When investing in bitcoin as an asset, or companies that build on top of the Bitcoin network as part of an asset mix, we need some set of metrics with which to evaluate the progress of the investment thesis, and by extension, the health of the Bitcoin network.

It’s more than just a price on a chart; it’s an open-source network with millions of users, thousands of developers, hundreds of companies, and several ecosystems built on top of it. Most Wall Street analysts and retail investors haven’t actually used a bitcoin wallet, taken self-custody of the asset, sent it to others, and/or used it in various ecosystems, and yet doing so is very helpful for fundamental research.

Bitcoin means a lot of different things to a lot of different people. It enables portable savings, censorship-resistant global payments, and immutable data storage. If you’re an American or European investor in high quality stocks and bonds, and are not thinking about the Bitcoin network from the perspective of a Nigerian, Vietnamese, Argentinian, Lebanese, Russian, or Turkish middle-class saver for example, then you’ve not yet fundamentally analyzed the asset’s use case.

And on top of that, people assess the health of the network in multiple different ways. If Bitcoin doesn’t conform to what they want it to be, they might conclude that it’s not doing well. On the other hand, if Bitcoin fits exactly with what they want, then they might think it’s doing great even if there is plenty of frictions remaining to be solved.

Having spent a lot of time studying monetary history, as well as spending time in the startup/venture space around Bitcoin and studying the technical details of the protocol in recent years, I have a handful of key metrics that I personally look at when assessing the health of the Bitcoin network. This article walks through them and sees how the network is doing in terms of each one.

1. Market Capitalization and Liquidity
2. Number of Conversion Points
3. Technical Security and Decentralization
4. Quality of User Experience
5. Legal Acceptance and Global Recognition

1) Market Capitalization and Liquidity

Some people say price doesn’t matter. “1 BTC = 1 BTC” is how they like to put it. It’s not bitcoin that is volatile; it’s that the world is volatile around bitcoin, man.

And there’s indeed some truth to that. Bitcoin has a fully diluted supply of 21 million bitcoin (technically 2.1 quadrillion sats, which are the smallest denomination of on-chain bitcoin), created and distributed in a pre-programmed decreasing pattern, produces blocks on average every ten minutes thanks to an automatic difficulty adjustment, and has operated with remarkable consistency since its inception with a higher uptime rate than Fedwire. I don’t know what the dollar supply will be next year, but I know what the bitcoin supply will be and can directly audit its exact supply at any time.

But price is an important signal. It doesn’t mean much on a day-to-day, week-to-week, or even year-to-year basis, but it certainly means something across several years. The Bitcoin network itself might be serving as a heartbeat of clockwork order in a world of chaos, but price is nonetheless a measure of its adoption. Bitcoin is competing in the global marketplace of monies now, against more than 160 different fiat currencies, gold, silver, and various other cryptocurrencies. As a store of value it’s also competing with non-monetary assets like equities and real estate or other things we can own with our limited resources.

It’s not really that the dollar is fluctuating in price around bitcoin as some proponents like to say. Bitcoin is the younger, more volatile, less liquid, smaller network compared to the dollar; it’s indeed the one fluctuating more in price. In some years, bitcoin holders can buy a lot more property, food, gold, copper, oil, S&P 500 shares, dollars, rupees, or whatever else compared to what they could buy in the prior year. In other years, they can buy a lot less. Bitcoin’s price is mainly what’s fluctuating on any given intermediate-term basis, and the fact that it fluctuates affects the purchasing power of the holders. So far, the fluctuations have aimed sharply up, meaning that a holder of bitcoin can buy a lot more than they could several years ago.

If price stagnates for a long time, that’s a piece of information. If that were to happen, we should reasonably ask why Bitcoin is failing to appeal to people. Is it not providing solutions to their problems? If not, why?

Fortunately, as the chart above shows, that has not been the case. Bitcoin’s price keeps making higher highs and higher lows, cycle after cycle. It’s one of the best-performing assets in history. And I would say it has held up rather well given the aggressive tightening of central bank balance sheets and the sharp rise in positive real rates over the past couple of years. Looking at on-chain indicators, its historic correlation with global broad money supply, and other factors, Bitcoin continues to enjoy long-term adoption and growth. But it must be monitored.

And then there’s liquidity. How much daily trading volume is happening on exchanges? How much transaction value is being sent around on-chain? Money is the most salable good. Liquidity is very important.

Bitcoin has been ranking very well in this metric too, with billions or tens of billions of dollars worth of daily trading volume against other currencies and assets, which puts it on par with Apple (AAPL) stock in terms of daily exchange liquidity. And unlike Apple where the vast majority of volume is on the Nasdaq exchange, bitcoins trade in many exchanges and currencies around the world including some peer-to-peer marketplaces. There are also billions of dollars worth of on-chain transfer volume in a given day.

A way to think about liquidity (and it’ll likely make you more bullish when you realize it), is that liquidity begets more liquidity. For money, that’s a big piece of what the network effect is.

When bitcoin had thousands of dollars worth of trading volume per day, someone couldn’t put a million dollars into it, even spread out over weeks, without drastically moving the price. It wasn’t a big and liquid enough market for them yet.

And then when bitcoin had millions of dollars worth of trading volume per day, someone couldn’t put a billion dollars into it, even spread out over weeks.

And now that bitcoin has billions of dollars of trading volume, there are trillion-dollar pools of capital that can’t put meaningful percentages into it; it’s still too small and illiquid for them. If they start putting a few hundred million dollars or a couple billions of dollars per day into it, that’s enough to tilt the supply/demand toward the buy side and seriously inflect the price upward. Since inception, the Bitcoin ecosystem has had to achieve certain levels of liquidity before it even gets on the radar of bigger pools of capital. It’s like leveling up.

So, who would buy bitcoin when it’s over $100k or $200k per coin? Entities that can’t really buy it until it’s that big, is who. And at $100,000 per bitcoin, each sat is worth a tenth of a cent.

Kind of like how the price of a 400 ounce gold “good delivery bar” doesn’t really matter for most people, the price of each full bitcoin (an arbitrary large unit) doesn’t really matter. What matters is overall network size and liquidity and functionality. And what matters is whether their share of the network is preserving or growing its purchasing power over the long run, or not.

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

Supply is fixed, but portions of it can be in weak hands or strong hands at any given time. During bull markets, a lot of new people excitedly buy in, and some longer-term holders trim their exposure and sell to those new buyers. During bear markets, a lot of recent buyers sell out at a loss, and the more steadfast people keep dollar-cost averaging into it, rarely if ever selling. Supply rotates from fast-money weak hands to vaulted-money strong hands that won’t easily part with it. This chart shows the percentage of bitcoin that hasn’t moved on-chain in over a year, along with the price of bitcoin:

When bitcoin’s supply is tight like that, it only takes a small spark of new demand and fresh capital inflows to raise the price significantly, since there won’t be a big supply response function from existing holders. In other words, even a sharp price increase won’t encourage much selling from those 70%+ of coins that have been held for over a year. But where does that demand come from?

Generally speaking, the biggest correlation I have found to bitcoin demand is global broad money supply, denominated in dollars. The first part, global money supply, is a measure of global credit growth and/or central bank money-printing. For the second part, the reason dollar denomination is important here is because the dollar is the global reserve currency and thus the primary unit of account for global trade, global contracts, and global debts. When the dollar strengthens, it hardens the debts of various countries. When the dollar weakens, it softens the debts of various countries. Global dollar-denominated broad money is like a big liquidity metric for the world. How quickly are fiat currency units being created? And how strong is the dollar relative to the rest of the global currency market?

Look Into Bitcoin has a macro suite and as part of that, they show the rate of change of bitcoin price relative to the rate of change of global broad money, and I’ve made a custom chart set out of it:

Basically, we’re comparing the exchange rate between two different currencies here. Bitcoin is smaller, but is getting harder over time thanks to its ongoing supply halvings and its supply cap of 21 million coins. The dollar is way bigger, and goes through periods of softening and hardening, but mostly it is softening and ever-increasing in supply with briefer periods of cyclical hardening. Both the fundamentals of bitcoin and the fundamentals of the dollar (global liquidity) affect the exchange rate between the two over time.

So when I am assessing the market capitalization and liquidity of the Bitcoin network, I am doing it in relation to global broad money and other major assets over time. It’s fine for it to have major ups and downs; after all it is bootstrapping from zero to who knows what, and that comes with volatility. Price appreciation attracts leverage, which eventually causes crashes. Bitcoin has to keep going through cycles and shaking off leverage and rehypothecation if it’s going to become widely adopted.

Bitcoin’s notorious volatility is unlikely to diminish much until it’s more liquid and more widely-held than it is now; there’s no fix for bitcoin’s volatility other than more time, more adoption, more liquidity, more understanding, and better user experience with the wallets, exchanges, and other applications. The asset itself is only changing slowly; it’s the world’s perception of it and the leverage built on top of it or ripped away from it that goes through manic and depressive cycles.

What would make me concerned? If the bitcoin price were to stagnate despite a prolonged period of rising global liquidity, or if bitcoin were to fail to keep making higher highs and higher lows over a multi-year timeframe despite global liquidity doing so. We would then have to ask difficult questions about why the Bitcoin network is failing to take market share for a prolonged period of time. So far, it’s quite healthy by this metric.

2) Number of Conversion Points

Bitcoin has gone through a number of narrative transitions over its 15-year lifecycle, although the funny thing is that virtually all of them were discussed by Satoshi Nakamoto, Hal Finney, and many others back in 2009 and 2010 on the original Bitcoin Talk forums. But since then, the the market has bounced around to emphasize different use-cases of the network over time.

It’s like the parable of the blind men and an elephant. In the parable, three blind men are all touching an elephant; one touches the tail, one touches the side, and one touches a tusk. They all aggressively argue with each other over what they are touching, when in reality they are all touching different parts of the same thing.

A big narrative that bounces back and forth in the Bitcoin ecosystem is whether it’s a payment method or savings method. The answer of course is both, but the emphasis tends to change sometimes. Nakamoto’s original whitepaper was about peer-to-peer electronic cash, although in his early posts he also talked about central bank monetary debasement and how bitcoin is resistant to that due to its fixed supply (i.e. useful as savings). Money does serve multiple roles, after all.

Do I contradict myself?
Very well then I contradict myself,
I am large, I contain multitudes.

-Walt Whitman

Both payments and savings are important, and both aspects strengthen each other. And because Bitcoin is mainly designed as a low-throughput network (which maximizes for decentralization), it primarily serves as a settlement network. Actual day-to-day coffee-scale transactions need to be done on higher layers of the network.

-Bitcoin’s ability to be sent from any internet user to any other internet user in the world is an essential part of what makes it useful. It provides the one holding it with the capability to make permissionless, censorship-resistant payments through points of friction. In fact, one of the first-ever use cases for it was well over a decade ago when Wikileaks was de-platformed by major payment platforms. Wikileaks then turned to bitcoin to continue receiving donations. Democracy advocates and human rights advocates in authoritarian regimes have made use of it by bypassing bank freezes and so forth. People have used it to evade unjust capital controls that try to keep them permanently locked into a rapidly debasing developing country currency.

-Similarly, bitcoin’s 21 million supply cap and its decentralized immutability that keeps its ruleset credible (including that supply cap) is what makes it attractive to hold. Most monies increase in supply over time with no limit, and even refined gold increases in supply by an average of about 1.5% per year, but bitcoin eventually does not. If people didn’t want to hold it, and instead just converted back and forth from fiat currency to bitcoin to briefly to make settlements/payments, then that would add all sorts of frictions, costs, and external points of censorship for the network. Paying with bitcoin or receiving payment in bitcoin works best when you actually want to hold bitcoin for the long term as well.

So, it’s that blend of both payments and savings that is important. The key way to think about this is optionality. If you hold bitcoin for the long run, you have the option to bring that portion of your wealth with you anywhere in the world, or to make permissionless, censorship-resistant payments to any internet-connected person in the world if you want to or need to. Your money can’t be unilaterally frozen or debased by any bank or government with a stroke of a pen. It’s not stuck in one jurisdiction within narrow borders; it’s global. Those features might not seem important to many Americans, but it’s huge for a lot of people in the world.

Many countries place capital gains taxes on bitcoin (and most other assets), meaning if people sell or spend it, they have to pay taxes relative to their cost basis, and they have to keep track of the accounting for that. That’s a big piece of how countries maintain their currency monopolies. Over time, that might go away for bitcoin as it becomes highly adopted and as some countries make it legal tender. But that taxation is the reality for most places now, and that makes it less attractive to spend compared to fiat currency in many contexts. That contributes to me not particularly wanting to spend mine much, yet. But then again, I’m in a jurisdiction and line of work where I rarely run into domestic payment frictions with my fiat systems.

Gresham’s law states that given a fixed exchange rate (or I would argue, some other friction as well like a capital gains tax), people will spend the weaker money first and hoard the stronger money. In Egypt, for example, if someone has U.S. dollars and Egyptian pounds, they’ll spend the Egyptian pounds and keep the U.S. dollars tucked away as savings. Or if each of my bitcoin transactions has a tax on it and my dollar transactions do not, I’ll usually spend the dollars and keep my bitcoin. The Egyptian could spend the dollars and I could spend my bitcoin in many cases, but we’re choosing not to.

Thiers’ law states that when a money gets extremely weak beyond a certain point, merchants won’t accept it anymore, and they’ll instead demand payment in the stronger money. That’s when Gresham’s law gets overridden, and people have to spend their stronger money. When a currency utterly fails, those people who have been saving in dollars in those countries tend to begin spending them, with the dollar and other monies taking over the weaker currency even in the medium of exchange role.

And in most economic environments, it’s not just merchants selling goods and services that matter. It’s also currency brokers. In Egypt or many developing countries, a random merchant like a restaurant might not accept dollars, even though dollars are treasured things that go for a premium within the country. Sometimes you need to convert to the local currency first in order to spend at an official merchant. Less official merchants are often more readily accepting of premium forms of payment.

Suppose I bring a wad of physical U.S. dollars, a couple South African kruggerand gold coins, or some bitcoin with me to a random country, and I don’t bring my Visa cards. How could I acquire local goods and services? I can either find a merchant to accept one of those monies directly, or I can find a broker that will convert these harder monies to local currency for me at the fair local price. For that latter method, it’s like I’m entering an arcade or casino; I might need to convert my real globally salable money to this place’s centralized monopoly play money while I’m here, and then convert back out to real globally salable money when I leave. It sounds harsh but that’s how it is.

In other words, what we need to know is how salable or convertible a type money is; not just how many merchants directly accept it or how much merchant volume is being done in a given currency. For a clear example, the amount of people paying for things directly in gold throughout the world is extremely low, and yet the liquidity and convertibility of gold is high; you can pretty easily find a buyer for a recognizable gold coin at fair market prices almost anywhere. Therefore, gold gives the holder quite a bit of optionality. Bitcoin is similar in that regard, but way more globally portable.

Most fiat currencies are extremely liquid and salable in their own countries, accepted by virtually all merchants. But all fiat currencies except for the top handful quickly lose salability and convertibility outside of their borders; outside of their enforced monopolies. In this sense, they are like arcade tokens or casino chips. My physical Egyptian pounds and Norwegian kroner are nearly useless in New Jersey, for example, even in terms of finding a place to easily convert them:

To roughly quantify things:

-The physical U.S. dollar has 10/10 salability in the United States, 7/10 salability in some countries, and maybe 5/10 salability in other countries. There’s a range, but overall it’s generally the most salable money in the world currently. Sometimes you can directly spend it, other times you have to convert it first, but either way there tends to be plenty of liquidity.

-Most physical currencies also have 10/10 salability in their own countries, but they have either 1/10 or 2/10 salability everywhere else. It’ll take quite a while and potentially a steep discount rate to find someone who will exchange value for them when they are outside of their host jurisdiction. Like an arcade token.

-Gold has probably like 6/10 salability almost everywhere, which makes it one of the more salable bearer assets around, up there with the dollar. You can’t spend it as easily as a country’s local fiat currency, and very little spending volume happens with it overall, but in just about any country you can exchange it for liquid value easily. Gold is a globally-recognized liquid and fungible form of value.

-Bitcoin has something like 6/10 salability in many urban centers of the world, similar to gold in that sense, but it drops down to 2/10 or so in many rural areas, similar to fiat currencies outside of their monopoly borders. But it’s on the strong uptrend, and it has come that far from nothing in just 15 years. Plus, it can also be converted online in most countries to mobile phone data top-ups, digital gift cards that are spendable locally, and other forms of value, so the overall number of offline and online conversion points for those that bring their bitcoin around with them is substantial.

The right question to ask in my opinion is “if I bring bitcoin with me, could I spend or convert it for value without much hassle?” In urban centers of many countries, like South Africa or Costa Rica or Argentina or Nigeria as developing country examples, or basically any developed country, that’s a pretty resounding yes. In other countries like Egypt, it’s not really there yet. So what we need to monitor is the general direction.

So far, bitcoin is definitely becoming more salable/convertible over time in any given multi-year time period.

The Rise of Bitcoin Hubs

In my view, the most promising trend is the growth of many small bitcoin communities around the world. El Zonte in El Salvador was among the first, and it triggered the president of the country to notice it and make it legal tender across the whole country. But it also sparked other communities like Bitcoin Jungle in Costa Rica, Bitcoin Lake in Guatemala, Bitcoin Ekasi in South Africa, Lugano in Switzerland, F.R.E.E. Madeira, and many others that have become dense areas of bitcoin usage and acceptance. The salability and convertibility in those places and others are both rather high. These hubs just keep popping up.

In addition, Ghana has hosted the Africa Bitcoin Conference run by a woman name Farida Nabourema for two years in a row. She is an exiled democracy advocate from Togo who is deeply familiar with financial repression as a tool for authoritarianism, and is also a critic of France’s neocolonialist ongoing monetary arrangement in over a dozen African countries. In addition, Indonesia now has a recurring bitcoin conference run by a woman named Dea Rezkitha. There are conferences in countries all around the world.

And there are small organizations like Bitcoin Commons in Austin Texas, Bitcoin Park in Nashville, Pubkey in New York, and Real Bedford in the United Kingdom, that serve as local bitcoin hubs. It’s becoming increasingly common that in a given city, there is a dedicated bitcoin community or recurring meet-up there. BitcoinerEvents.com and other sites help you find them, and they can serve as means of convertibility and salability as well.

There are also apps that let you find bitcoin merchants in your area. BTCMap.org for example lets you find merchants around the world that accept bitcoin. The 2023 BTC Prague conference and the 2023 Africa Bitcoin Conference had Fedi event apps. In addition to serving as a bitcoin wallet, this app provided schedules for all major events at the conference, includes this interactive map that showed locations of merchants in the area that accept bitcoin as payment, and provided other services like AI assistants paid with bitcoin micro-transactions over the Lightning network. (As a disclosure, I’m an investor in Fedi via Ego Death Capital.)

Here were some of the questions I asked it, without using a ChatGPT subscription but rather just within the bitcoin wallet app that reached out to ChatGPT via an API, and paid for by the end user (me in this case) using bitcoin:

3) Technical Security and Decentralization

My friend and colleague Jeff Booth often uses the phrase “As long as Bitcoin remains secure and decentralized,” before describing his future outlook on the asset and its macroeconomic implications. In other words, it’s an if/else view that rests on the caveat that the network continues to operate roughly as it has for the past 15 years, and that the traits that make the Bitcoin network valuable continue to persist into the future.

Bitcoin isn’t magic. It’s a distributed network protocol. For it to continue to be valuable, it has to function through opposition and attacks, and has to be the best and most liquid way to do it. The concept of Bitcoin is insufficient to really matter for anything; it’s the reality of Bitcoin that is important. If Bitcoin suffers from catastrophic hacks or gets captured and centralized and permissioned/censored, then it would cease to offer the use-case that it does now, and its value would be partially or entirely degraded.

In addition to network effects and associated liquidity, the focus on security and decentralization is largely what makes Bitcoin different from other cryptocurrency networks. It sacrifices performance in almost every other category: speed, throughput, and programmability, in order to be as simple, streamlined, secure, robust, and decentralized as possible. Its design maximizes for those traits above all else. All additional complexity must be built on layers on top of it, rather than embedded into the base layer, because embedding those traits into the base layer would sacrifice performance in those key attributes of security and decentralization.

Therefore, monitoring Bitcoin’s level of security and decentralization is important when building or maintaining a long-term thesis on the network’s value and utility.

Security Analysis

Bitcoin has had a very robust security track record for an emerging open source technology, but not a faultless one. As I wrote about in my book Broken Money, here is a list of some of the more notable technical issues it has faced so far:

In 2010 when it was still brand new and barely had a market price, the Bitcoin node client had an inflation bug, which Satoshi fixed with a soft fork.

In 2013, a Bitcoin node client update was accidentally not backward-compatible with the prior (and widely used) node client due to an oversight, resulting in an unintended chain split. Within hours, developers analyzed the problem and told node operators to fall back to the prior node client, which resolved the chain split. Since that time over a decade ago, the Bitcoin network has enjoyed 100% perfect uptime. Even Fedwire has encountered outages and failed to achieve 100% uptime during that period (and doesn’t even attempt to run 24/7/365 to begin with like Bitcoin does).

In 2018, another inflation bug was accidentally added to the Bitcoin node client. However, this one was identified and discreetly fixed by developers before it was exploited, and so it never caused an issue in practice.

In 2023, people began making use of the SegWit and Taproot soft fork upgrades in ways that were not intended by the developers of those upgrades, including inserting large images into the signature portion of the Bitcoin blockchain. While this is not a bug per se, it shows the risks of how certain aspects of the code can be used in ways that were not intended, and therefore shows the ongoing need for conservatism when performing upgrades in the future.

Bitcoin suffers from the “year 2038 problem” that many computer systems have. During the year 2038, the 32-bit integer used for Unix timestamping will run out of seconds for many computer systems, resulting in an error. However, because Bitcoin uses an unsigned integer for this, it won’t run out until the year 2106. This can be fixed by updating the time to a 64-bit integer or by taking the block height into account when interpreting the wrapped-around 32-bit integer, but as far as I understand it this may require a hard fork, which means an upgrade that is backward-incompatible. This shouldn’t be hard in practice because it’s obviously necessary and can be done well in advance of the problem (years or decades even), but it may open a window of vulnerability. One potential way to do it would be to release an update that is backward-compatible at first, but that activates when the integer runs out and thus solves the problem.

–Broken Money, Chapter 26

Bitcoin can indeed rebound from technical problems. The basic solution is for node operators on the decentralized network to roll back to a prior update before the bug existed and reject the new updates that are causing the problem. However, we must imagine a worst-case scenario. If a technical issue goes unnoticed for years and becomes entrenched as part of the broad node network, and then gets found out and exploited, then that is a more catastrophic problem. It’s still not unrecoverable, but it would be a serious blow.

As Bitcoin’s codebase exists over years and decades, it hardens and benefits from the Lindy effect.

Overall, the rate of major bugs has decreased over time, and the fact that the network has had 100% uptime since 2013 is remarkable.

Decentralization Analysis

For decentralization, we can measure node distribution and mining distribution as key variables. A widely-distributed node network makes changing the network’s rules very hard to do, because each node enforces the rules for its user. Similarly, a widely-distributed mining network makes transaction censorship harder to pull off.

Bitnodes identifies over 16,000 reachable Bitcoin nodes. Bitcoin core developer Luke Dashjr estimates that there are over 60,000 nodes when taking into account ones that are running privately.

In contrast, Ethernodes identifies about 6,000 Ethereum nodes, of which about half are hosted by cloud operators rather than run residentially. And because Ethereum nodes use too much bandwidth to run privately via Tor, that’s probably close to the actual number.

So, Bitcoin is rather strong in terms of node distribution.

Bitcoin miners cannot change the core rules of the protocol, but they can determine what transactions make it into the network or not. So, miner centralization can increase the odds of transaction censorship.

The largest publicly-traded miner, Marathon Digital Holdings (MARA) has less than 5% of the network hash rate. There are a couple other private miners roughly on that scale. And then there are various public and private miners with 1-2% of the network, and many with less. In other words, mining is indeed quite decentralized; even the largest players have tiny allocations of the network.

Ever since China banned bitcoin mining in 2021, the United States has been the largest mining jurisdiction, but is estimated to have less than half of mining hash rate. China is ironically still the #2 mining jurisdiction because mining is really hard to stamp out even with their level of authoritarianism. Other energy-rich countries like Canada and Russia have sizable mining infrastructure, and dozens of countries have small operations.

Mining companies usually direct their hashing power to mining pools. Mining pools are currently rather centralized, with two pools collectively controlling about half of transaction processing, and the top ten pools controlling virtually all of the transaction processing. I think this is an area for improvement:

Chart Source: Blockchain.com

There are, however, some important caveats. Firstly, mining pools do not custody the mining machines, which is a critical distinction. If a pool misbehaves, miners can easily switch to another pool. So while a few pools could work together to do a brief 51% attack on the network, their ability to sustain such an attack is likely very weak. Secondly, Stratum V2 has been rolling out recently, which allows miners to have more control of the block construction process than just letting the pools do all of the work.

The physical mining supply chain is also rather centralized. Taiwan Semiconductor (TSM) and a few other foundries in the world serve as the key bottlenecks for most types of chip production, including the application-specific chips that bitcoin miners use. In fact, I would go so far as to say that I think pool centralization is an overrated risk, and that semiconductor foundry centralization is an underrated risk.

Overall, ownership of active mining machines is very decentralized, but the fact that some countries have a large percentage of miners, that certain pools have a lot of mining power directed at them, and the mining supply chain has some centralized aspects, chips away at that mining decentralization to a moderate degree. I think mining is an area that could benefit from more development and attention even though the most important mining variable (the ownership and physical distribution of electrified mining machines) is fortunately very decentralized.

4) Quality of User Experience

If Bitcoin is hard to use technically, then it mainly gets restricted to programmers, engineers, ideologues, and power users that are willing to put in time to learn it. On the other hand, if it’s nearly effortless to use, it can spread to people more easily.

When I looked at cryptocurrency exchanges back in 2013-2015, they were very sketchy looking. Nowadays it’s generally easier to buy bitcoin on reputable exchanges and brokers, and with simple interfaces. And back in the early days, there were no dedicated bitcoin hardware wallets; people had to figure out how to manage their keys on their own computers typically. Most of the “lost bitcoins” you hear about in the media were from that early era, when bitcoin was not valuable enough for people to pay close attention, and when keys were harder to manage.

Over the past decade, hardware wallets have become more widespread and easier to use. Software wallets and interfaces have also improved a lot as well.

One of my favorite recent combinations is the Nunchuk+Tapsigner combo, which works well for modest amounts of bitcoin. The Tapsigner is a $30 NFC card wallet that can hold private keys offline inexpensively, while Nunchuk is a mobile or desktop wallet that can work with many hardware wallet types including Tapsigners for moderate amounts of bitcoin or full-feature hardware wallets for larger amounts of bitcoin.

Decades ago, learning to use a checkbook was an important skill. Nowadays, many people get bitcoin/crypto wallets before they get bank accounts. Managing public/private key pairs is likely to become a more routine part of life, both for managing money and for signing things to differentiate real social content from fake content. It’s easy to learn, and many people will grow up with the technology around them.

The number of bitcoin ATMs in the world according to Statista also increased by a factor of more than 100x from 2015 to 2022:

And alongside ATMs, there has been a rise in voucher purchase methods, which I think is one of the reasons why the ATM numbers started to flat-line recently. Azteco was founded in 2019, and in 2023 they raised $6 million in seed capital in a funding round led by Jack Dorsey. Azteco vouchers can be purchased for cash at hundreds of thousands of retail points and online platforms, particularly across developing countries, and then redeemed for bitcoin.

The Lightning network ramped up over the past six years, and reached very usable levels of liquidity by late 2020.

Websites like Stacker News and communication protocols like Nostr also integrated the Lightning network, and this ultimately blends value transfer with information transfer. Browser plug-ins like Alby are fairly new, and have made it easy to use Lightning on multiple websites from one wallet, and can be used as a sign-on method for many of them instead of a username/password combination.

Overall, the Bitcoin network has become easier and more intuitive to use over time, and from what I see in the development pipeline as a venture investor in the space, that will continue to be the case in the years ahead.

5) Legal Acceptance and Global Recognition

“But what if the government bans it?” has been a common objection to Bitcoin since inception. Governments do enjoy their state-issued currency monopolies and capital controls, after all.

However, when answering that question, we need to ask, “which government?” There are about 200 of them. And game theory is such that if one country bans it, another country can gain business by inviting people to come and build with them instead. One country (El Salvador) even recognizes bitcoin as a legal tender now. Some other countries are using capital from their sovereign wealth funds for bitcoin mining.

Also, some things are just really hard to stop. Back in the early 1990s, Phil Zimmerman created Pretty Good Privacy or “PGP”, which was an open source encryption program. It allowed people to send private information to each other over the internet, which is not something that most governments liked. After his open-source code found its way outside of the United States, the U.S. federal government launched a criminal investigation against Zimmerman for “munitions export without a license”.

In response, Zimmerman published his full open-source code in a book, which gave it protection under the First Amendment. It was, after all, just a collection of words and numbers that he chose to express to others, or speech in other words. Some people including Adam Back (the creator of Hashcash, which eventually was used within Bitcoin as its proof-of-work mechanism) even began putting various encryption code on T-shirts.jpg), with the warning on the T-shirt that the shirt was classified as munitions and thus illegal to export or show to a foreign national.

The U.S. federal government indeed dropped their criminal investigation of Zimmerman, and encryption regulations were reformed. Encryption became a key part of e-commerce, since paying online requires secure encryption, and thus a lot of economic value could have been delayed or pushed elsewhere if the U.S. federal government had tried to persist beyond what was feasible.

These types of protests were successful in other words, and used the rule of law against government overreach, and also pointed to the absurdity and infeasibility of trying to restrict such concise and easily-spreadable information. Open-source code is just information, and information is hard to suppress.

Similarly, Bitcoin is free open-source code, which makes it hard to stamp out. Even restricting the hardware side is tough; China banned Bitcoin mining in 2021 but China is still the second largest mining jurisdiction. When China has trouble banning something, it’s clearly not easy to ban. The software side is even stickier than that.

A lot of countries have flip-flopped on banning Bitcoin, or ran into their own rule of law or division of power. In relatively free countries, government is not a monolith. Some government officials or representatives like Bitcoin, whereas others do not, and they are accountable to the people and to the rule of law.

-In 2018, India’s central bank banned banks from interacting with cryptocurrencies, and lobbied the government to prohibit cryptocurrency use entirely. But in 2020, India’s supreme court ruled against them, which restored rights of the private sector to innovate with this technology.

-In early 2021, amid a decade of persistent double-digit inflation of their own currency, Nigeria’s central bank prohibited banks from interacting with cryptocurrencies, although they didn’t try to illegalize it among the public because it’s really hard to enforce. Instead, they launched the eNaira central bank digital currency, and clamped down on physical cash with much stricter withdraw/ATM limits, to try to corral people into their centralized digital payment systems. During the ban, Chainalysis assessed that Nigeria had the second highest cryptocurrency adoption in the world (mostly stablecoins and bitcoin), and specifically had the highest peer-to-peer trading volume in the world, which is how they got around the bank blockage. In late 2023, after nearly three years of an ineffective ban being in place, Nigeria’s central bank reversed their decision and opened banks up to interacting with cryptocurrencies with regulations.

-Back in 2022, amid heavy demand for cryptocurrencies by the public to defend against triple-digit inflation, some of Argentina’s major banks were stepping up efforts to offer them to customers, but Argentina’s government banned banks from offering them to customers. They cited the typical headline reasons of volatility, cybersecurity, and money laundering, but really it was about trying to slow the flight out of the their failing currency. And then in 2023, they went a step further by also banning fintech payment apps from offering digital assets to customers. But this started to be reversed after the election of Javier Milei, who is pro-bitcoin and in favor of the market determining what it wants to use as money. During Milei’s campaign, economist Diani Mondino (now Argentina’s Minister of Foreign Affairs) wrote that “Argentina will soon be a Bitcoin haven.”

-For years, the United States Security Exchange Commission blocked spot bitcoin ETFs. Other countries had spot bitcoin ETFs with no issue, and the Commodities Futures Trading Commission allowed bitcoin futures trading, and the SEC allowed futures-based ETFs (both long and short). The SEC even allowed a leveraged futures bitcoin ETF. But they repeatedly blocked all spot ETFs, which is the simplest type and which is what the market wanted. In 2023, the D.C. Circuit Court of Appeals found that the SEC’s allowance of 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 began trading.

There are about 160 currencies in the world, and they have a sort of “financial blood-brain barrier” around them. They can control how much physical money (e.g. cash and gold) comes through ports of entry with tight restrictions, and they can control what currencies banks are allowed to operate in, what domestic and foreign bank wires they can make, and what denomination of currency accounts they can provide to their customers.

Even if a developing market jurisdiction does allow broad access to dollar accounts, they can be dangerous for the holders. They are fractionally reserved and do not have FDIC insurance backed by the U.S. government and U.S. central bank. In other words, dollar deposits in developing country foreign banks are basically junk-rated and uninsured leveraged bond funds. During times of currency shortage, the dollar accounts can be forcibly converted to local currency at a fake exchange rate, or blocked from withdraw. If someone holds dollars in a domestic bank account in a country where hyperinflation occurs, they are unlikely to be getting most or any of their dollars back either.

These 160 different fiat currencies can be a real problem for a lot of people. Latin America has over 30 currencies. Africa has over 40 currencies. All of those financial borders are frictions for trade, and all of those financial borders keep people partially locked into rapidly-devaluing 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 dollars rather than their local rapidly-devaluing currency, their government and banking system can block the transfer and make them receive it in local currency in any number of ways. And they can set an artificial exchange rate as well. It’s tightly controlled:

But if that graphic designer elects to be paid in bitcoin or dollar stablecoins, I could send it to them with a QR code on a video call, or over a DM or email, and it goes around their banking system. For legal reasons I wouldn’t send it to a country with sanctions (it would be too risky for me to do), but I’m happy to do it if they’re in a country that is legally acceptable for Americans to send money to and where the primary friction is on their side, which represents the vast majority of countries.

Additionally, someone can bring unlimited amounts of bitcoin and stablecoins with them globally just by having a private key. They could write it down in their luggage, store it on a device, memorize twelve words that represent the key, or stick it in a password-protected encrypted cloud file temporarily, and thus bring unlimited value density through any port of entry.

I see signs at airports that say, “No cash over $10,000” and chuckle to myself, because they have no way of knowing who in the line has ten million dollars or any other arbitrary value of bitcoin or stablecoins accessible to them in some way.

With this technology, those 160 financial borders that separate us all are increasingly porous. Trying to stamp out bitcoin or stablecoins or similar stuff is like trying to build sand walls to hold back the ocean tide. The ability to transfer money around banks, between any internet-connected parties, opens up global competition between monies.

This is good for most people. It’s only bad for people who rent-seek off the top, constantly dilute peoples’ savings and wages and channel that value toward themselves and their cronies, and that rely on obfuscation rather than transparency to finance themselves. Capital naturally flows to places with good legal protections and rule of law, and technology makes that process quicker and smoother, and makes it accessible to the working class and middle class rather than just the wealthy.

There mere holding and using of bitcoin puts governments in an awkward place if they try to ban it, especially governments that have any semblance of rule of law. They have to argue that it’s a bad thing for there to exist money that can’t be debased and that people can hold themselves and send to others. Or another way of putting it, they have to make the case that a decentralized spreadsheet is a threat to national security, and that such a dangerous thing as that must be banned under threat of imprisonment.

Instead, the biggest legal challenges for the Bitcoin network ahead are likely in the area of privacy, and by major governments like the United States. Governments really don’t want people to have any sort of financial privacy, especially at scale. Financial privacy was the default for most of history, but in recent decades it’s increasingly not.

The premise from their perspective is that in order to prevent the 1% of bad people from doing terrorist financing or human trafficking or other bad things, 100% of people have to give up their rights to financial privacy and allow the government to surveil all transactions between all parties. In addition, governments have shifted much of their revenue toward income taxes, which rely on ubiquitous surveillance of all payment flows to enforce. But of course, such a thing can lead to massive overreach, and with grave consequences.

In addition, we live in an age of surveillance capitalism. We are offered myriad free services by corporations if we sign away our digital soul, meaning all of our data. What we look at, and what we spend on, is very valuable commercial information. And governments enhance this and help make it the norm because they plug into the back-end and collect that data too. Sometimes it could be for national security reasons, and other times it could be to try to control the whole population (e.g. China’s social credit scores).

However, the ability for people to self custody their own money, and send money to others, and do it in such a way that corporations can’t surveil it and governments can’t surveil it or debase it, is an important check on power. For corporations, there are plenty of reasons to not want them to surveil us, not least being that they are often hacked and spill that data onto the dark web. And for governments, rather than being able to surveil and freeze funds without probable cause in sweeping manner in ways that benefit them, these sorts of technologies force them to have probable cause before using targeted enforcement, which comes with cost and legal procedure.

In the 19th century and before, financial privacy was the norm because most exchange occurred via cash and coins, and there wasn’t any significant technology to monitor that. The idea of monitoring everyone’s transactions was a type of science fiction. Starting in the late 19th century and especially throughout the 20th century, people increasingly used banks for their savings and payments, and those banks were increasingly centralized and surveilled by governments. The telecommunication age, and the age of modern banking that it contributed to, enabled ubiquitous financial surveillance to become normal. Governments mostly didn’t have to enforce privacy controls on individuals; they mainly just had to enforce them on banks, which is easy and happens behind the scenes. The rise of factories and corporations brought people off of farms and into cities, earning paychecks that they receive in their bank accounts, with taxes automatically withdrawn, and with all of their financial activities easily surveilled.

However, as computer processing, encryption, and telecommunications kept improving, eventually Bitcoin was created and allowed for peer-to-peer pseudonymous value transfer. The more widespread Bitcoin and adjacent technologies become, and particularly private layers and methods on top of them, the more untenable it becomes for governments to maintain that existing centralized surveillance apparatus. People can begin opting out, but governments won’t make it easy. They are now trying to impose bank-type surveillance and reporting requirements on individuals, which is orders of magnitude more difficult to enforce than on institutions.

I suspect that there will be more Zimmerman-like conflicts in the years ahead, but this time for financial privacy. Governments will increasingly tighten these frictions around people using various privacy-preserving methods, up to and including trying to criminalize them, and the defense to such overreach is that many of them are open-source. They’re just information. To restrict their creation and their usage by people who are not otherwise committing crimes, requires criminalizing the usage of words and numbers in a certain order. It’s both hard to legally justify in jurisdictions that have free speech, and hard to enforce in practice because open-source code spreads rather easily. And in the United States and certain other jurisdictions, well-funded lawsuits can push back on these laws as being unconstitutional. So, I expect that period to be messy.

Final Grade: A-

Grading the network is kind of a joke since it’s not really quantifiable, but basically most aspects of the network are either getting better or are staying roughly the same.

The areas where we can subtract points and thus bring it down to an A- rather than an A or A+, is that miner decentralization could be better (particularly with regard to pools and ASIC production), and overall user experience and second layer application/ecosystem development could be further along than it is now. For that second item, I’d like to see more and better wallets, more seamless usage of higher layers on the network, more adoption of built-in privacy features, and so forth.

If Bitcoin enters a sustained period of higher fees, as it has been in lately, then I think those second layer developments will accelerate. When fees are low, people are more likely to use the base layer and have less reason to use higher-layer solutions. When fees are high, various existing use-cases get stress tested, and users and capital gravitate toward what is working or what is being demanded.

Additionally, governments have generally been pulled, sometimes willingly and sometimes with protest, toward accepting it to some degree. However, the battle ahead is likely around privacy, and in my view that’s nowhere near being finished yet. If anything it’s just heating up.

Overall, I continue to view the Bitcoin network as being highly investable, both in bitcoin directly as an asset, and in the equity of companies building on top of the network.

There are still areas of risk, but they represent areas of potential improvement and contribution. Part of what makes the Bitcoin network powerful, is that its open source aspect makes it so that anyone can audit the code and propose refinements to it, anyone can build layers on top of it that attach to it, and anyone can build applications that interact with it and enhance it for users.

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