This article makes the case for the existence and value of cryptocurrencies (I’ll use the terms cryptocurrency, crypto and coins interchangeably). I’m a financial conservative - crypto is not a political cause for me. But nevertheless I say that crypto will be progressively integrated into all aspects of the world economy. Crypto exists due to its utility. That underpins its value.

“It is reasonable to try to make money trading cryptocurrencies because they are a part of the economy and their prices need to be discovered.”

The many emerging crypto businesses’ existence - including mine - is predicated on this statement being true. It is therefore worth examining its veracity.

This question was broached in an excellent and entertaining FTX Podcast earlier this year. The host, Tristan Yver of FTX, interviews Quantfury’s Lev Mazur and Daniel Schwartzkopff of Invictus Capital. At this stage in the video something remarkable happens. While Lev Mazur acknowledges that he and others are making money, he asks: “where’s the real usage of the end product?”. He goes on to compare crypto to the traditional finance world, suggesting that crypto is a house of cards. Tristan Yver interjects almost in panic - it’s as if Lev Mazur, as a crypto insider, has challenged a central edict of the faith. He says “[but] they’re doing so much volume” - as if the trading in itself justifies what’s traded. What follows is a debate between Lev and Tristan on the basis of crypto (moderated in effect by Daniel Schwartzkopff). They never come to a resolution.

For many business cases in the sector, this question - real usage - is critical. Mr Mazur is stating the obvious: if there’s no connection with the real world, eventually all crypto will go to zero. Those left HODLing when “the tide goes out” will have their nakedness revealed. They’ll lose all their money. Trading will end. Everyone closes down.

What’s surprising is that none of the three try to put forward actual real-world arguments. Have they never stopped to think it through?

Bitcoin as Digital Gold

Let me have a go then. I’ll start with Bitcoin. Bitcoin is digital gold - not in that Bitcoin is like gold, but that gold is like Bitcoin. Gold has some utility - in electronics etc. It’s used for jewelry, but - think about it - it’s discoloured! Aesthetically it’s inferior to silver, platinum and palladium. Nevertheless it is priced higher and is more desired. Buyers want to see that particular colour of 18 karat gold. But it’s the historical value of the metal over the ages that has given to its colour this perception.

Gold’s price does not reflect its intrinsic value. In 1976 it was less than $500 per ounce (adjusted for inflation). Its utility was a fraction of that - perhaps $50. But the consensus of history has turned gold into a wealth store when risk presents itself, contributing the great majority of its price.

Bitcoin lets you send money over the internet. But you can do bank transfers. You just interchange your banks for Bitcoin miners. Where’s the utility?

In a word: it’s trustless. Miners have no interest nor knowledge of the transactions they validate - there’s no middle-man.

Bitcoin is digital gold because, like gold, it has some small (proportional to price) utility while having historical “lustre”. Somehow Bitcoin has compressed the thousands of years gold has had to take its place in human consciousness into just 12. It’s position as a gold-like store of wealth is being progressively validated with the influx of institutional investment.

Contracts That You Don’t Need to Trust

But Bitcoin is just the beginning. Enter Vitalik Buterin. He was an early innovator in the crypto community. He realised that the removal of middle-men through trustlessness could produce enormous efficiency improvements for the economy. Scripting generalised transactions could allow all sorts of business to be done in code - not just the transfer of money. Think of all the intermediary business functions - bankers, agents, brokers. If their agreements could be replaced by code the results would be revolutionary. But Buterin’s suggestion of adding scripting to Bitcoin was rejected. He therefore broke away to create Ethereum. The Ethereum virtual machine allows the execution of arbitrary Contracts written in its purpose designed Solidity programming language. These “smart contracts” are validated trustlessly. Ether (ETH) was created as the reward currency for Ethereum network validators (miners).

An early Ethereum innovation was tradable smart contracts called “tokens”. They have a huge variety of behaviours and purposes. They now constitute the great majority (numerically) of the current 8000 or so coins. Each token’s function is defined in code in association with other smart contracts. The utility of such tokens depends on the business case of their economic niche. The value of the token can be expected to rise and fall with this real-world utility.

The RealT platform is a simple example. It provides a way to trade real-estate. It does it by associating tokens with fractions of a property. Token holders receive rental income through the US dollar stablecoin Dai. Dai is kept at dollar parity via the trading of the associated Maker token. Given the utility of the trustless transfer of real estate ownership it’s not unreasonable to expect RealT and similar systems to succeed comprehensively.

In general, smart contracts can be used to define economic interactions and make them trustless. The associated transactions are more efficient because they need no middle-men. Aspects of this interaction that involve value lead to the introduction of cryptocurrency coins. Depending on the fundamentals of the area of the economy involved, these coins rise and fall in value. They are traded in various venues and are kept liquid with market-making to facilitate efficient price discovery.

A Coin For Everything

Distributed ledger networks like Ethereum bring value through trustless efficiency. Other distributed ledger blockchains have emerged in competition with Ethereum as the economic value has become clear. In widening areas of the economy, as innovative systems of smart-contracts are devised, more coins are being introduced. Their trading venues will encourage efficient markets in them. The role of professional crypto traders will expand.

Sam Bankman-Fried, CEO of FTX, is a major motivator of the crypto revolution. He actively pushes the boundaries of crypto’s place in the economy. For instance FTX lists “tokenized stocks” of Tesla and other companies. They have what might be called “probability contracts” such as a future that pays out if Trump wins the 2024 presidency. He sees FTX becoming the “exchange of everything”.

This is the vision of crypto: all transactions are trustless smart contracts. All business dealings are encoded via a programming language immutably onto a blockchain. Miners and other players are rewarded with freely traded crypto. The role of the lawyer and the coder merge. The economy optimizes in terms of fairness and efficiency.

In the past year a number of thresholds seem to have been passed in terms of cryptocurrency acceptance in the finance industry. The implications of this acceptance would appear to be immense: that the professions and industries that have required middlemen are in the process of fundamental change. In their place, miners and traders of crypto and the industry around them must inevitably massively expand.