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What to know about bitcoin if you don’t understand cryptocurrencies

jamie dimon
cryptocurrencies could be a mistake.

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  • JPMorgan CEO Jamie Dimon said this week
    he regrets
    calling bitcoin a “fraud,”
    but he’s still not interested in
    the cryptocurrency.
  • Berkshire Hathaway CEO
    Warren Buffett said his firm has no interest
    in investing
    in cryptocurrency and thinks it “definitely will come to a bad
  • Meanwhile, Adam Ludwin, the cofounder
    and CEO of Chain, argues that while it’s easy to
    believe cryptocurrencies have no inherent value — or
    conversely, that they will disrupt banks and tech giants —
    neither extreme is true. 

  • Ludwin says Bitcoin and other cryptocurrencies
    are an important new asset class enabling decentralized

  • The probability of mass adoption may be small,
    but the impact would be very large, which Ludwin says justifies
    the high valuations. 

This piece was originally
in October 2017 on Chain’s blog, after Jamie Dimon called bitcoin a
in September. Dimon has since said he regrets the comment, but
maintained he is not interested in bitcoin. 

Dear Jamie,

My name is Adam Ludwin and I run a
company called Chain. I have
been working in and around the cryptocurrency market for several

Last week you said a few things about Bitcoin:


It’s easy to believe cryptocurrencies have no inherent value. Or
that governments will crush them.

It’s also becoming fashionable to believe the opposite: that they
will disrupt banks, governments, and Silicon Valley giants once
and for all.

Neither extreme is true.

The reality is nuanced and important. Which is why I’ve decided
to write you this briefing note. I hope it helps you appreciate
cryptocurrencies more deeply.

Let me start by stating that I believe:

  • The market for cryptocurrencies is overheated and
    irrationally exuberant
  • There are a lot of poseurs creating them, and some scammers,
  • There are a lot of conflicts of interest, self-serving hype,
    and obfuscation
  • Very few people in the media understand what’s going on
  • Very few people in finance understand what’s going on
  • Very few people in technology understand what’s going on
  • Very few people in academia or government understand what’s
    going on
  • Very few people buying cryptocurrencies understand
    what’s going on
  • It’s very possible I don’t understand what’s going


  • Banks and governments aren’t going away
  • Traditional software isn’t going away

In short: there’s a lot of noise. But there is also signal. To
find it, we need to start by defining cryptocurrency.

Without a working definition we are lost. Most people arguing
about cryptocurrencies are talking past each other because they
don’t stop to ask the other side what they think cryptocurrencies
are for.

Here’s my definition: cryptocurrencies are a
new asset class that enable decentralized

If this is true, your point of view on cryptocurrencies has very
little to do with what you think about them in comparison to
traditional currencies or securities, and everything to do with
your opinion of decentralized applications and their value
relative to current software models

Don’t have an opinion on decentralized applications? Then you
can’t possibly have one on cryptocurrencies yet, so read on.

And since this isn’t about cryptocurrencies vs. fiat currencies
let’s stop using the word currency. It’s a head fake. It
has way too much baggage and I notice that when you talk about
Bitcoin in public you keep comparing it to the Dollar, Euro, and
Yen. That comparison won’t help you understand what’s going on.
In fact, it’s getting in the way. So for the rest of this note, I
will refer to cryptocurrencies as crypto assets.

So, to repeat: crypto assets are a new asset class that
enable decentralized applications.

And like every other asset class, they exist as a mechanism to
allocate resources to a specific form of organization.
Despite the myopic focus on trading crypto assets recently, they
don’t exist solely to be traded. That is, in principle at least,
they don’t exist for their own sake.

To understand what I mean, think about other asset classes and
what form of organization they serve:

  • Corporate equities serve companies
  • Government bonds serve nations, states,
  • Mortgages serve property owners

And now:

  • Crypto assets serve decentralized applications

Decentralized applications are a new form of
and a new form of software. They’re a
new model for creating, financing, and operating software
services in a way that is decentralized top-to-bottom. That
doesn’t make them better or worse than existing
software models or the corporate entities that create them. As
we’ll see later, there are major trade-offs. What we can say is
simply that they are radically different from software
as we know it today and radically different from the
forms of organization we are used to.

How different? Imagine the following: you grew up in a rainforest
and I brought you a cactus and told you it was a tree. How would
you react? You’d probably laugh and say it’s not a tree because
there’s no point in a tree being a stumpy water tank covered in
armor — after all, water is abundant here in the rainforest!
This, roughly, is the reaction of many people working in Silicon
Valley to decentralized applications.

But I digress. I owe you an important explanation:

What is a decentralized application?

A decentralized application is a way to create a service that no
single entity operates.

We’ll come to the question of whether that’s useful in a
moment. But first, you need to understand how they work.

Let’s go back to the birth of this idea.

It’s November 2008. The nadir of the financial crisis.

An anonymous person publishes a paper explaining how to make
electronic payments without a trusted central party like Chase or
PayPal or the Federal Reserve. It’s the first decentralized
of this kind ever proposed.

It’s a decentralized application for payments.

The paper is titled Bitcoin.

How does it work? How is it possible to send an electronic
payment without a designated party who will track and update
everyone’s balances? If I hand you a dollar that’s one thing. But
data is not a bearer instrument. Data needs intermediation and
validation to be trusted.

The paper proposes a solution: form a peer-to-peer network. Make
it public. Announce your transaction to everyone. In your
announcement, point to the specific funds on the network you want
to spend. Cryptographically sign your announcement with the same
software key that is linked to those funds so we know they’re

It almost works. We need one more thing: a way to make sure that
if you broadcast two competing announcements (that is, if you try
to spend the same funds twice) that only one of your attempts

Bad solution: designate a party to timestamp the
transactions and only include the transaction that came first.
We’re back to square one. We have a trusted intermediary.

Breakthrough solution: let entities compete to be the
“timestamper!” We can’t avoid the need for one, but we can avoid
designating one in advance or using the same one for every batch
of transactions.

“Let entities compete.” Sounds like a market economy. What’s
missing? A reward for winning. An incentive. An asset.

Let’s call that asset Bitcoin. Let’s call the entities competing
for the right to timestamp the latest batch of announced
transactions “miners.” Let’s make sure anyone can join this
contest at any time by making the code and network open.

Now we need an actual contest. The paper proposes one. On your
mark, get set: find a random number generated by the network! The
number is really, really hard to find. So hard that the only way
to find it is to use tons of processing power and burn through
electricity. It’s a computing version of what Veruca Salt made
her dad and his poor factory workers do in Willy Wonka. A brute
force search for a golden ticket (or in this case, a golden

Why the elaborate and expensive competition to do something as
simple as timestamp transactions for the network? So that we can
be sure the competitors have incurred a real financial
. That way, if they win the race to find the random
number and become the designated timestamper for a given batch of
transactions, they won’t use that power for evil (like censoring
transactions). Instead, they will meticulously scan each pending
transaction, eliminate any attempts by users to spend the same
funds twice, ensure all rules are followed, and broadcast the
validated batch to the rest of the network.

Because if they do indeed follow the rules, the network is
programmed to reward them…

… with newly minted Bitcoin, plus the transaction fees,
denominated in Bitcoin, paid by the senders. (See why they are
called miners and not timestampers, now?)

In other words, miners follow the rules because it is in their
economic self-interest to do the right thing.

You know, like Adam Smith said:

It is not from the benevolence of the butcher, the brewer or the
baker, that we expect our dinner, but from their regard to their
own self interest.

Crypto assets: the invisible hand… of the internet.

Bitcoin is capitalism, distilled. You should love it!

And since these miners have debts to pay (mostly electricity
bills), they will likely sell their newly earned Bitcoins on the
open market in exchange for whatever real currency they need to
satisfy their liabilities. Anything left is profit. The Bitcoin
is now in circulation. People who need it can buy it. And so can
people who just want to speculate on it. (More on the people who
“need it” vs. those who are speculating later.)

Eureka! We have killed two birds with one stone: the financial
reward that substitutes our need for a trusted central party with
a marketplace of competing yet honest timestampers is the
same asset
that ends up in circulation for use as a
digital bearer instrument in an electronic payments
network that has no central party (it’s circular, I know).

Now that you understand Bitcoin, let’s generalize this to
decentralized applications as a whole.

In general, a decentralized application allows you to do
something you can already do today (like payments) but without a
trusted central party.

Here’s another example: a decentralized application called
Filecoin enables users to store files on a peer-to-peer network
of computers instead of in centralized file storage services like
Dropbox or Amazon S3. Its crypto asset, also called Filecoin,
incentivizes entities to share excess hard drive space with the

Digital file storage is not new. Neither is electronic payments.
What’s new is that they can be operated without a
. A new form of organization.

One more example.

Warning: this one is a bit confusing because it’s meta.

There’s a decentralized application called Ethereum that is a
decentralized application for launching decentralized
. I am sure by now you have heard of “initial
coin offerings” (ICOs) and “tokens.” Most of these are issued on
top of Ethereum. Instead of building a decentralized application
from scratch the way Bitcoin was, you can build one on top of
Ethereum much more easily because a) the network already exists
and b) it’s not designed for a specific application but
rather as a platform to build applications that can execute
arbitrary code. It is “featureless.”

Ethereum’s protocol incentivizes entities to contribute
computing resources to the network. Doing so earns these
entities Ether, the crypto asset of Ethereum. This makes Ethereum
a new kind of computing platform for this new class of software
(decentralized apps). It’s not cloud computing because Ethereum
itself is decentralized (like aether, get it?). That’s
why its founder, Vitalik Buterin, refers to Ethereum as a “world

To summarize, in just the last few years the world has invented a
way to create software services that have no central operator.
These services are called decentralized applications and they are
enabled with crypto assets that incentivize entities on the
internet to contribute resources — processing, storage,
computing — necessary for the service to function.

It’s worth pausing to acknowledge that this is kind of
miraculous. With just the internet, an open protocol,
and a new kind of asset, we can instantiate networks that
dynamically assemble the resources necessary to provide many
kinds of services.

And there are a lot of people who think this model is the
future of all software, the thing that will finally
challenge the FANG stocks and venture capital to boot.

But I’m not one of them. Because there’s a problem.

It’s not at all clear yet that decentralized applications are
actually useful to most people relative to traditional software.

Simply put, you cannot argue that for everyone
Bitcoin is better than PayPal or Chase. Or that for
everyone Filecoin is better than Dropbox or
iCloud. Or that for everyone Ethereum is better
than Amazon EC2 or Azure.

In fact, on almost every dimension, decentralized services are
worse than their centralized counterparts:

  • They are slower
  • They are more expensive
  • They are less scalable
  • They have worse user experiences
  • They have volatile and uncertain governance

And no, this isn’t just because they are new. This won’t
fundamentally change with bigger blocks, lightning networks,
sharding, forks, self-amending ledgers, or any other technical

That’s because there are structural trade-offs that result
directly from the primary design goal of these services, beneath
which all other goals must be subordinated in order for them to
be relevant: decentralization.

Remember that “elaborate and expensive competition” I described?
Well, it comes at the cost of throughput. Remember how users need
to “cryptographically sign” their transaction announcements?
Well, those private keys need to be held onto much more securely
than a typical password (passwords can be recovered). Remember
how “no single entity operates” these networks? The flip side is
that there is no good way to make decisions or govern them.

Sure, you can make decentralized applications more efficient and
user friendly by, for example, centralizing users’ cryptographic
signing keys (i.e., control of their coins) with a trusted
entity. But then we’re mostly back to square one and would be
better off using a service that is centralized.

Thus, bitcoin, for example, isn’t best described as
“Decentralized PayPal.” It’s more honest to say it’s an extremely
inefficient electronic payments network, but in exchange we
get decentralization.

Bottom line: centralized applications beat the pants off
decentralized applications on virtually every dimension.


And not only are decentralized applications better at this one
thing, they are the only way we can achieve it.

What am I referring to?

Censorship resistance.

This is where we come to the elusive signal in the noise.

Censorship resistance means that access to decentralized
applications is open and unfettered. Transactions on these
services are unstoppable.

More concretely, nothing can stop me from sending Bitcoin to
anyone I please. Nothing can stop me from executing code on
Ethereum. Nothing can stop me from storing files on Filecoin. As
long as I have an internet connection and pay the network’s
transaction fee, denominated in its crypto asset, I am free to do
what I want.

(If Bitcoin is capitalism distilled, it’s also a kind of freedom
distilled. Which is why libertarians can get a bit obsessed.)

And for readers who are crypto enthusiasts and don’t want to take
my word for it, will you at least listen to Adam Back and Charlie


So while we can’t say “for everyone Bitcoin is better
than Visa,” it is possible that for some cohort of users
Bitcoin truly is the only way to make a payment.

More generally, we can ask:

For whom is this the right trade-off?


Who needs censorship resistance so much that they are willing to
trade away the speed, cost, scalability, and experience benefits
of centralized services?

To be clear, I’m not saying you have to make this trade-off
in order to buy/speculate on crypto assets. I am saying
that in order for decentralized applications themselves to have
utility to some cohort, that cohort must be optimizing for
censorship resistance.

So, who are these people?

While there is not a lot of good data, actual users of
decentralized applications seem to fall into two categories:

  1. People who are off the grid: that is, in countries where
    access to competently operated traditional services is limited
    (for any number of reasons) but where internet is not
  2. People who want to be off the grid: that is, people
    who don’t want their transactions censored or known

With that framework in mind we can ask:

  • For whom is Bitcoin the best/only way to make a payment?
  • For whom is Filecoin the best/only way to store a file?
  • For whom is Ethereum the best/only way to compute code?

These are the questions that get at the heart of the value
proposition of the technology.

So far, most decentralized applications have very little use
relative to traditional services. Bitcoin, for example, has fewer
mainstream merchants accepting it as a payment option in the U.S.
today than in 2014. And for all the talk of Bitcoin’s value as a
payments system in developing countries or emerging markets like
China, it is traditional software (i.e., apps) like AliPay and
Paytm that are actually driving sweeping change in these places.

At the same time, use of Bitcoin on the dark web and for
ransomware is evident, even if it is hard to get good data.

But aren’t people using Bitcoin as a “store of value?” Sure,
which is just another way of saying people are investing in
Bitcoin with a longish time horizon. But remember I’m not talking
about investing in the crypto asset yet. I’m talking about
whether there are people who find a decentralized application
for payments
(which is enabled by that asset) useful. Real
estate is only a good store of value in the long run if
people live and work in the buildings. The same is true of
decentralized applications.

What should we make of Ethereum evaluated through the “censorship
resistance” lens? After all, it seems to be getting a ton of use
by developers. Since Ethereum is a developer platform for
decentralized applications
, does that mean it is
developers who have been censored or blocked somehow? In
a way, yes. Developers and start-ups who wish to build financial
products do not have open and unfettered access to the world’s
financial infrastructure. While Ethereum doesn’t provide access
to that infrastructure, it does provide a different
infrastructure that can be used to, for example, create and
execute a financial contract.

Since Ethereum is a platform, its value is ultimately a function
of the value of the applications built on top. In other words, we
can ask if Ethereum is useful by simply asking if anything that
has been built on Ethereum is useful. For example, do we need
censorship resistant prediction markets? Censorship resistant
meme playing cards? Censorship resistant versions of YouTube or

While it’s early, if none of the 730+ decentralized
built on Ethereum so far seem useful, that may be
telling. Even in year 1 of the web we had chat rooms, email, cat
photos, and sports scores. What are the equivalent killer
applications on Ethereum today?

So where does this leave us?

Given how different they are from the app models we know and
love, will anyone ever really use
decentralized applications? Will they become a critical part of
the economy? It’s hard to predict because it depends in part on
the technology’s evolution but far more on society’s reaction to

For example: until relatively recently, encrypted messaging was
only used by hackers, spies, and paranoids. That didn’t seem to
be changing. Until it did. Post-Snowden and post-Trump, everyone
from Silicon Valley to the Acela corridor seems to be on either
Signal or Telegram. WhatsApp is end-to-end encrypted. The press
solicit tips through SecureDrop. Yes, the technology got a little
better and easier to use. But it is mainly changes in society
that are driving adoption.

In other words, we grew up in the rainforest, but sometimes
things change and it helps to know how to adapt to other

And this is the basic argument that the smart money is making on
crypto assets and decentralized applications: that it’s simply
too early to say anything. That it is a profound change. That,
should one or more of these decentralized applications actually
become an integral part of the world, their underlying crypto
assets will be extremely valuable. So might as well start placing
bets now and see how it goes. Don’t get to hung up on whether we
see the killer apps yet.

That’s not a bad argument and I tend to agree.

I would summarize the argument as: in the
long-run, a crypto asset’s value is driven by use of the
decentralized application it enables. While it’s early, the high
valuations are justified because even if the probability of mass
adoption is small, the impact would be very large, so might as
well go along for the ride and see what happens.

But how do we explain the recent mania?

Bitcoin is up 5x in a year, Ethereum is up 30x. The total market
cap of all cryptocurrencies is ~$175B, up from $12B just a year
ago. Why?

As in every mania in history, it is currently rational to be

To understand what’s going on, let’s look at the buyer and seller
mentality right now, starting with the buyers.

If you invested early in Bitcoin or Ethereum, you are sitting on
a windfall. It feels like you are playing with “house money,” a

well-known psychological
effect. You feel smart and willing to
risk more than you otherwise would if it was “your money.” Might
as well diversify a bit and parlay your gains into the next
crypto asset, or two, or three.

If you didn’t invest, the fear-of-missing-out continues
to build until the “screw it” moment when you buy in. Maybe you
read about Bitcoin, didn’t understand it, and followed Warren
Buffet’s (good) advice not to invest in things you don’t
understand. Some of your friends made money but you still ignored
it. Then you read about Ethereum, which you really
didn’t understand, also passed on buying, and later found out
that your friends are planning to retire because they did. The
lesson seems to be anti-Buffet: only invest in things
you don’t understand. This is causing people to check
their judgement at the door when the latest all-time high finally
convinces them to jump into the market.

And that is not good.

Because there will be sellers to fill the demand, especially the
demand coming from people who have decided they will never
understand this stuff so will just place bets on things that
sound complex and impressive.

Let’s think about these sellers. And by sellers, I don’t mean
people selling their holdings of existing crypto assets. I mean
new issuers. Teams launching new crypto assets.

The basic model is to pre-sell some percentage of the crypto
assets the proposed network will generate as a way to fund the
development of the decentralized application before it launches.
The project founders tend to hold on to some percentage of these
assets. Which means that raising money for a project this way is
a) non-dilutive as it is not equity and b) not debt, so you never
have to pay anyone back. This is basically free money. It’s never
been this good for entrepreneurs, even in the 90s dot-com boom.
Which makes it incredibly tempting to try and shoe-horn every
project that could perhaps justify an “initial coin
offering” to go for it, even if they aren’t actually building a
decentralized application. After all, an ICO lets you
exit before you even launch.

And there is a pervasive narrative out there that supports
entrepreneurs looking to create new crypto assets. The idea is
that by selling assets to users before your network launches, you
create “evangelists” who will be early users and promoters you
wouldn’t otherwise have if there were no financial incentive to
participate in your community.

The problem with this line of thinking is that it conflates early
investors with early users. The overlap between
people who buy your crypto asset and people who actually want to
use the service you are building is likely very, very small,
especially during market manias like this one. It creates a false
sense of “product-market fit.” Yes, people are buying your crypto
asset. But that’s because the “market” are people who want to get
rich and the “product” you are selling is a “way to get rich.”


But “this is fine.”

Everyone’s making money. For now.

It’s currently rational to be irrational.

As long as that blue line keeps going up.

Only when the tide goes out do you discover who’s been swimming

At the same time, I wouldn’t bet against crypto

He who lives by the crystal ball will eat shattered glass.

Consider the following. The total market cap of crypto assets has
been increasing by an order of magnitude every few
years. Where will they be in 2022? It’s certain that many (most?)
of the crypto assets launching today won’t make it. But neither
did most of the ones that were launched back in the 2013/4 boom
(when they were referred to as “alt coins”). Though an important
alt coin from 2014 did stick around and drove the most recent
boom to new heights by being the platform to power all the
others: Ethereum.


So, Jamie, what’s the bottom line?

Allow me to summarize.

  • Cryptocurrencies (which I prefer to call crypto assets) are a
    new asset class that enable decentralized applications
  • Decentralized applications enable services we already have
    today, like payments, storage, or computing, but without a
    central operator of those services
  • This software model is useful to people who need censorship
    resistance which tend to be people that are either off the grid
    or who want to be off the grid
  • Most everyone else is better off using normal applications
    because they are 10x better on every other dimension, at least
    for now
  • Society’s embrace or rejection of new technology is hard to
    predict (think about encrypted messaging)
  • In the long-run, the value of a crypto asset will rise and
    fall in proportion to the use of the decentralized application it
  • In the short-run, there will be extreme volatility as FOMO
    competes with FUD, confusion competes with understanding, and
    greed competes with fear (on both the buyer side and the issuer
  • Most people buying into crypto assets have checked their
    judgement at the door
  • Many sellers of new crypto assets aren’t actually building
    decentralized applications but are instead shoe-horning an ICO
    into their service because of the market mania; that doesn’t mean
    decentralized applications are bad, it just means people are
    capitalizing on the confusion and are probably themselves
  • Don’t bet against crypto assets in the long-run: as
    we approach the 10 year anniversary of the Bitcoin paper it is
    clear that they aren’t going anywhere and that decentralized
    applications may very well find an important place alongside all
    the other forms of organization we have come to take for granted.


p.s. — You may have noticed that I didn’t use the word
“blockchain” in this note. The word now tends to confuse more
than enlighten.

p.p.s  —  There is another, related market I didn’t talk about:
cryptographic ledgers for the enterprise. My
perspective on that is here

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