Bitcoin, Blockchain, and Cryptoassets: discussing bubbles vs. discussing socio-technical systems

Disclaimer: I own several cryptoassets. My views might be biased.


  • Because Bitcoin and Blockchain are inseparably linked arguing that Bitcoin is a bubble that will burst but its underlying technology – Blockchain – will prevail is difficult without context (i. e. which Blockchain and – see second – what constitutes a Bitcoin bubble)
  • Basing Bitcoin’s value on USA’s money supply and global gold supply a value for Bitcoin can be estimated that refutes any bubble-related claims
  • Altcoins are better defined as cryptoassets. Cryptoassets can be divided into cryptocurrencies and cryptotokens.
  • Cryptotokens enable a semi-publicization of centralized customer data and through that shift data governance to the data’s rightful creators
  • Cryptotokens can be used to incentivize early adopters and kickstart networks
  • Cryptotokens could create more financially conscious people and lead to positive social impacts by allowing more people to invest in companies
  • Blockchain and Co. can be seen as an all-encompassing socio-technical system that could lead to unexpected second-order consequences in industry and society as it was the case with touchscreens, the Internet, and smartphones

(I should make a TL;DR for the TL;DR)

In the last couple of days, there has been quite some medial attention regarding Bitcoin. Some part of that activity centered around Bitcoin being a bubble that will burst while its underlying technology — Blockchain — will stay.

Defining Bitcoin, its value, Blockchains, and financial bubbles

The argumentation that “Bitcoin is a bubble but its underlying technology will stay” is difficult for several reasons, the biggest being the lacking definition of “bubble” and “Blockchain”. In regards to Blockchain specifically, the problem is a too loose usage of that term.

Blockchain is the technology, the Bitcoin Blockchain is one variation and both are inseparably linked

Blockchain is first and foremost a technology of which several implementations exist and which all have certain attributes. To ensure these implementations’ attributes a cryptographic asset (token, coin etc.) is required. One implementation is the Bitcoin Blockchain. To ensure the Bitcoin Blockchain’s attributes the cryptographic asset Bitcoin is required.

In other words, no cryptographic asset (e. g. Bitcoin), no blockchain (e. g. Bitcoin Blockchain). Thus, generally claiming that Bitcoin is a bubble about to burst but Blockchain will prevail, does not contribute much to the discussion.

Bitcoin’s fundamental value “guesstimated” at USD 62,000 as a function of USD money supply and global gold supply

Furthermore, the “Bitcoin is a bubble” claim lacks a definition of what „bubble“ means. A financial bubble can be defined as: “surges in asset prices to levels significantly above the fundamental value of that asset.“ [2].

Bitcoin’s fundamental value is driven by speculative and utility value. As speculative utility (believing in a future price increase) can be expected to disappear over time, let’s focus only on utility value which I will assume as a store of value and as a means of payment. Bitcoin’s value (“market share”) would then depend on the monetary value of these two functions. As a proxy for store of value I will take USA’s M2-M1 money supply (ca. USD 8 trillion)[4] and global gold supply (ca. USD 2,6 trillion). The proxy for means of payment will be USD’s M1 money supply (ca. USD 2,5 trillion)[4]. Assuming an arbitrary 10% market share yields a potential market of USD1,3 trillion. Without discounting it, considering velocity, loss of bitcoins, the „wrong“ market base (as bitcoin is a global currency choosing USD’s money supply doesn’t make too much sense) or anything else this yields a value of around USD 62,000 per bitcoin.

This calculation is a drastic oversimplification and full of assumptions. Among other things, the assumptions are its social acceptance, future volatility and technical limitations (transaction costs and speed). It should be pointed out that alternatives to Bitcoin or Bitcoin’s lightning network update indicate that technical limitations are solvable. Furthermore, stablecoins (Bitcoin alternatives that are pegged to global currencies such as the USD) indicate that volatility can be reduced. Thus, similar price estimations as above could be applied to any cryptographic currency.

In short, I think that labeling Bitcoin a bubble is easier said then argued. In this context, another thing that was supposed to have burst in the first half of January (2018) are so-called altcoins. Labeling those a bubble is even harder.

Altcoins, cryptoassets, and semi-public customer data for shifting governance over data to rightful creators

As indicated above, there are other Blockchain implementations besides the Bitcoin Blockchain. The cryptographic assets of these variations are often referred to as altcoins. These altcoins are the other thing that was supposed to have burst in the first half of January (2018). Such price-oriented reporting is problematic for two reasons. Firstly, discussing their prices, especially when (partially wrongly) comparing them to Bitcoin and seeing altcoins as “another Bitcoin” is almost impossible without properly defining them. Secondly, such a price-oriented discussion derails the attention from what’s really going on.

Defining altcoins as cryptoassets consisting of cryptotokens and cryptocurrencies

In the altcoins-context, the term “coin” might actually be misleading as it leads to altcoins being equated to currencies. This, furthermore, leads to interpreting their function as that of money (store of value, means of payment, unit of account). The truth, however, is that they are more than that.

Thus, a better term, encompassing Bitcoin and altcoins is cryptoassets. These cryptoassets can be divided into cryptocurrencies and cryptotokens. Cryptocurrencies are virtual money (e. g. Bitcoin) and (crypto)tokens are virtual chips similar to those used at fairs. Whereas cryptotokens are in a way also currencies they differ in a few aspects. Cryptotokens can only be used for one specific service, they are used to get something token-specific in return and by redeeming them one becomes part of the overall network.

Take, for instance, a fictional service called dDropbox (“d” for decentralized) with its fictional token DDX. dDropbox consists of individuals connected through a Blockchain renting out hardware space. If you own DDX you can only redeem it at dDropbox, you get hardware space in return and by using that service you become part of the dDropbox network [3].

Currently, there are tokens for almost everything. A large part of them are tokenized versions of current Internet applications, i. e. there is a tokenized Facebook, a tokenized Apple Health, a tokenized PayPal, a tokenized Instagram a tokenized Amazon etc. Or, in a less technical way, they are semi-public variations of Facebook’s, Apple Health’s, PayPal’s, Instagram’s or Amazon’s customer data.

Using cryptotokens to semi-publicize customer data and give data governance to their rightful creators

The semi-public nature of these tokenized businesses implies that only the rightful owner of the data has full control over who can see and use what how. This means that there is a global database that stores all Facebook/Apple Health/PayPal/Instagram/Amazon etc. data (e.g. relationships, heartbeat, images, buying preferences) and that only the individuals who have created that data have full governance over it. Similarly to how one can decide which smartphone app can use one’s contact list, one would be able to decide which app can use one’s payment history, photos, health data and so on.

In other words, anybody whom you grant access to your purchase history could build an alternative Amazon without having to spend weeks learning your preferences. Anybody whom you grant access to your multimedia digital assets (images, soundtracks, GIFs, videos…) and online relationships can build an alternative Instagram or Facebook with all your followers and digital assets without the need to re-upload all your content or re-connect with your friends on a new social network. Anybody whom you grant access to your health data can build an alternative Apple Health without first having to collect your data over several months or weeks. The list goes on as the principle is applicable to probably everything.

Recalling now that customer data is responsible for a huge chunk of these companies’ success and knowing that cryptotokens have the potential to make that data semi-public shows just one reason why labeling “altcoins” as bubbles without properly defining them is — similarly to Bitcoin — easier said than argued.

Nevertheless, at this point one might — rightfully — argue that there is no need to “semi-publicize” the above-mentioned companies because they work well. However, although these companies might work well, due to the data monopoly they have, their impact on society might be less than it would be in a more competitive environment. Economist call this deadweight loss. The banking (see here for other posts on “banking”) , telecommunication (telco), and health industry show nicely how a public record (i. e. a Blockchain) could help reorder power on the Internet by semi-publicizing data that originally belongs to the individual (images, health information, relationships…) and is only owned by companies due to regulatory arrangements.

Examples for semi-public customer data from banking, telco, and health industry

  • Open banking distributed value gains between banks and customer more fairly by lowering switching costs: Until recently incumbent banks had a quasi-monopoly; due to switching costs attracting already banked customers was difficult for challenger banks. Movement towards “open banking” (e.g. regulatory enforced switching services or PSD2) has (or might) erode these switching costs and consequently the banks’ quasi-monopolies to almost zero. The consequence is a fairer value distribution between companies and customers by offering more and better choices to customers.
  • Number portability distributed value gains between telcos and customers more fairly by lowering switching costs: The telco industry shows a similar dynamic. Number portability made switching carriers easier, increased competition and thus — similarly to banking — distributed value gains between telcos and customers more fairly.
  • Siloed online health data could lead to constrained choice for digital health treatment: Furthermore, analog health records allow for an interesting analogy to their digital counterparts. Switching between doctors in the “offline” world is almost completely frictionless; medical records are easily transferable between doctors and thus each doctor has all the data that there is. Online, however, with health trackers like Apple Health or AI-doctors like Ada or Cara (see Cara, a German PoopTech-startup, received a $2 Million investment for a food diary and tailor-made drugs) health-related information is becoming increasingly siloed. If the Digital Health industry (see here for more on Digital Health) grows in importance alongside company-specific centralization of health data it could lead to similar lock-ins as currently with iOS/Android and consequently constrain the choice for digital health treatment significantly.

In the context of bubbles and cryptotokens, it merits to point out another advantage that cryptotokens bring, namely how they solve the chicken-egg problem of network-based applications by providing utility, concretely financial utility, where application utility cannot exist.

Incentivizing early adopters, kickstarting networks, and creating financially conscious people

Cryptotokens are often distributed to the public as a way to kickstart an application that relies on network effects by incentivizing early adopters. For instance, if I were to start a new Uber I would have troubles attracting customers due to the chicken-egg problem; as there are no drivers no passengers will use the service and because there are no passengers no drivers will sign-up. However, if I did an ICO and gave tokens to early adopters (passengers and drivers) I could offer them the promise of financial benefits. If the network grows, the demand for the token will as well and consequently its value. Thus, initial users would first profit financially and then, once the network is big enough, also from the application because there are now enough users; drivers have passengers to transport and passengers have drivers to be transported by.

Creating a new group of financially conscious people with positive societal impact

If we consider the ubiquitousness of network-based application we could imagine a future with far more cryptotokens then currently in existence. If that were to happen we would be looking at a completely different “world”. This would be a world where-— after stock investors with IPOs, VC investments and crowdfunding — yet another group of people (everyday investors with low budgets) is included in the funding of new companies. Whether such an influx in seed money would — if it were to happen — would have positive impacts on society (e.g. through the creation of new jobs through the funding of new companies) is to be seen. I believe that it could and that it at least would raise people’s awareness towards investing and thus a more conscious approach towards saving.

Overall, this proclaimed societal impact points at another aspect I believe gets less attention than deserved, namely Blockchain and Co. as an all-encompassing socio-technical system.

Blockchain and Co. as an all-encompassing socio-technical system

A socio-technical system consists of the technology per se, the applications and everything around it such as user practices, regulations, and symbolic meaning.

Among other things this socio-technical perspective implies that a technology’s final application differs from its initial application by far, that the new technology shows its revolutionary power only ones it becomes foundational, that it unfolds its potential only when coupled with other technologies, that it introduces second-order consequences that go beyond the industrial sphere into society, that these second-order consequences are unimaginable as of today and that society starts as an influencer of the technology but over the long term is governed by the technology.

The touchscreen, the Internet, and smartphones are a good example for such socio-technical system. Both these inventions were probably celebrated highly within their respective niches when they came out. However, it was only when the touchscreen became the foundational technology for the smartphone, the Internet the foundational technology for apps and those two merged that we entered a “mobile-only” world, causing initially completely unimaginable second-order consequences not only in the industrial setting but also society as a whole.

Not only did the smartphone and the Internet destroy and create industries they are now also used today for drastically different things than in its infancy (e.g. AirBnB or Uber). Furthermore, we can also observe second-order societal and industrial consequences that weren’t imaginable when these technologies were conceived. Our “mobile-only” society and the creating of whole industries and billion-dollar companies based on one app icon are maybe the most obvious ones. Finally, the smartphone now governs us instead of us being in control; it dictates what we do after waking up, if we get into a fight (e.g. by not replying on time) or how we spend our time while with other people (Instagramming or talking).

50 years from now we will see if Blockchain will have similar impacts but until then I think it is important to have concise terminology, a broader view on that technology going beyond prices and bubbles and keeping the overall societal impact in mind.



[3] Such a decentralized Dropbox does actually exist. However, for the sake of neutrality, I have avoided naming it.

[4] Money, Banking and Financial Markets by Stephen G. Cecchetti and Kermit L. Schoenholtz

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