One question I was asked recently was "what can you do with Bitcoin do that you can't do with US Dollars?"
It's a fair question, and one that can often get overlooked if people are just looking at Bitcoin and seeing potential profits. So let's take a look at some of the fundamental benefits that Bitcoin has, as well as some unique benefits that other cryptocurrencies have.
- Act as a true store of value - The first and most important benefit is that Bitcoin is truly finite: there will only be 21 million Bitcoin ever. Unlike dollars, this means that your purchasing power cannot be inflated away by the Government. Often, this is countered with "what if they just changed the code?" or "but if people keep making more and more cryptocurrencies then isn't that the same thing?" Explaining why these objections aren't quite effective is tricky if the audience doesn't have much of an understanding of cryptocurrencies. But let's try. One the first point: if such a code changed was introduced, it probably wouldn't go anywhere. If it did, it would create a hard fork - this means that you'd have the original Bitcoin and then this new inflated offshoot. Anyone who held Bitcoin prior to this would then get an equal amount of each. But from there, market dynamics would play out as holders sell the one they don't want and buy the one they do want. At the end of the day, you'd probably just end up with another Bitcoin to Bitcoin Cash comparison, where this new inflated Bitcoin exists, but is ultimately only worth 1% of the original (as is the case with Bitcoin vs. Bitcoin Cash as of this writing). On the second point - yes, there has been an explosion of crypto projects. But most of these are worthless and will eventually go to zero. Of the ~13,000 coins listed on CoinMarketCap, there are maybe only about 100 with some sort of value prop, and even then, not all of those will make it as many of them compete. But each of those 100 is providing a real utility within the cryptocurrency universe. This is tough to understand until you dive into the space. But you should not see Ethereum, Cardano, Solana, or Polkadot as Bitcoin replacements. Rather, they are complimentary currencies that have specific strengths and niches. They aren't trying to replace Bitcoin and Bitcoin isn't trying to replace them.
- Transfer funds anywhere, worldwide, in a matter of minutes - "I can do this now!" I can hear you saying already. And sure, you can Venmo a few bucks to a friend and Venmo has created instant withdrawals (for a fee). But the modern financial system is actually quite slow. Bank transfers and wire transfers take several days, have high fees, and various bureaucratic headaches if done internationally. Bitcoin is universal, and can be sent to any address in a matter of minutes, no matter how large or how small the transaction is. As far as fast microtransactions, the Lightning Network is a new layered solution on top of Bitcoin that enables instant and super low transaction fee transactions.
- Permission-less transactions - as we head into an age of increasing censorship, it is more important than ever to have money without strings attached. Plenty of people have been kicked out of their bank or other financial providers for having the wrong views. While most of us can fly under the radar on that front, we should also expect censorship and financial censorship in particular to spread. You do not need anyone's permission to send Bitcoin from one account to another - the transaction is done on a distributed network that is impossible for any one party to censor. While we should all look to combat a censorious culture, one should also look to protect himself from it. One should not be reliant on a bank or credit card company that can say that they will no longer allow you to use their services.
- Capture the Banker's Yield - A big part of crypto is the democratization of actions that used to be fully within the realm of banking. The cleanest example of this is that of an AMM or Automatic Market Maker. An AMM essentially codifies a pool of two assets, say dollars and Bitcoin, so that people can exchange one asset for the other. In traditional finance, banks do this and naturally take a small chunk of profit on each transaction. However, with AMMs, you or I can provide our funds to the AMM and we can get the small share of transaction fees for providing our services. This is also true with loans. Banks pay you a paltry 0.2% or less on your savings accounts, but then loan out that money at much higher rates: e.g. mortgages at 3%, or various other loans which often come at even higher rates. In the crypto universe, this process too is codified, and the spread between lender and borrower is closed substantially. For stablecoins, this gap is around 1%: you can lend USDC out and earn 5.52% interest while a borrower would pay 6.74% as of this writing. This should all make intuitive sense. As we replace a high-overhead bank with low-overhead code, the economics should get better for everyone involved (except the bankers)!
- Programmable Money - Admittedly, the above use is an example of this, but it is worth calling out the broader point. Cryptocurrencies essentially move value in the same way that data is moved around the world. It is worth remembering that the internet was also initially pooh poohed as a novelty for chat rooms and, yes, porn. It is now obvious that the internet was so much more than that, and we are now at a point where an unimaginable amount of data flows in previously unimaginable ways and has a profound effect on society as a result. In 10 years time, this will likely also be true of value. Having value flow at the speed of code enables a lot of interesting things. Most importantly it makes it a lot easier to align incentives between different parties in a system. This shouldn’t be underestimated - systems work to the degree that their incentives work. So there is an opportunity here to craft a world of effective businesses, governments, and various other agencies to a level the world hasn’t seen.
Hopefully that gives you a sense of what can be done with cryptocurrencies and why there is an excitement around them, at least at the fringe, that extends far beyond financial speculation.