Bitcoin may be the OG of crypto, but is it time to let it go?

When Tesla founder Elon Musk sneezes, Bitcoin holders clutch on for dear life. Throw in a Chinese cryptotrading ban into the mix and you’re in for a stomach-lurching plunge. This is exactly what happened on May 12, when the US electric-car maker announced that it would stop accepting bitcoin as payment, sparking a major sell-off of that digital asset along with Ether and even meme token Dogecoin.

Bitcoin sank by more than 45% from its peak price, reaching roughly US$33,000 on May 23.

Tesla CEO Elon Musk / Image credit: Timmy Loen, based on a photo by Steve Jurvetson

The Bitcoin rout reportedly wiped out US$10 billion in leveraged positions and half a trillion dollars off the cryptocurrency market. It’s not the first time the crypto market has responded to what enthusiasts call the “China FUD (fear, uncertainty, doubt).” Chinese regulators have clamped down on cryptocurrencies at least three times since 2013, and Bitcoin prices have crashed and recovered every single time.

Either way, investing in bitcoins is clearly not for the faint-hearted and certainly not the only way to get into the crypto space. In fact, Bitcoin may not have a great future in the emerging world of blockchain-driven finance.

Bitcoin is not a cryptocurrency

Released in 2011, Bitcoin is the first cryptocurrency to emerge and is considered the boomer of all digital assets that now exist in the crypto space. It was originally designed for peer-to-peer payment transactions on a network without the need for intermediaries or regulators.

This makes it useful as a medium of transaction for illegal dealings on the dark web, although research shows that Bitcoin has since gone legit. In 2020, transactions involving darknet entities only accounted for 0.36% of the total Bitcoin market capitalization; privacy-focused Monero has taken over the crypto of choice on the dark web.

“I don’t welcome a currency that’s so useful to kidnappers and extortionists and so forth, nor do I like just shuffling out of your extra billions of billions of dollars to somebody who just invented a new financial product out of thin air,” said Charlie Munger, vice chairman of US conglomerate Berkshire Hathaway, in a recent interview with CNBC.

Bitcoin’s role in criminal activity is one of the reasons why many old-timers in the traditional finance (TradFi) industry find it objectionable.

Many people who own bitcoins now consider it a store of value.

With the Bitcoin roller coaster now in full swing, detractors and supporters alike are having a field day arguing about whether the bubble has burst, or whether the selldown is merely an aberration in the inevitable rise of cryptocurrencies as a legitimate means of payment.

One vocal contrarian is Chen Zhao, chief global strategist at investment research firm Alpine Macro. Like other detractors, he maintains that Bitcoin is a Ponzi game because the token’s volatility makes it useless as a medium of exchange. He argues that fundamentally, there is only one way to value bitcoins – buy them in order to sell them at a higher price to someone else. And once Bitcoin enthusiasts stop speculating, the entire scheme collapses.

Crypto insiders agree that it’s inaccurate to call Bitcoin a cryptocurrency. Many people who own bitcoins now consider it a store of value or as a type of investment security rather than a currency per se.

They contend that far from being a Ponzi scam, Bitcoin’s status as the OG of cryptocurrencies has allowed it to benefit from a large network effect. That is to say, the more people use bitcoin, the more valuable it becomes as a payment network. (Investment content platform Seeking Alpha has a great explanation on why Bitcoin is not a Ponzi scheme.)

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