Cryptocurrency as currency

By John Pfeffer

Source: https://hostingfilesonline.co.uk/An%20Investor's%20Take%20on%20Cryptoassets%20v6.pdf

This article is an excerpt from the author's article "An Investor's Take on Cryptoassets (v6)" published in 2017. The excerpt appears on pages 12 to 21 of the PDF file attached to the original link.

Crypto assets as currency

“Currency” is a debt ledger with three sub-functions:

1. Store of Value
2. Payment medium
3. Unit of Account

Compared with existing forms of currency, the advantages of cryptocurrency are: (a) it is the most obvious and strongest in terms of value storage function; (b) it is better than some payment media, but is far from being stronger than all rivals; (c) when used as a unit of account, it differs depending on the purpose it serves.

As a store of value, cryptocurrencies are significantly better than gold (to name just one example). (I won’t list all the reasons, as it’s pretty intuitive and well-documented.) As a medium of payment, they can outperform existing technology in certain cases (such as cross-border payments), but Visa, Apple Pay, Google Pay, PayPal, and fiat currencies are very fluent and outperform cryptocurrencies for the vast majority of daily payments. As a unit of account, a non-sovereign cryptocurrency can be very useful in international trade, global commodity markets, foreign exchange reserves, and even in jurisdictions where the local currency is unstable.

Before addressing the question of how to value a cryptocurrency’s ability to pay and store value, I want to analyze the relationship between payment and value storage functions. Many observers implicitly assume that the relationship between the two is very close, but the reality is more complicated.

First, we need to distinguish between store-of-value currencies and run-of-the-mill assets. Store-of-value currencies are characterized by their price being decoupled from their utility for other uses and the cost of making/extracting and storing them. A roomful of goods, a roll of copper, and a barrel of gasoline are all assets and have prices (determined by the market equilibrium point, which is the point where the marginal utility of such an item is equal to its marginal cost of making/extracting it, i.e. MR = MC). Stocks of these assets appear on a company's balance sheet, but companies try to keep the inventory they need to carry to do business as it has overhead. They don't accumulate inventory to store their operating retained earnings. Gold, in contrast, is a store-of-value currency. Its price is also unrelated to the cost of extracting and storing it (which forms the equilibrium). While we sometimes make jewelry out of gold (an ancient way to show our wealth to other members of society), and we use small amounts of gold in electrical appliances and for other industrial purposes, we also keep large amounts of gold in the form of inert lumps of metal as a kind of savings - a store of value - with no intention of using it for anything else. Therefore, gold is unreasonably expensive compared to its extraction and storage costs. Its price is entirely subjective.

Let’s take a look at the difference between what we use for payments today and the currencies we use to store value [21]:

• Payment media: Visa (credit and debit cards), SWIFT, PayPal, Apple Pay, Google Pay, Western Union, physical cash
• Store of value currencies: gold, time and demand deposits, cash

Footnote 21: Note that I exclude prepaid debit cards, gift cards, prepaid phone cards, and airline miles because they are not so closely related to the financial system. When they are used, they can be used as payment and as an asset, but people actually treat them as operating assets (fixed balance sheet assets with book costs) rather than savings; so if they really have to be classified, they are closer to means of payment than to currencies that store value.

What’s interesting here? Only one thing appears in both categories: cash. However, while cash is both a means of payment and a store of value, people generally keep only the amount they need in their wallets and withdraw money from their savings accounts when they need it. Companies other than retailers generally do not hold cash, or hold very little cash (instead, they keep most of their operating funds in bank savings accounts, commercial paper, Treasury bonds, etc.). For retailers, cash in the drawer is not considered a currency (store of value), but a form of operating capital. Bank deposits are a store of value currency, but not a payment instrument or cash; instead, deposits are contractual liabilities of institutions operating on a fractional reserve system. When you need to pay, you can convert your deposit (store of value) into cash (payment instrument) and then pay with cash; or you can use Visa, which can be paid later by the local interbank payment network (payment instrument), and the whole process requires changing the ledger entries of your savings account, Visa, and the merchant. Credit cards are obviously not a store of value. SWIFT is a payment medium, but it does not store any value. On the other hand, gold is just a currency that stores value, but it is not a payment tool. No company will use gold to keep accounts, and retailers will not use gold (ounces) to price the goods in their stores. But this does not prevent some people from using gold as a store of value.

The reality is that means of payment and store of value are generally separate, not combined. The above analysis is intended to show that a large number of payment instruments do not exhibit store of value characteristics. It is an oversimplification to assume that people are used to holding things for payment. People generally convert as little store of value as possible into payment medium as close to the moment of payment as possible.

There is a lot of evidence that economic actors’ choices of payment mediums and store-of-value currencies are independent of each other, based on the intrinsic functional indicators and negative characteristics of these “things” as payment mediums or store-of-value. Crypto assets are an interesting special case in that their technology has potential advantages over existing forms of money used as store-of-value, as well as over some payment media, so a particular crypto asset may succeed in both tracks. (The counter-argument is that because converting between two cryptocurrencies may be virtually frictionless, the payment function and the store-of-value function may be easier to separate; as with current forms of money, people will convert as needed.)

A useful thought experiment here is to imagine that there are competing cryptocurrencies with the following relative utility scores on the following five key currency properties:

When the dust settles, which cryptocurrency will win? Which will become the dominant medium of payment, and which will become the dominant store of value? Will currency C dominate the market? [22] Or will currency A become the dominant store of value, currency B become the dominant medium of payment, and people will exchange A for B on demand? A lot of the answer depends on the technical and political trade-offs of creating these cryptoassets that score high or low on the five dimensions, but I personally tend to think that specialization plus protocol interoperability is the more likely outcome (rather than one currency dominating the market).

Original footnote 22: A spork in the crypto asset world? A spork is a hybrid of a spoon and a fork. No one likes to use it because it can neither be used to fork things like a fork nor to scoop soup like a spoon. This is an insightful piece of humor from: https://medium.com/@hamptonfischer/bitcoin-cash-a-spork-7f9f6230a57

Or is this a spork ? I digress.

It would be a step too far to discount the necessary properties of payment as a mainstream SoV currency (although gold does not have payment properties). A cryptoasset that aspires to be a major SoV currency should carefully pursue reasonable payment capabilities (divisibility, homogeneity, ease of adoption); the stronger the better, as long as it does not sacrifice its SoV capabilities (scarcity and durability). Poor (or no) payment capabilities may affect a cryptocurrency's ability to be adopted as a SoV currency, so it is still an important attribute. But the core idea of these analyses is that a cryptoasset with the strongest SoV capabilities and good (but not the strongest) payment capabilities is likely to win (as a major SoV). For a cryptoasset used as a SoV currency, payment capabilities are the icing on the cake, not the overriding condition.

A further corollary is that just because a cryptoasset is strong in payment capabilities, it does not automatically make it a store of value. Recall that in the examples above, only one payment tool is also a store of value, and that is cash. If there is a cryptoasset that performs better in payments (lower transaction fees and more bank support) like Ripple, but is weaker than Bitcoin as a store of value (due to its centralized governance and uncertainty in supply), then it is unlikely to win as a store of value. Moreover, just because some users use some useful cryptoassets (such as ETH) for specific purposes does not mean that these users regard them as a store of value currency and hold them as a savings. Users are still more likely to regard them as an operating asset and keep as little as possible on their balance sheet (only buying some ETH when needed).

What is the use of the above analysis when evaluating the potential value of crypto assets as currencies? First, you should treat the valuation of payment functions and the valuation of value storage currencies as two independent and complementary things. Then, you should consider the relative strength of the crypto assets you are evaluating in terms of payment and value storage compared to competing crypto assets to ensure that extreme weakness in one dimension does not lead to weakness in another dimension; you should not simply assume that the two are inseparable. The network value of a hypothetical crypto asset that will eventually become both a value storage currency and a payment medium can be derived on the basis of a combined analysis (sum-of-parts), that is, total network value = valuation of value storage currency + valuation of payment medium.

You ask me what I think the end game will be like? One very likely scenario is that you will end up with a hybrid market of non-sovereign cryptocurrencies, sovereign e-currencies, off-chain/layer-2 payment solutions, and evolving centralized payment systems (e.g. Visa, PayPal, Apple/Google Pay), all competing with each other for payments (each with strengths and weaknesses in specific types of payments), and at the same time, a single non-sovereign store of value currency that plays the role that gold does today. This store of value currency can also replace a large amount of foreign exchange reserves and has the potential to become the unit of account for international trade and commodities.

It is possible that payments will remain a fragmented market, with sovereign e-currencies, off-chain (censorship-resistant or not) payment solutions, and centralized payment systems succeeding in capturing the majority of global payment volume, with the majority of payments being small, domestic, and daily, so speed and cost will be more important than censorship resistance. In this scenario, non-sovereign, censorship-resistant, decentralized payment protocols may end up being a niche product used for cross-border payments, markets where local sovereign currencies fail, and payments where censorship resistance is important (capital controls, sanctions, political repression, illegal activity). I can imagine sovereign states enacting regulations that favor the use of sovereign e-currencies for domestic payments, thereby helping them maintain control over their monetary policy and taxation. But it is worth noting that while sovereign e-currencies may outperform non-sovereign cryptocurrencies for payments (in terms of payment volume), they may also assist the emergence of a non-sovereign store of value currency, as sovereign e-currencies will help eliminate the friction and on-exchange-off-exchange banking issues currently involved in fiat-cryptocurrency conversions.

If you want to predict what will happen in the future, you need to know that the value storage function is likely to be much more important than the payment function. Therefore, if a value storage cryptocurrency can also be a payment medium, it will only add a little extra value. For us (investors), the value storage function is much more important.

Payment

Based on the broad observations at the beginning of this paper, a payment medium, apart from its value storage function, is just another application protocol (utility protocol), and the value of its token cannot be decoupled from the computer resources used to maintain the payment blockchain, that is, M = P·Q/V (Translator's note: The author uses M = PQ/V as the token valuation of the application protocol in the beginning of the paper, where M is the total value of tokens in circulation, P·Q represents the value of computer resources used to maintain the network, and V is the circulation velocity of tokens). If a payment medium wants to achieve scale, it must be cheap. So much so that if a cryptoasset is both a value storage and a primary payment medium, in order to remain price competitive as a payment medium, its payment part must be economically decoupled from the value storage function, so that the increase in M used in payment can still match the PQ/V of the computing resources used to assist the payment function, and V can become very high. This unbundling can be achieved with an explicit mechanism, such as Ethereum’s gas mechanism, or with another scalability solution, such as off-chain transaction processing, and/or by making transaction fees more important than block rewards in rewarding mining networks. The effect of a solution like layer 2 transaction processing is to significantly increase V (and reduce M) in the payment component of cryptoasset valuations based on merged analysis.

In reality, blockchain payments are today worth far less (to token holders) than their centralized competitors, such as Visa, Apple/Google Pay, and PayPal. It is incorrect to assume that because a cryptoasset can be used as a medium of payment, the holder of its token has a value comparable to, say, Visa’s enterprise value (divided by the number of tokens issued). Instead, in a mature equilibrium, the network value of such a token would be M = PQ/V, where PQ is simply the total cost of computing resources to run the blockchain network (think of it as the annual IT budget of an existing payment network of equal size, multiplied by a factor to reflect the relative computational inefficiency of decentralized networks compared to centralized architectures), and V is a certain (possibly high) velocity. The value revealed by this correct valuation framework, M = PQ/V, is far, far less than the enterprise value of existing payment providers. Blockchain payments may disrupt or even replace existing competitors, bringing many benefits to users, but the value these protocols derive from their tokens will be far less than the value of the businesses that are destroyed.

An additional factor to consider is the amount of inventory of payment tokens that businesses and individuals will choose to hold as operating assets on their balance sheets. The question is how strong the driving force behind these operating assets actually is. Both businesses and individuals will only keep a small amount of cash. Just as they will hold cash equivalents as a buffer against uncertainty, they will also choose the form of money they actually spend, which seems to favor sovereign electronic currencies and existing payment systems unless retailers and suppliers begin to directly repricing units of cryptocurrency on a large scale. Except for users who need to make a lot of cross-border payments, are mainly involved in international trade, commodity trade, or operate in areas where the national currency is weak, it makes no sense to hold a large amount of non-sovereign, non-pricing medium of payment cryptocurrencies. In a world where cryptocurrencies become commonplace, moving from one cryptoasset to another (such as exchanging a value storage cryptoasset for a payment medium cryptoasset, or switching between two competing payment cryptoassets) will be very simple, instant, and frictionless. So what is the point of holding an inventory of a payment medium cryptoasset?

It seems worthwhile to review the distinction between various cash equivalents, such as deposits in fractional reserve banking and cash, and whether this distinction exists for crypto assets. If a crypto asset does not have a fractional reserve banking system, users may choose to store value in interest-bearing, fiat-denominated deposit contracts while holding a small inventory of the payment medium crypto asset rather than holding a large amount of this non-interest-bearing crypto asset, or they may purchase interest-bearing, crypto-denominated bonds and commercial paper (i.e., lend their crypto assets) [23].

Footnote 23: Note that all of these options would increase the money multiplier while materially reducing the scarcity of the cryptoasset.

Finally, when considering the potential value of a non-sovereign cryptocurrency as a payment function, it’s worth pointing out that while there are obvious network effects in payments (Visa is simply more useful and more valuable (as a business) than Diners Club because it’s accepted by more merchants and used by more consumers), today’s payments market is structurally fragmented. How many non-sovereign stores of value do people have in their portfolios? Gold is the obvious answer. But think about how many payment channels you’ve used in the past month: cash (probably in multiple currencies), Visa, Amex, PayPal, direct debit, SWIFT, etc. They’re all good, all good for slightly different use cases, and all have slightly different characteristics: cash for paying your gig worker, Visa for paying Amazon, Amex for buying airline tickets (and earning points), PayPay for paying on dodgy websites where you don’t feel comfortable giving out your credit card number, debit cards for paying your utility bills, SWIFT for transferring money across borders. We should always be wary of assuming that new paradigms will be like old ones (e.g., in the 90s, we always imagined that we could move old media online, but we didn’t think of social media). But applying fundamental principles (not triggered by the status quo), we can expect that payments will continue to be a fragmented market. Conversion between crypto assets will be frictionless, and there will be a large number of seats between payment scenarios. Therefore, it is more likely that we will use many different payment media, based on how well their respective characteristics match the scenario. Time will tell which crypto assets will win, but it is not difficult to come up with a preliminary list of possibilities: fully automated smart contract payments that require a Turing-complete language middle layer, payments where speed and cost are critical, payments where security and anonymity are critical, and counter-party merchants that only accept Litecoin or are willing to accept Dash and many other cryptocurrencies.

To summarize, I can imagine continued innovation and an ever-changing, fragmented, and increasingly competitive payments market. This is the opposite of the situation with value-storage currencies - the advantages of leaders will become increasingly obvious. The effect of "path dependence" may be stronger in value-storage currencies than in the payment field. Although payment media will gain some value that is unique to them and cannot be touched by value-storage currencies, it is relatively small. The lack of payment functions may hinder the value-storage currency utility of a cryptoasset, but there are also many examples that show no effect and payment functions do not automatically give rise to value-storage functions, so any causal relationship is not strong.

Store of Value Currency

I would argue that one cryptocurrency is likely to become the dominant non-sovereign SoV, as it is not clear what additional benefit there is to holding two or more cryptocurrencies. Gold is a dominant SoV that is not a fiat currency and is not tied to any fiat currency. There is silver, of course, but the value of all silver is a fraction of the value of all gold, and only 20% of annual demand for silver ($3.3 billion in 2016) is for use as money [24], which is negligible from a financial market perspective. Why would we need multiple cryptocurrencies that are also non-sovereign SoV? What value would additional categories bring?

Original footnote 24: https://www.silverinstitute.org/silver-supply-demand/

This brings us to an important question: quantifying the potential future price of the dominant store of value crypto-asset — and its appreciation relative to its current price. A logical starting point for estimating the potential network value of a crypto-asset if it were to become a dominant store of value currency is as a fraction or multiplier of the total stock value of the technology currently playing that role; that role is currently gold, which is worth $7.8 trillion.[25] The problem is that which fraction or multiplier to use is largely a matter of opinion. You might think that it would be difficult or a long time for a crypto-asset to completely replace gold, since gold has been around for thousands of years, so you think a fraction is more appropriate. Or you might think that the technological advantages of crypto-currencies, especially divisibility and ease of transfer, mean that more people in the world can hold this crypto-asset (more than gold), because anyone with a smartphone, USB stick, and paper wallet can hold any amount of crypto-asset, but it is more difficult to carry and store gold for investment. This crypto-asset can also, to a greater or lesser extent, play a role in payments that gold cannot.

Footnote 25 of the original text: US$7.8 trillion = 187,200 metric tons of mined gold * 32,150.7 ounces per metric ton * US$1,292 per ounce; the price used is August 21, 2017 (the date of this writing).

To be objective on this last question, let’s look at the current situation of gold. The total amount of gold mined today is 187,200 tons, of which 38% is in the form of gold bars, of which slightly less than half is held by government agencies (i.e., national treasuries), and the rest is held by the private sector. The rest of the mined gold is almost all in the form of manufactured goods, of which about 80% is jewelry and about 20% is industrial products [26].

Original footnote 26: “ GFMS Gold Report 2017 ” page 36.

With this background, you can imagine your own endgame and success stories. I'll give you a straw man scenario below.

While some jewelry may be nominally held for investment purposes, and some gold coins with collectible value among manufactured goods may be considered “investments” by their holders, I generally exclude manufactured goods because cryptoassets are not, if not entirely, substitutable for most of them. Instead, I consider only gold in the form of bullion. Because of the superior properties of cryptoassets relative to gold, and their additional utility in certain payments, we can assume that a successful mainstream store-of-value cryptoasset will be worth 1–3 times the value of the private stock of gold bullion at maturity. Because treasuries may be slower to adopt or even resist adoption, I would suggest assuming 0.25–1 times the average value of the government’s stock of gold bullion over a 10-year period. We split gold bullion (38% of the mined gold stock) into 20% held by the private sector and 18% held by the government, and using the above analysis, we estimate that the price of the dominant store-of-value cryptocurrencies (at maturity) will be 25–78% of the total value of the gold stock [27], or $1.9–6.1 trillion.

Footnote 27 of the original article: Lower limit: (20% * 1) + (18% * 0.25) = 25%; upper limit: (20% * 3) + (18% * 1) = 78%.

However, alternatives to gold may be just the appetizer. Gold makes up less than 11% of all foreign exchange reserves, valued at $12.7 trillion, while fiat currencies make up 86%, with the International Monetary Fund’s Special Drawing Rights (IMF SDRs) and other assets making up the remaining 3%. [28] Of the fiat currencies, the U.S. dollar makes up 67%, the euro 20%, and other fiat currencies (primarily the British pound, the Japanese yen, and the Swiss franc) make up the rest.

Footnote 28 of the original text: As of April 28, 2017. International Monetary Fund 2017 Annual Report . Note: On April 28, 1 IMF SDF = 1.371020 USD .

We need to distinguish between fiat currencies used in domestic payments and fiat currencies used for foreign exchange reserves. As mentioned above, there are good reasons to doubt how successful non-sovereign crypto assets can be in places where national sovereign currencies are stable: the low cost and high efficiency of existing centralized payment channels, the reluctance of countries to give up control of their own monetary policy, and the inevitability of sovereign electronic currencies. But think about how uncomfortable a country would be with using other countries' fiat currencies as its foreign exchange reserves. We know that this may be particularly true of China and Russia. They would like to have an alternative to the dollar and the euro, and have even discussed creating an alternative (not going very far, because creating such an alternative requires mutual trust). Think about how difficult it is for China (and other commodity producers) to price their exports in dollars. Moreover, any dollar-based transactions must go through SWIFT, which is controlled by the United States, and being excluded from SWIFT would be tantamount to being completely cut off from the international financial system (such as Iran). This situation is increasingly unacceptable to many sovereign countries, especially as the United States' global influence decreases. A non-sovereign, non-fiat, trustless, censorship-resistant crypto asset would be much better than most sovereign currency foreign exchange reserves. The IMF's SDR is already a synthetic store of value, so it can be easily and sensibly replaced by such a crypto asset.

Based on the gold bar analysis above, and adding some numbers related to the potential impact of our store of value cryptocurrency’s network value, we can assume that it would displace 0.25-0.75% of non-gold foreign exchange reserves. My lower bound assumption is completely arbitrary, but the upper bound assumption reflects the probability that these countries will want to diversify their foreign exchange reserves, as they already do (holding fiat currencies other than the US dollar). These assumed values would add an additional $2.8-8.5 trillion to the price of our dominant store of value cryptocurrency. Adding these numbers to the gold bar analysis gives a total potential price range of $4.7-14.6 trillion for our dominant store of value cryptocurrency [29].

Footnote 29 of the original text: The total value of foreign exchange reserves is $12.6 trillion, of which 89% of non-gold reserves are $11.3 trillion. The lower limit is $11.3 trillion * 25% = $2.8 trillion; the upper limit is $11.3 trillion * 75% = $8.5 trillion.

My aggregation stops here, but there are two further appreciations that I have not yet explicitly included. The first is that such a cryptoasset could potentially replace the dollar as the standard unit of account for international trade and commodities. Trading and commodity-centric businesses would then choose such a cryptoasset as capital, creating further demand for its limited supply, and fractional reserve banking and bond markets for such a cryptoasset would emerge, increasing the money multiplier for such an asset and alleviating the inconvenience of its limited supply. Second, such a cryptoasset might become customarily used for certain payments, such as cross-border payments or domestic payments in the absence of a stable sovereign currency (which is already happening). The latter potential is, at least in part, already accounted for in the rough calculations above, because when we start thinking of such a store-of-value cryptocurrencies as a multiplier on the stock of private bullion, we implicitly include a partial replacement for the stock of cash. [30] As explained in the previous section, the incremental value added to the combined analysis by the payment function is not comparable to the store-of-value component, so ignoring them may not materially affect our potential price analysis.

Original footnote 30: To give a basic idea of the potential price of replacing part of a country's fiat currency stock, global M0 is about $5 trillion, so we can say that this is only a relatively small portion.

The next question is, which cryptocurrency is most likely to be the dominant store of value today? To me, based on the information we have today, the likely answer is Bitcoin (BTC). It has more users, decentralized (to the point of dysfunctional) governance, more hash power (than any other cryptocurrency), is very stable and robust, has survived the longest, and has never been hacked. Other cryptoassets may have features that Bitcoin doesn't have that are useful in a variety of scenarios outside of store of value, but store of value itself is a function (probably the simplest of all uses for cryptoassets), and Bitcoin has (and continues to) perform that function perfectly. Critics point out that political conflicts complicate the process of changing Bitcoin's code, but from a pure store of value currency perspective, this is more of a feature than a bug. To me, Bitcoin has a much greater chance of becoming the dominant store of value cryptocurrency than any of its current and future competitors. If Bitcoin does become the dominant store of value, based on my estimates of the total network value at maturity ($4.7–14.6 trillion), a fully unlocked supply of Bitcoin [31] would have a price of $260,000–800,000/BTC.

Original footnote 31: When arriving at this price estimate, I used the total number of released BTCs of 21 million - 2.8 million = 18.2 million. Although the final issuance of BTC is fixed at 21 million, blockchain analysis company Chainalysis estimates that 2.8 to 3.8 million BTC may have been permanently lost and cannot be recovered. Even if some of these bitcoins can be recovered in the future, it can be expected that more bitcoins will be gradually lost, so the lower limit estimate of 2.8 million is completely reasonable for our purposes.

We should stop here and not consider how long it will take for a crypto asset to grow into a mainstream store of value. On the one hand, gold has been around for thousands of years, so the mindset shift may take longer than 10 years, or may never be completed. On the other hand, we rode horses for thousands of years, but moved very quickly to better technology (motor vehicles). Such a shift would require a lot of changes to physical infrastructure, but here, the changes that interest us only require a small shift in thinking. In addition, financial markets tend to underestimate as long as there is a consensus on the future, so the price of BTC may indicate the level of adoption that I have not considered.

As for risk, an investment with a potential 20-60x appreciation [32] would only need a 2-5% probability of success to be an expected net value positive investment. Each of us can have our own opinion on the probability of the above scenario occurring. I personally am very confident that given the state of Bitcoin development and adoption today, the probability is greater than 2-5%, and probably much higher. While there are many technical, political, regulatory, and psychological hurdles to overcome, the store of value use case is by far the simplest one and the one that is closest to being realized. Therefore, I would argue that Bitcoin is an investment with a depreciation/appreciation multiple ratio of -1x to 60x (-1x:60x) and a positive expected net value. Investments that have both of these characteristics are extremely rare.

Original footnote 32: At the time of this update (December 2017), the exchange rate of BTC to USD is 13,000.

While this paper is not concerned with analyzing future risks, one observation is interesting: of all the possible uses of crypto assets, store of value currencies are the ones with the least technical risk. While Bitcoin will continue to evolve and upgrade (hopefully becoming more scalable, more fungible, etc.), and these upgrades will also increase in value, the fact is that it does not need to be upgraded (at least not significantly) to replace gold and most foreign exchange reserves. The existing state of software and network infrastructure is basically ready to serve as a basic Gold 2.0/Foreign Exchange Reserve 2.0. All that is needed is almost universal adoption and institutional changes in thinking and attitudes. In contrast, the more ambitious decentralized application protocols (such as EVM-type) require a series of technical advances and major infrastructure investments beyond what we have today. It is reasonable to believe that these advances will happen gradually over time, and we all hope so, because they have the potential to make the world a better place, but it is obviously a longer and riskier road.

It is often said that Bitcoin's leadership as the growing mainstream store-of-value cryptocurrency will be replaced by another cryptoasset now or in the future. This is possible, but as Bayesians, we base our views on probabilities based on current information and update our views as new information becomes available. Based on currently available information, Bitcoin is the most likely to become such a store-of-value cryptocurrency, and the probability seems high enough (greater than 5%) to make it a solid investment. As information about new and existing competitors becomes available, we can (and should) update our assessment. So far, as Bitcoin's price increases, its probability of success increases. For now, Bitcoin remains the best choice.

The question of forks and whether they will weaken Bitcoin’s scarcity is often raised. Because Bitcoin forks share the same hash power, they will either prove themselves to have different and valuable niche functions (compared to BTC) or they will gradually wither. As long as BTC performs well as a non-sovereign store of value, any such differentiating function will likely need to target less valuable uses. Perhaps a Bitcoin fork will find such a non-store of value use case and survive at a relatively low, sustainable price (reflecting the niche function it has solved). It is also possible that the market will allocate some value to an alternative store of value for a period of time, either irrationally (an ideological split occurs and perpetuates itself for a period of time) or as a final fallback to the risk of corruption of the main chain. In the end, the equilibrium outcome is more likely to be a dominant store of value currency, and at this point it is more likely to be BTC itself. For investors who already hold BTC, the prudent investment strategy is to simply hold all forks that seem likely to have a sustainable user base and then evaluate their value. And for new investors, it may not make sense to allocate funds to previous forks, as they have a lower chance of success and relatively less potential value.