Crypto today, and its future as relates to retail finance
In the past couple of years, crypto companies have IPO’d, bought basketball arenas, and acquired traditional financial services companies, capturing a growing share of the public imagination.
If you’ve invested in crypto, you’ve either won big, lost big, or perhaps both. Crypto challenges conventional thinking about finance and government, with some predicting the emergence of a decentralized new world order. As Vest prepares to launch a full-service crypto offering, we’d like to reflect on crypto’s history, where it’s going, and why we are thrilled to integrate Vest into the crypto ecosystem.
The first cryptocurrency: Bitcoin
On January 9, 2009, an anonymous individual or group of individuals operating online as “Satoshi Nakamoto” published the first block on the bitcoin blockchain, embedding the following text from The Times: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” This was during the depths of the 2008/2009 financial crisis, and was a reference to the failures of the modern financial system, which many blamed for wrecking the global economy. No one knows Satoshi Nakamoto’s identity. He/She/They remained active in the development of bitcoin until mid-2010, when they handed over control of the project’s source code to the community and simply disappeared.
The big idea behind bitcoin–and the many crypto projects that have followed it–is that of a trustless, decentralized ledger. When you swipe your credit card, pull cash out of an ATM, or pay your electric bill, what’s happening behind the scenes is that one database registers a debit, while another one registers a credit. Modern money is nothing more than the business of adding credit and debit entries to a centralized network of databases controlled by financial institutions.
Bitcoin shares this with the regular financial system: it’s a ledger that we all collectively agree is a valid register of who controls how much economic value. The difference is that bitcoin’s database is decentralized. Anyone in the world can download bitcoin’s source code as well as every bitcoin transaction ever made here. When parties transact with bitcoin, those transactions are stored and then validated in “blocks” by the network of computers running bitcoin’s source code. These computers are called “miners,” and they receive bitcoin in exchange validating and maintaining the ledger. These blocks of transactions stack on top of each other to form what’s called the “blockchain,” a complete transaction ledger.
Unlike your bank, no single entity can edit the blockchain. Unlike with national currencies like the dollar, there is also no governmental entity that can create new money. Only the blockchain network can do this. Bitcoin’s source code caps the creation of coins at 21,000,000. There will never be any more than this number of bitcoin in existence. Because no government can print more bitcoin, many view it as a hedge against inflation.
Bitcoin continues to be by far the most valuable coin in the cryptocurrency ecosystem, but it is by no means the only coin. Over-simplifying, cryptocurrencies do two things: store value, and run programs. Bitcoin is digital money, or as many of its proponents call it, “digital gold,” and is intentionally built for this narrow use case. The second most valuable crypto coin, Ethereum, founded by Vitalik Buterin and released on July 30, 2015, is essentially open-source code that anyone on the network can run. Its goal is to enable people to build and run applications on a decentralized computer network, rather than on a centralized cluster of servers. Ethereum is to application development what bitcoin is to money. If you’ve heard of DAOs or NFTs, for example, these projects tend to be built on top of Ethereum.
What’s next with cryptocurrencies
Bitcoin was just the beginning, and its core ideas have spawned thousands of projects built for thousands of different use cases. These projects share a commitment to decentralization. They aim to transfer power, and the capture of value, from institutions to participants in the network. Money is power, and one of the most important ways that governments today exercise power and control is through their control of money. Crypto, by design, challenges this power–it is an inherently subversive technology.
Many see this is a good thing, but it comes with costs. Bitcoin has long been used to launder money and facilitate black markets. An unregulated medium where individuals can transact and enter into contracts without any government oversight carries a higher risk of fraud, abuse, and excess than the regulated financial system. If you’re someone who wasn’t able to withdraw your crypto holdings from Celsius in June 2022, you are familiar with at least one of these risks.
Markets are currently adjusting to a collapse of digital asset prices that is the result of the unwinding of a huge amount of leveraged, speculative trading. What happens from here, though, and whether crypto assets represent a good long-term investment, depends on whether the technology fulfills its promises in the coming years.
I believe in crypto as an alternative value store to national currencies. It is durable, transferable, scarce, and can’t be arbitrarily printed. At Vest, we spend a lot of time thinking about how to efficiently move our users’ funds across borders, in and out of their investment accounts. SWIFT, the standard used by banks internationally, is slow and expensive. With crypto wallets we can allow any user who is able to acquire crypto in her local market to fund her Vest account in minutes without needing a local banking integration in the country where she lives.
The thesis of crypto as a decentralized computer is more nuanced. When is it advantageous to users and to the network to run applications in a distributed manner, rather than on a central server? Most of the apps that you run on your phone or computer today would likely suffer performance decreases if run on the blockchain. One of the most compelling responses is that if you place a high value on your privacy, you prefer to have your data stored on a decentralized ledger where you own it, rather than being vulnerable to abuse by the entity that controls your data. The recent surge of interest in blockchain applications, then, may indicate the extent to which people are rethinking themes of collective governance and privacy. Yet when push comes to shove, most people, most of the time, place a premium on a high-quality user experience over control of their data. As long as this continues to be the case, it is hard to imagine a decentralized application disrupting an Uber or Airbnb.
In both cases, the crypto ecosystem today confronts an interesting challenge: for as much innovation as there has been over the past decade, end-users’ ability to use digital assets requires them to transfer those assets to fiat currencies. This is where the vast majority of VC returns have been generated: by very conventional, centralized institutions that intermediate the flow of value between crypto and conventional finance.
This will continue to be the case until there is widespread commercial adoption of crypto as a means of paying for goods and services. This presents a challenge to governments committed to controlling transactions within their borders. That’s why crypto is illegal in China. El Salvador, on the other hand, has taken a radically different approach as the world’s first country to adopt crypto as a form of “legal tender.” Regulators in the U.S. have been open to crypto adoption, but are becoming more interested in regulating the technology as adoption increases and risks to consumers and institutions become more clear. The regulatory outlook for crypto globally continues to evolve in fascinating and unpredictable ways.
Crypto at Vest
Crypto isn’t likely to build a decentralized new world order. In a world where governments and corporations control physical infrastructure–including the fiber optic cable and satellites that power the internet–they will preserve their ability to act as gatekeepers. On the other hand, crypto is here to stay both as a store of value and a means of decentralizing applications. I believe that it is likely that mass retail adoption, as well as institutional interest–particularly from financial firms–will cause the network demand for crypto to grow at a faster rate than new crypto assets are minted, powering long-term appreciation in value.
Whatever happens, we are thrilled to be integrating crypto into our offering at Vest as an alternative form of long-term investing and a means of transferring value in and out of accounts. Our commitment is to continue to evolve at the intersection of both conventional finance and crypto along with our users, helping them to navigate the complexity, opportunity, and risk inherent in both worlds.
The next 10 years will be fascinating, and we cannot wait to experience them with you.
If you’d like to join the journey with us you can download our app from iOS or Android, and with my referral code — aaronp — receive a $10USD bonus after having funded your account with your first $50 or more 🎉 I would love to hear product feedback and suggestions via DM either at @aaroninvierte on IG, or at my email, at aaron [at] mivest [dot] io.
Investing involves risk, including the potential risk of loss. For more information, please see our Social Media Disclosure. Cryptocurrency trading on Vest’s platform is made available by Vest Crypto, Inc. and offered and served through Apex Crypto LLC. Neither Apex Crypto LLC nor Vest Crypto, Inc. are members of SIPC or FINRA. Cryptocurrencies are not securities and are not FDIC or SIPC insured. Cryptocurrency execution and custody services are provided by Apex Crypto LLC (NMLS ID 1828849) through a software licensing agreement between Apex Crypto LLC and Vest Crypto, Inc. Please ensure that you fully understand the risks involved before trading: apexcrypto.com/legal.