods can expand bitcoin usage beyond storing value and into daily spending and/or settlement of capital markets like stocks, bonds, derivatives.

But there’s a problem here – some of these methods will subject it to 2 primary risks:

@Croesus_BTC 1) Political capture
2) Fractional reserve credit emerging

Bitcoin adoption will come from custodial and non-custodial users. The greater the proportion of bitcoin that is ultimately controlled by custodians the greater the likelihood of political capture of the system.

@Croesus_BTC Which could mean anything from bitcoin being a state reserve asset to bitcoin being attacked or controlled for state incentives.

I don’t know what the outcome would be – all I know is that it would make bitcoin a tool of the state to some degree.

@Croesus_BTC If bitcoin adoption emerges from non-custodial users, the opposite is true (note I’m referring to non-custodial as any custodial scheme whereby a 3rd party does NOT maintain unilateral control over funds).

@Croesus_BTC The greater the proportion of bitcoin that is non-custodial the increased likelihood that the state will not be able to politically influence the system.

Non-custodial solutions are effectively a deterrence mechanism against the state’s ability to control custodial assets bc… twitter.com/i/web/status/1…

@Croesus_BTC Non-custodial solutions are a major innovation of bitcoin. Since the dawn of financial systems, banks have never had to compete against a non-custodial financial system. Both non-custodial and custodial bitcoin will exist.

@Croesus_BTC The question is not one or the other but how much will be in one or the other?

If enough bitcoin exists in non-custodial solutions and the consumer UX is competitive enough, then any custodial operation will always have to be worried that their users will withdraw funds

@Croesus_BTC and move them into the P2P non-custodial markets.

As long as the custodial system has to compete against the non-custodial system this will act as a strong deterrence mechanism against fractional reserve ever emerging in the custodial system.

@Croesus_BTC Fractional reserve custodians will need to compete against a “full reserve” P2P system.

There is some theoretical % of bitcoin that must remain in non-custodial solutions for the system to remain relatively apolitical and fully mature.

@Croesus_BTC Perhaps it’s 50%, maybe it’s as low as 20%. It needs to be material enough for large economies to form that provide the liquidity and consumer UX to be competitive against the custodial system.

In terms of price, the larger fractional reserve markets would become from custodial institutionalized bitcoin, the lower the value of bitcoin as the underlying reserve.

As a hypothetical example if there are $700T in global assets and bitcoin is being held in 10% reserves then it is only representing $70T of that value.

If bitcoin were non-custodial and/or full reserve representing 100% of global assets, then it’s market potential would be 10x… twitter.com/i/web/status/1…

So, this matters because the form of adoption that is driving bitcoins price up today may be the form of adoption that limits it’s price appreciation in the future.

Blackrock and all the other major asset managers absorbing bitcoin from the 401Ks of users who can do nothing with it other than check if its market value has gone up or down is not bitcoin – it’s another wall street financial product in a government-controlled vehicle.

That financial product has a much smaller market size than a global apolitical monetary base.

Make no mistake – wall street doesn’t want to sell you bitcoin, they want to sell you financial products. Bitcoin ETFs give wall street a new line of business whereas bitcoin puts wall… twitter.com/i/web/status/1…

Contrast this with a wave of millions of individuals all around the world buying bitcoin so that they can send it to one another without having to ask anyone for permission.

That’s adoption that will eventually lead to a global apolitical monetary system – a market multiples greater than just another wall street financial product in government-controlled vehicle.

TO BE CLEAR: there are many benefits to the short-term adoption of bitcoin via wall street financial products that also have future knock-on effects that benefit bitcoin.

Price appreciation begets future adoption, which increases the ability to garner more institutional adoption, which makes the industry richer and increases its political lobbying efforts.

The major issue with all of this: it increases the probability that bitcoin will become more inherently political.

Custodial solutions are necessary and significant throughout the world, but the cryptographic solutions of bitcoin enable superior schemes beyond trusted redemption… twitter.com/i/web/status/1…

Price isn’t the most important aspect of this. The most important aspect is that people need to be able to send bitcoin to whoever they want whenever they want for whatever they want. That can only exist if the non-custodial market is large enough to deter political influence… twitter.com/i/web/status/1…

The government needs to be so scared of non-custodial P2P markets that they will allow the custodial markets to run free as well. If bitcoin is just digital gold sitting in 401ks then the potential for the innovation will have been wasted.

All adoption is good for bitcoin. The question is: will it be good for bitcoin tomorrow?

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