When investing in Bitcoin as an asset or in companies built on the Bitcoin network, we need some metrics to assess the progress of investment themes and, consequently, evaluate the health of the Bitcoin network.

Bitcoin is not just a price on a chart; it is an open-source network with millions of users, thousands of developers, hundreds of companies, and multiple ecosystems built on top of it. Most Wall Street analysts and retail investors have not actually used a Bitcoin wallet, have not self-custodied their assets, have not sent it to others, or used it in various ecosystems, but doing so is very helpful for fundamental research.

Bitcoin means different things to different people. It enables portable savings, censorship-resistant global payments, and immutable data storage. If you are a U.S. or European investor in high-quality stocks and bonds and have not considered the Bitcoin network from the perspective of middle-class savers in Nigeria, Vietnam, Argentina, Lebanon, Russia, or Turkey, then you have not fundamentally analyzed the use case of this asset.

Most importantly, people assess the health of the network in various ways. If Bitcoin does not meet the outcomes they desire, they may conclude that Bitcoin is underperforming. On the other hand, if Bitcoin perfectly aligns with their desired outcomes, they may think that, despite many frictions to solve, Bitcoin is still performing well.

In recent years, I have spent a lot of time researching monetary history and have dedicated a significant amount of time to the startup/venture capital space around Bitcoin, studying the technical details of this protocol. Therefore, I consider some unique key indicators when evaluating the health of the Bitcoin network. This article will introduce them one by one and examine how the Bitcoin network performs in each.

1. Market Capitalization and Liquidity
2. Convertibility
3. Technical Security and Decentralization
4. User Experience
5. Legal Acceptance and Global Recognition

Market Cap and Liquidity

Some people say that the price is not important. They often say, “1 BTC = 1 BTC.” It’s not Bitcoin that fluctuates; it’s the world revolving around Bitcoin.

This makes some sense. Bitcoin’s maximum supply is 21 million, created and distributed in a pre-programmed decreasing pattern. The Bitcoin network generates a block approximately every ten minutes, thanks to its automated difficulty adjustment mechanism. It has been running consistently since its inception, with normal operating times surpassing Fedwire. I don’t know the supply of the U.S. dollar next year, but I know the exact supply of Bitcoin and can audit it directly at any time.

However, price is an important signal. It may not matter much on a daily, weekly, or even yearly basis, but it does have significance over several years. Bitcoin’s network may be the heartbeat of order in a chaotic world, but price remains its adopted benchmark. Bitcoin is now competing in the global currency market against over 160 different fiat currencies, gold, silver, and various other cryptocurrencies. As a store of value, it also competes with non-monetary assets like stocks and real estate or anything else we can own with finite resources.

Contrary to what some supporters say, the price of the U.S. dollar does not revolve around Bitcoin. Compared to the dollar, Bitcoin is a younger, more volatile, less liquid, and smaller network with greater volatility. In certain years, Bitcoin holders could purchase more real estate, food, gold, copper, oil, S&P 500 stocks, dollars, rupees, or anything else than the previous year. But in other years, they could purchase much less. Bitcoin’s price primarily fluctuates on a mid-term basis, and its volatility affects the purchasing power of holders. Currently, the price of Bitcoin has risen sharply, meaning Bitcoin holders can purchase more than they could a few years ago.

If the price of Bitcoin remains stagnant for an extended period, we may need to consider why Bitcoin is not attracting people. Wasn’t it supposed to provide solutions to their problems? If it’s not solving problems, why not?

Fortunately, as shown in the chart above, this is not the case. Bitcoin’s price continues to make history in one cycle after another. It is one of the best-performing assets in history. Considering the significant tightening of central bank balance sheets and the sharp rise in real interest rates over the past few years, this trend has held up quite well. From on-chain metrics, historical correlations with global broad money supply, and other factors, Bitcoin is expected to continue its path of long-term adoption and growth.

Next is liquidity. How much is the daily trading volume on exchanges? How much transaction value is sent on-chain? Money is the best-selling commodity, and liquidity is crucial.

Bitcoin ranks very well in this metric too, with daily trading volumes reaching billions or even tens of billions of dollars when exchanging for other currencies and assets. Its daily trading liquidity is comparable to Apple (AAPL) stock. Unlike most of Apple’s transactions that occur on the Nasdaq exchange, Bitcoin is traded on many exchanges worldwide, including some peer-to-peer markets. The daily on-chain transfers on the Bitcoin network also reach billions of dollars.

One way to consider liquidity is that it begets more liquidity. For money, this is a crucial part of the network effect.

When Bitcoin’s daily trading volume is in the thousands of dollars, an individual cannot invest a million dollars without causing significant price fluctuations, and they may even have to spread the trades over several weeks. For them, this is not a market with sufficient liquidity.

When Bitcoin’s daily trading volume is in the millions of dollars, an individual cannot invest a billion dollars or even spread the trades over several weeks.

Now, Bitcoin has a daily trading volume in the tens of billions of dollars, but a capital pool of trillions of dollars still cannot invest a meaningful portion, indicating that liquidity is still insufficient for them. If they were to start investing hundreds of millions or billions of dollars daily, it would be enough to tilt supply and demand in favor of buyers and significantly drive up prices. Since its inception, the Bitcoin ecosystem has needed to reach a certain level of liquidity to attract the attention of a larger capital pool. It’s like leveling up.

So, when Bitcoin’s price exceeds $100,000, $200,000, who will buy it? Who are the entities that won’t buy it until Bitcoin is so powerful? Calculated at $100,000 per Bitcoin, each sat is worth 0.1 cents.

Just as the price of 400 ounces of gold (standard gold bar) is not important to most people, the price of each full Bitcoin is not important. What is important is the overall network scale, liquidity, and functionality. What matters is whether their share in the network can maintain or enhance their purchasing power in the long run.

Like any asset, the price of Bitcoin is a function of supply and demand.

The supply is fixed, but at any given time, some of it may be held by weak hands, while some may be held by strong hands. During a bull market, many new investors eagerly buy, and some long-term holders reduce their holdings and sell to these new buyers. During a bear market, many recent buyers sell at a loss, while the more steadfast ones sell less frequently. Supply transitions from weak hands looking for quick gains to strong hands that are less likely to give up easily. The chart below shows the percentage of Bitcoin that has not moved on-chain for over a year and the price of Bitcoin:

When Bitcoin’s supply is tight, even a small amount of new demand and capital inflow can significantly increase prices because existing holders are unlikely to have a substantial supply response. In other words, even with a significant price increase, it won’t encourage a massive sell-off of tokens held for over a year, which represents more than 70% of the total tokens. But where does this demand come from?

Generally, I have found the highest correlation with Bitcoin demand is the globally priced broad money supply. The first part is the global money supply, which measures global credit growth and central bank printing. The second part, the importance of the US dollar denomination, is because the US dollar is the global reserve currency, making it the primary unit of account for global trade, contracts, and debt. When the US dollar strengthens, countries’ debts become more robust. When the US dollar weakens, it softens the debts of various countries. The globally priced broad money denominated in dollars is like a significant liquidity indicator for the world. How fast is the creation of fiat currency units? How strong is the US dollar compared to other currencies in the global currency market?

Look Into Bitcoin has a macro data suite, and as part of it, they show the relationship between Bitcoin prices and the global broad money growth rate. I created a chart using it:

Here we compare the exchange rates between two different currencies. Bitcoin is smaller, but is getting stronger over time due to its ongoing supply halving and supply cap of 21 million coins. The dollar is much greater in value and goes through periods of weakness and strength, but mostly it is weak and in increasing supply with shorter periods of cyclical strength. Both Bitcoin fundamentals and USD fundamentals (global liquidity) will affect the exchange rate between the two over time.

Therefore, when I assess the market cap and liquidity of the Bitcoin network, I do so based on global broad money and other major assets over time. It doesn’t matter if it has ups and downs, after all, it is from zero to an unknown future, and it is accompanied by fluctuations. Rising prices attract leverage and ultimately lead to a crash. If Bitcoin is to be widely adopted, it must continually go through cycles and move away from leverage and circular collateralization.

Bitcoin’s notorious volatility is unlikely to abate significantly unless it becomes more liquid and widely held than it is now. There is no solution to Bitcoin’s volatility other than more time, more adoption, more liquidity, more understanding, and a better user experience on wallets, exchanges, and other applications. The asset itself changes only slowly, while the world’s perception of it, the process of adding and removing leverage on top of it, goes through manic and depressive cycles.

What would I worry about? If global liquidity rises for a long time but Bitcoin price remains stagnant, or if global liquidity remains at a standstill but Bitcoin fails to consistently make new highs on a multi-year time frame. We will then have to ask some tricky questions about why the Bitcoin network was unable to capture market share for a very long time. But so far, by this metric, it’s pretty healthy.

Convertibility

Bitcoin has gone through multiple narrative shifts in its 15-year lifespan, and interestingly, almost all of them were explained by Satoshi Nakamoto, Hal Finney, and many others back in 2009 and 2010 on the Bitcoin Talk forum discussed. Since then, the Bitcoin market has grown strongly around different use cases for the network.

It’s like the parable of the blind men and the elephant. Three blind men were each touching an elephant; one touched the tail, one the sides, and one the tusks. They were all arguing about what they were touching, when in fact they were all touching different parts of the same object.

An important recurring topic in the Bitcoin ecosystem is whether it is a method of payment or a method of savings. The answer is of course both, but sometimes the emphasis changes. Satoshi Nakamoto’s original white paper was about peer-to-peer electronic cash, although in his earlier posts he also talked about central bank currency devaluation and how Bitcoin is resistant to such devaluation due to its fixed supply (i.e. as a method of savings). After all, money does have many uses.

Do I contradict myself?

Very well then I contradict myself,

(I am large, I contain multitudes.)

——Walt Whitman

Paying and saving are both important and go hand in hand. Since Bitcoin was primarily designed as a low-throughput network (to maximize decentralization), it primarily functions as a settlement network. Actual daily consumption transactions need to be completed on a higher layer of the network (such as Layer 2).

1. Bitcoin has the crucial capability to be sent from any internet user to any other internet user worldwide, and this is a vital component that enables its functionality. It provides holders with the ability to make permissionless, censorship-resistant payments. In fact, its initial use case emerged over a decade ago when major payment platforms withdrew support for WikiLeaks. WikiLeaks then turned to Bitcoin to continue receiving donations. Advocates for democracy in authoritarian regimes and human rights activists have leveraged it by circumventing bank freezes. People use it to evade unjust capital controls that attempt to permanently confine them to rapidly devaluing currencies in developing countries.
2. Likewise, Bitcoin’s 21 million supply cap and immutability make its ruleset trustworthy (including the supply cap), which is what makes Bitcoin attractive. The supply of most currencies increases indefinitely over time, even gold’s supply increases by an average of about 1.5% per year, but not Bitcoin. If people don’t want to hold it, but just convert back and forth from fiat to Bitcoin for short periods of time for settlement/payments, then this will add all kinds of friction, cost, and external scrutiny to the network. When you do want to hold Bitcoin for the long term, paying with or receiving payments in Bitcoin is the best way to go.

Therefore, the combination of payments and savings is crucial. The key to considering this issue is optionality. If you hold Bitcoin for the long term, you have the option to take this portion of wealth anywhere in the world or make permissionless, censorship-resistant payments to anyone connected to the internet, if you wish or need to. Your money won’t be unilaterally frozen or devalued by any bank or government with a stroke of a pen. It is not limited to a narrow jurisdiction; it is global. These features may not be essential for many Americans, but they are significant for many people around the world.

Many countries impose capital gains tax on Bitcoin (and most other assets), meaning if people sell or spend it, they must be taxed based on their cost basis and keep track of their accounting. This is an essential part of maintaining currency monopolies worldwide. With the widespread adoption of Bitcoin and some countries designating it as legal tender, this situation may change. However, this tax reality is prevalent in most places now, reducing the attractiveness of using Bitcoin for consumption in many cases compared to fiat currency. This makes me less inclined to spend too much money. However, on the flip side, in the jurisdiction I am in, there is rarely friction with the fiat currency system.

Gresham’s Law states that with fixed exchange rates (or, I think, some other frictions like capital gains taxes), people will spend the weaker currency first and hoard the stronger currency. For example, in Egypt, if someone has US dollars and Egyptian pounds, they spend the Egyptian pounds and keep the US dollars as savings. Alternatively, if every one of my Bitcoin transactions is subject to tax, but my USD transactions are not, then I will generally spend the USD and keep my Bitcoin. Egyptians can spend dollars and I can spend bitcoins in many places, but we both choose not to.

Thiers’ Law states that when a currency becomes extremely weak beyond a certain point, merchants will no longer accept it and will instead demand payment in a stronger currency. At that point, Gresham’s Law will be overturned and people will have to spend more money. When a currency collapses completely, those who have been saving in dollars in those countries tend to start spending dollars, and the dollar even replaces the weaker currency in the medium of exchange.

In most economic environments, it is not just the merchants who sell goods and services that are important, currency brokers are also important. In Egypt or many developing countries, businesses like restaurants may not accept U.S. dollars, even though they are a valuable item that can appreciate in value in that country. Sometimes you’ll need to convert to local currency before you can spend money at official merchants, but less official merchants are often more likely to accept premium currency payment methods.

Let’s say I bring a stack of physical dollars, a few South African Krugerrands, or some Bitcoin to a country, but I don’t bring a Visa card. How can I get local goods and services? I can find a merchant that accepts these currencies directly, or I can find a broker that will convert these strong dollars into local currency at a fair local price. For the latter approach, like if I were entering an arcade or casino, I might need to convert the real global currency into the monopoly currency of this place, and then convert back to the real global currency when I leave. It sounds ironic, but it’s true.

In other words, what we need to know is the marketability or convertibility of a currency, not just how many merchants accept it directly or how many merchant transactions a certain currency completes. To give an obvious example, the number of people in the world who pay directly with gold is extremely low, but the liquidity and convertibility of gold are very high. You can easily find buyers for identifiable gold coins almost anywhere at fair market prices. Therefore, gold offers its holders quite a few options. Bitcoin is similar in this regard, but more portable around the world.

Most fiat currencies are extremely liquid and marketable within their country and are accepted by almost all merchants. However, except for a few legal currencies, all legal currencies are not marketable and convertible overseas. In this sense, they are like arcade game tokens or casino chips. For example, my Egyptian pounds and Norwegian krone were virtually useless in New Jersey, even if I found a place where I could exchange them easily:

Egyptian and Norwegian banknotes

To roughly quantify it:

1. The physical US dollar has 10/10 convertibility in the United States, 7/10 in some countries, and possibly 5/10 in others. There’s a range, but overall, it is usually the most liquid currency in the world. Sometimes you can spend it directly, and sometimes you may need to exchange it, but in either case, there is often ample liquidity.
2. Most physical currencies have 10/10 convertibility in their home country but only 1/10 or 2/10 convertibility elsewhere. It takes a considerable amount of time and may require high discount rates to find someone willing to exchange them outside their jurisdiction, similar to arcade game tokens.
3. Gold has nearly 6/10 convertibility almost anywhere, making it one of the anonymously convertible assets like the US dollar. You cannot use it as easily as a local fiat currency in a specific country, and its overall spending volume is relatively small. However, you can easily convert it into liquid value in almost any country. Gold is a globally recognized form of liquid and interchangeable value.
4. Bitcoin’s convertibility is around 6/10 in many urban centers worldwide, similar to gold. In many rural areas, however, its convertibility drops to around 2/10, similar to fiat currencies outside the monopoly boundary. But it is on a strong upward trend and has made significant progress from non-existence to its current state in just 15 years. Moreover, in most countries/regions, it can also be converted online into mobile recharges, digital gift cards for local spending, and other forms of value. Therefore, the total of offline and online conversion methods is significant for those carrying Bitcoin.

In my view, the right question is “If I carry Bitcoin with me, can I easily spend or cash its value?” In many urban centers in countries like South Africa, Costa Rica, Argentina, Nigeria, or basically any developed country, the answer is a fairly loud “yes.” In other countries like Egypt, this situation has not truly materialized yet. So far, Bitcoin is sure to become more convertible within any given few years.

The Rise of Bitcoin Hub

In my view, one of the most promising trends is the growth of many small Bitcoin communities worldwide. El Zonte in El Salvador is one such example, drawing the attention of the country’s president. There’s also a surge in other community initiatives, like Bitcoin Jungle in Costa Rica, Bitcoin Lake in Guatemala, Bitcoin Ekasi in South Africa, Lugano in Switzerland, F.R.E.E. in Madeira Island, and many more regions that have become hubs for Bitcoin usage and acceptance. The saleability and convertibility of Bitcoin in these places are quite high, and Bitcoin hubs continue to emerge.

Furthermore, Ghana has hosted Africa Bitcoin conferences for two consecutive years, led by a woman named Farida Nabourema. She is an exiled democracy advocate from Togo who understands that financial suppression is a tool of authoritarianism and is critical of the new colonialism currency imposed by France in over a dozen African countries. Additionally, Indonesia now regularly hosts Bitcoin conferences hosted by a woman named Dea Rezkitha. Bitcoin conferences are happening worldwide.

There are also small organizations like Bitcoin Commons in Austin, Texas, Bitcoin Park in Nashville, Pubkey in New York, and Real Bedford in the UK, which serve as local Bitcoin hubs. In a specific city, having a dedicated Bitcoin community or regular meetups has become increasingly common. Websites like BitcoinerEvents.com can help you find them, serving as channels for Bitcoin exchange.

Some applications can help you find Bitcoin merchants in your area. For example, BTCMap.org lets you discover businesses worldwide that accept Bitcoin. The 2023 BTC Prague Conference and the 2023 Africa Bitcoin Conference are featured in the Fedi Events app. Apart from acting as a Bitcoin wallet, the app provides schedules for all significant events at conferences, an interactive map showing the locations of businesses accepting Bitcoin payments in the region, and an AI assistant for Bitcoin Lightning Network micro-payments. (Disclosure: I am an investor in Fedi through Ego Death Capital.)

Technical Security and Decentralization

My friend and colleague Jeff Booth often uses the phrase “as long as Bitcoin remains secure and decentralized” when describing his outlook for Bitcoin’s future and its macroeconomic impact. In other words, this is an if/else viewpoint, based on the network continuing to operate as it has for the past 15 years and the features that make the Bitcoin network valuable persisting into the future.

Bitcoin is not magical. It is a distributed network protocol. To continue to deliver its value, it must function by resisting and thwarting attacks and must be the best, most liquid way. The concept of Bitcoin is not enough to have a real impact on anything; what matters is the reality of Bitcoin. If Bitcoin were to suffer a catastrophic hack or become centralized (requiring permission/censorship), it would lose its current use cases, and its value would partially or entirely disappear.

In addition to network effects and related liquidity, the focus on security and decentralization is largely what sets Bitcoin apart from other cryptocurrency networks. It sacrifices almost all other categories of performance—speed, throughput, and programmability—to be as simple, streamlined, secure, robust, and decentralized as possible. Its design maximizes these features. Any additional complexity must be built on top of the Bitcoin network layer rather than embedded in the foundational layer because embedding these features in the foundational layer would sacrifice the performance of these crucial attributes of security and decentralization.

Therefore, monitoring the levels of security and decentralization in Bitcoin is crucial when considering the long-term themes of building and maintaining network value and utility.

Security analysis

Bitcoin, as an emerging open source technology, has a very strong security record, but it is not perfect. As I wrote in Broken Money, here are some of the more noteworthy technical issues it has faced so far:

In 2010, when Bitcoin was brand new and had almost no market price, the node client had an inflation bug, which Satoshi Nakamoto fixed with a soft fork.

In 2013, due to an oversight, a Bitcoin node client update accidentally became incompatible with the previous (and widely used) node client, resulting in an unexpected chain split. Within a few hours, developers analyzed the problem and told node operators to return to the previous node client, resolving the chain split. In the more than a decade since then, the Bitcoin network has maintained a perfect 100% runtime. Even Fedwire experienced outages during this period and failed to achieve 100% runtime.

In 2018, another inflation vulnerability was accidentally added to the Bitcoin node client. However, this issue was identified and carefully fixed by the developers before being exploited, so it did not cause problems in practice.

In 2023, people began using the SegWit and Taproot soft fork upgrades in ways that developers had not anticipated, including inserting images into the signature part of the Bitcoin blockchain. While this, in itself, is not an error, it highlights the risk that certain aspects of the code may be used in unexpected ways, indicating the need to maintain a conservative approach when implementing upgrades in the future.

Bitcoin faces a challenge known as the “2038 problem,” a common issue in many computer systems. By 2038, the 32-bit integers used for Unix timestamps in many computer systems will run out of seconds, leading to errors. However, since Bitcoin uses unsigned integers, this issue will not arise until 2106. This problem could be addressed by updating time to a 64-bit integer or by incorporating block height into a 32-bit integer. However, based on my understanding, this may require a hard fork, implying a backward-incompatible upgrade. In practice, this should not be difficult, as it is evidently necessary and can be completed well before the problem arises (even several years or decades in advance), but it might open a window of vulnerability. One possible approach is to initially release a backward-compatible update that activates when the integers are exhausted, thereby resolving the issue.

—Broken Money, Chapter 26

Bitcoin indeed has the capability to recover from technical issues. The fundamental solution involves node operators on the decentralized network rolling back to a pre-existing update before the error and rejecting new updates that cause the problem. However, we must consider the worst-case scenario. If a technical issue goes unnoticed for many years, becomes part of a widespread node network, and is then discovered and exploited, it becomes a more serious, potentially catastrophic problem. While not irrecoverable, this would be a significant blow.

Due to Bitcoin’s code repository existing for several years, even decades, it has become more robust and benefited from the Lindy effect.

Overall, the incidence of major errors has decreased over time, and the fact that the network has maintained 100% runtime since 2013 is notable.

Decentralized Analysis

We can consider node distribution and mining distribution as crucial variables for measuring decentralization. A widely distributed node network makes changing network rules challenging since each node enforces rules for its users. Similarly, a widely distributed mining network makes transaction censorship more difficult to achieve.

Bitnodes has identified over 16,000 accessible Bitcoin nodes. Bitcoin Core developer Luke Dashjr estimates that considering privately run nodes, the total number of nodes exceeds 60,000.

In comparison, Ethernodes recognizes about 6,000 Ethereum nodes, with roughly half hosted by cloud service providers rather than running locally. Due to Ethereum nodes consuming too much bandwidth for private operation, this number may be close to the actual figure.

Therefore, Bitcoin is quite robust in terms of node distribution.

Bitcoin miners cannot change the core rules of the protocol, but they can decide which transactions enter or do not enter the network. Thus, mining centralization increases the likelihood of transaction censorship.

The largest publicly listed miner, Marathon Digital Holdings (MARA), controls less than 5% of the network’s hash rate. Several other private miners have a scale roughly similar. Various public and private miners own 1-2%, and many miners with even less hash power exist. In other words, mining is reasonably decentralized; even the largest participants can only allocate a small portion of network resources.

Since China banned Bitcoin mining in 2021, the United States has been the largest mining jurisdiction, but its estimated mining hash rate is still less than half of the total hash rate. Ironically, China remains the second-largest mining jurisdiction because, even with a high level of authoritarianism, it’s challenging to eradicate mining. Other energy-rich countries like Canada and Russia have extensive mining infrastructure, and several other countries have small-scale mining operations.

Mining companies typically allocate their hash power to mining pools. Currently, mining pools are quite centralized, with two pools jointly controlling about half of transaction processing, and the top ten pools almost entirely controlling all transaction processing. I believe this is an area that needs improvement:

Source: Blockchain.com

However, there are some important considerations. Firstly, mining pools do not host mining machines, which is a crucial distinction. If a mining pool encounters issues, miners can easily switch to another pool. Thus, while several pools may collectively conduct a brief 51% attack on the network, their ability to sustain such attacks may be very weak. Secondly, Stratum V2 has recently been introduced, allowing miners to have better control over the block-building process, rather than relying solely on the pool to handle all the work.

The physical mining supply chain is also relatively centralized. TSMC (Taiwan Semiconductor Manufacturing Company) and a few other foundries worldwide are key bottlenecks for the production of most types of chips, including the specialized chips used by Bitcoin miners. In fact, I would go so far as to say that mining pool centralization is an overestimated risk, while semiconductor foundry centralization is an underestimated risk.

Overall, ownership of active mining machines is highly decentralized. However, in reality, some countries have a significant number of miners, certain pools have a substantial portion of mining power directed towards them, and the mining supply chain exhibits some centralized aspects, which weaken the decentralization of the mining industry. I believe mining is an area that could benefit from more development and attention. Fortunately, the most critical variables (ownership of mining machines and physical distribution) are highly decentralized.

User Experience

If Bitcoin is technically challenging to use, it will be limited to programmers, engineers, theorists, and advanced users willing to invest time in learning. On the other hand, if it is effortless to use, it can spread more easily to the general population.

Looking back at cryptocurrency exchanges from 2013-2015, they appeared quite rough. Today, purchasing Bitcoin from reputable exchanges and brokers is typically more accessible, and the interfaces are user-friendly. In the early days, there were no dedicated Bitcoin hardware wallets; people often had to figure out how to manage keys on their computers. Most of the “lost Bitcoin” stories you hear in the media come from that early era when Bitcoin’s value wasn’t high enough to capture people’s attention, and key management was more challenging.

In the past decade, hardware wallets have become more prevalent and user-friendly. Software wallets and interfaces have also seen significant improvements.

One of my recent favorite combinations is Nunchuk + Tapsigner, which works well for small amounts of Bitcoin. Tapsigner is a $30 NFC wallet that securely stores private keys offline at an affordable price, while Nunchuk is a mobile and desktop wallet that can be used with various hardware wallet types, including Tapsigner for moderate amounts of Bitcoin or a full-featured hardware wallet for larger amounts.

A few decades ago, learning to use a checkbook was an important skill. Today, many people get a Bitcoin/crypto wallet before they get a bank account. Managing public/private key pairs may become a more regular part of life, both for managing funds and for signing to distinguish real social content from fake content. It’s easy to learn, and many people grow up with the technology around them.

According to Statista, the number of global Bitcoin ATMs will also increase more than 100 times from 2015 to 2022:

There has also been an increase in coupon purchasing methods other than ATMs, which I believe is one of the reasons why ATM numbers have started to level off recently. Azteco was founded in 2019 and raised $6 million in seed capital in 2023 in a round led by Jack Dorsey. Azteco vouchers can be purchased for cash at hundreds of thousands of retail and online platforms, especially in developing countries, and then exchanged for Bitcoin.

The Lightning Network has continued to grow over the past six years, reaching very respectable liquidity levels by the end of 2020.

Websites like Stacker News and communication protocols like Nostr also integrate the Lightning Network, ultimately merging the delivery of value with the delivery of information. Novel browser plugins like Alby make it easy to use Lightning on multiple websites from a single wallet, and can replace username/password as the signing method in many scenarios.

Overall, the Bitcoin network has become easier and more intuitive to use over time, and from what I’ve seen as a venture capitalist in this space, this will continue to be the case in the coming years.

Legal Acceptance and Global Recognition

“But what if the government bans it?” Since the birth of Bitcoin, it has been something widely opposed by many. After all, governments do have the power of currency monopoly and capital controls.

However, when answering this question, we need to ask: “Which governments?” There are about 200 of them. Game theory comes into play here; if one country prohibits it, another country can gain new business by inviting people to build together. El Salvador even recognizes Bitcoin as legal tender now, and some countries are using funds from their sovereign wealth funds for Bitcoin mining.

Moreover, some things are really hard to stop. In the early 1990s, Phil Zimmerman created Pretty Good Privacy (PGP), an open-source encryption program. It allowed people to send private information to each other over the Internet, something most governments did not like. After his open-source code flowed outside the United States, the U.S. federal government initiated a criminal investigation against Zimmerman, citing “unauthorized export of munitions.”

In response, Zimmerman published his complete source code in a book and was protected by the First Amendment. After all, it was just a collection of words and numbers he chose to express to others. Some individuals, including Adam Back (the creator of Hashcash, eventually used in Bitcoin as a proof-of-work mechanism), even started printing various encryption codes on T-shirts, with a warning that said, “This shirt is classified as munitions, and may not be exported from the United States, or shown to a foreign nation.”

The U.S. federal government did abandon the criminal investigation against Zimmerman and made changes to encryption regulations. Encryption technology has become a crucial part of electronic commerce, as secure encryption is necessary for online payments. Therefore, if the U.S. federal government attempts to overstep its authority, much economic value could be delayed or moved to other countries.

In other words, these types of protests have been successful, using the rule of law to oppose government overreach and pointing out that attempting to restrict this easily disseminated information is absurd and impractical. Open-source code is just information, and information is challenging to suppress.

Similarly, Bitcoin is freely available open-source code, making it difficult to eliminate. Even restricting it on the hardware side is challenging; China banned Bitcoin mining in 2021, but China remains the second-largest mining jurisdiction, indicating that trying to ban it is not easy. The software aspect has gained more engagement.

Many countries have been inconsistent in banning Bitcoin or have gotten entangled in their own legal and power divisions. In relatively free countries, the government is not a monolith. Some government officials or representatives like Bitcoin, while others do not.

In 2018, the Reserve Bank of India banned banks from participating in cryptocurrency-related businesses and lobbied for a complete ban on the use of cryptocurrencies. Still, in 2020, the Supreme Court of India made a ruling against the ban, restoring the right of the private sector to innovate using this technology.

In early 2021, amidst double-digit inflation in its national currency for a decade, the Central Bank of Nigeria prohibited banks from interacting with cryptocurrencies, although they did not attempt to portray it as illegal to the public because it was challenging to enforce. Instead, they introduced the eNaira central bank digital currency and attempted to limit physical cash by imposing stricter withdrawal limits, trying to bring people into their centralized digital payment system. During the ban, Chainalysis assessed that Nigeria had the second-highest cryptocurrency adoption rate globally (mainly stablecoins and Bitcoin), especially having the highest peer-to-peer transaction volume globally, which was their way of circumventing the banking blockade. By the end of 2023, after implementing an ineffective ban for nearly three years, the Central Bank of Nigeria reversed its decision and allowed banks to interact with cryptocurrencies under specified regulations.

In 2022, to counter triple-digit inflation, there was strong demand for cryptocurrencies among the public in Argentina, with some major banks making efforts to offer cryptocurrencies to customers. However, the Argentine government prohibited banks from offering such services to customers. They cited typical reasons such as volatility, cybersecurity, and money laundering, but it was actually to slow down the outflow of their national currency. Then, in 2023, things started to turn around after Javier Milei was elected president. He supported Bitcoin and endorsed letting the market decide what it wants to use as currency. During Milei’s campaign, economist Diani Mondino (now the Argentine Minister of Foreign Affairs) wrote, “Argentina will soon be a Bitcoin paradise.”

For years, the U.S. Securities and Exchange Commission (SEC) has been suppressing Bitcoin spot ETFs. Spot Bitcoin ETFs in other countries have had no issues, and the Commodity Futures Trading Commission allows Bitcoin futures trading, while the SEC permits futures-based ETFs. The SEC even allows leveraged futures Bitcoin ETFs. However, they repeatedly blocked all spot ETFs, the simplest type and the one the market wants. In 2023, the Washington, D.C. Circuit Court of Appeals found that the SEC’s practice of allowing Bitcoin futures ETFs but not spot ETFs was “arbitrary and capricious” rather than based on reasonable and coherent arguments. By early 2024, several spot Bitcoin ETFs started trading.

There are approximately 160 currencies worldwide, surrounded by a “financial blood-brain barrier.” They can control how much physical currency (such as cash and gold) passes through entry ports and impose strict restrictions. They can control which currencies banks use for operations, domestic and international bank transfers, and the currencies they can offer to customers.

Even if emerging market jurisdictions do allow access to USD accounts, they can be risky for account holders. They are partially reserved and lack FDIC insurance supported by the U.S. government and the U.S. central bank. In other words, USD deposits in foreign banks in developing countries are essentially junk-grade and uninsured leveraged bond funds. During currency shortages, USD accounts can be forced to exchange at fake exchange rates into the local currency or be prevented from withdrawing. If someone holds USD in a domestic bank account in a country experiencing hyperinflation, they are unlikely to retrieve most or any USD.

These 160 different fiat currencies can be a real problem for many people. Latin America has over 30 currencies, and Africa has over 40 currencies. All these financial borders create trade frictions, and they lock people into rapidly depreciating currency units.

In other words, if I want to pay a graphic designer from a developing country using various traditional payment methods, and they want to receive USD instead of the rapidly depreciating local currency, their government and banking system can block the transfer and have them receive the local currency represented in various ways. They can also set artificial exchange rates. Financial control is strict:

But if the designer chooses to be paid in Bitcoin or a USD stablecoin, I can send them the QR code through a video call, or via direct messages or email, and it will propagate in their banking system. For legal reasons, I won’t send it to countries under sanctions (too much risk for me), but if their country legally allows Americans to send money, I’m happy to do so, and the main friction is on their end, representing the majority of countries.

Moreover, as long as someone has the private key, they can carry an unlimited amount of Bitcoin and stablecoins globally. They can write it in their luggage, store it on a device, remember the twelve words representing the key, or temporarily paste it in a password-protected encrypted cloud file, bringing unlimited value density through any entry point.

I saw a sign at the airport that said “No carrying more than $10,000 in cash,” and I chuckled to myself because they couldn’t know among the people in line who possesses $10 million or any arbitrary value of Bitcoin or stablecoins.

With this technology, the 160 financial borders between us are becoming increasingly loose. Trying to eliminate Bitcoin, stablecoins, or similar things is like trying to build a sand wall to stop the tide. The ability to transfer funds between banks, and any parties connected to the internet, has opened up global competition between currencies.

This is a good thing for most people. This is bad for those who seek rent from the top down, constantly diluting people’s savings and wages, channeling this value to themselves and their cronies, and relying on obfuscation rather than transparency to finance themselves. Capital naturally flows to places with good legal protections and the rule of law, and technology makes this process faster and smoother, and makes capital accessible to the working class and middle class, not just the wealthy.

Holding and using Bitcoin would put governments in an awkward position if they tried to ban it, especially those with a semblance of a rule of law. They have to argue that it is a bad thing to have a currency that cannot be devalued and that people can hold for themselves and send to others. In other words, they must prove that decentralized spreadsheets pose a threat to national security, and such dangerous things must be banned under threat of imprisonment.

Instead, the biggest legal challenges facing the Bitcoin network in the future may come from the area of ​​privacy, and from major governments such as the United States. The government really doesn’t want people to have any kind of financial privacy, especially on a large scale. For much of history, financial privacy was the default, but in recent decades, that has become increasingly different.

Their reasoning is that, to prevent 1% of bad actors from engaging in terrorist financing, human trafficking, or other malicious activities, 100% of individuals must relinquish their financial privacy, allowing the government to monitor all transactions among parties. Additionally, the government derives a significant portion of its revenue from income taxes, and the enforcement of income taxes relies on ubiquitous monitoring of all payment flows. However, such practices could potentially lead to widespread overreach and have severe consequences.

Furthermore, we live in an era of surveillance capitalism. If we surrender our digital soul, meaning all our data, companies will offer us countless free services. What we see and consume constitutes highly valuable business information. The government reinforces this and helps make it the norm because they also intervene in the backend and collect this data. Sometimes it may be for national security reasons, and other times it might be an attempt to control the entire population.

However, people have the ability to custody their own money, transfer money to others, and transact in a way that corporations and governments cannot monitor or devalue. This serves as a crucial check on power. For businesses, there are many reasons not to want to surveil us, especially considering the frequent occurrence of hacking attacks that lead to data leaks on the dark web. For governments, technologies like this cannot comprehensively monitor and freeze funds without reasonable cause before utilizing targeted enforcement, which comes with costs and legal procedures.

Until the 19th century and earlier, financial privacy was the norm since most transactions were conducted using physical cash, and there was no significant technology to monitor this. The idea of monitoring every individual’s transaction was science fiction. Starting in the late 19th century, especially throughout the 20th century, people increasingly used banks for savings and payments, and these banks also became more centralized and subject to government surveillance. The telecommunications era and the modern banking era it facilitated made ubiquitous financial monitoring the norm. Governments mostly didn’t need to enforce privacy controls on individuals; they primarily just needed to enforce them on banks, which was easy and happened behind the scenes. The rise of factories and companies brought people from farms into cities, earning wages into bank accounts, and automatic tax extraction made all their financial activities easily monitored.

However, with continuous improvements in computer processing, encryption, and telecommunications technologies, Bitcoin was eventually created, allowing peer-to-peer anonymous value transfers. As Bitcoin and related technologies become more widespread, especially with privacy layers and methods built on top of them, the government’s maintenance of the existing centralized surveillance situation becomes increasingly untenable. People can start choosing to opt-out, but the government won’t give up easily. They are currently attempting to impose bank-like surveillance and reporting requirements on individuals, which is orders of magnitude more challenging than enforcing it on institutions.

I suspect there will be more conflicts like Zimmerman’s in the coming years, but this time for financial privacy. Governments worldwide will increasingly ramp up friction against the use of various privacy-preserving methods, even attempting to criminalize these methods. The defense of such privacy is that many of these methods are open source, and they are just information. To restrict the creation and use of those methods for those who have not committed any crimes, they would need to criminalize the use of words and numbers in a certain order. In jurisdictions with freedom of speech, it’s challenging to legally justify, and due to the ease of spreading open-source code, it’s also challenging to enforce in practice. In the United States and some other jurisdictions, well-funded lawsuits can overturn these laws on constitutional grounds. Therefore, I anticipate that period to be quite tumultuous.

Assessment Grade: A-

Scoring the Bitcoin network is somewhat like a joke because it’s not something that can truly be quantified, but essentially, most aspects of the network either improve or remain roughly the same.

Areas where we could deduct points, bringing it down to an A- instead of an A or A+, include the potential for improved miner decentralization, especially concerning mining pools and ASIC production. Additionally, the overall user experience and the development of Layer2 applications/ecosystems could potentially advance further. For the second aspect, I’d like to see more and better wallets, smoother integration with higher-layer networks, greater adoption of built-in privacy features, and so on.

If Bitcoin enters another sustained period of high fees, similar to recent times, I believe the development of Layer2 solutions will accelerate. When fees are low, people are more likely to use the base layer without a reason to turn to higher-layer solutions. However, when fees are high, various existing use cases will face stress tests, and users and capital will tend to gravitate towards what is efficient or in demand.

Moreover, governments worldwide are generally forced to accept it to some extent, sometimes willingly and sometimes passively. However, the future battles may revolve around privacy, and in my view, this battle is far from over.

Overall, I still believe the Bitcoin network holds high investment value, whether directly as the asset Bitcoin or as equity in companies built on the network.

Risks persist, but they represent areas for potential improvement and contribution. Part of the strength of the Bitcoin network lies in its open-source nature, allowing anyone to audit the code and propose improvements, build additional layers on top of it, and create interactive applications while continuously enhancing it.

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