Bitcoin has blown up this year. The price is up over 15X. There are forks every 2 months. Jamie Dimon weighed in. Floyd Mayweather and Paris Hilton have their own altcoins. The voices claiming Bitcoin is the next big thing or the biggest asset bubble in history are as loud as ever. Something’s gotta give.

The price movements are exciting, but personally I’m more interested in understanding what Bitcoin can be and why it may fail or succeed. This involves diving into the tech behind it, but also understanding the underlying economic forces that make bitcoin behave the way it does. Are we in a collective delusion? Will crypto fans get a big spoon of I-told-you-so by Paul Krugman (hint: probably not).

As I talk to bitcoin skeptics this holiday season I am hearing several common view points that I think fall apart under more scrutiny. I wanted to test myself and see if I could write down some responses to these. What follows are my own deeply flawed opinions — take with a spoon-full of salt.

Skeptic #1: It’s the Blockchain, stupid

By far the most common anti-Bitcoin meme is that it’s the technology and not the token. This gets repeated a bunch by people in consulting, banking, and other non-technical fields. It also holds a tiny bit of truth.

So what is the blockchain and why is it so important? The blockchain is the data structure that makes most cryptocurrencies work. It’s essential. Without it we would not be having this conversation at all. But the blockchain is also just a data structure. Data structures are building blocks of any system with any arbitrary set of properties. Algorithms are the instructions of how data structures get used. And finally, systems that involve human incentives and free will, like security or decentralized networks, have a third component that relates to human behavior and game theory. In the case of Bitcoin this mechanism is really simple: random enterprising folks secure the Bitcoin network because they get paid with valuable stuff (bitcoin). If they stoped getting paid, or the “stuff” stopped being valuable, they would stop securing the network.

(For more on how miners make Bitcoin secure, see proof-of-work. Possibly the most revolutionary and controversial part of Bitcoin.)

To expand on this point I’d like to propose a (slightly flawed) metaphor. Let’s compare Bitcoin to building a house. A blockchain without Bitcoin’s algorithms is just plywood and nails with no instructions. If you have the algorithm but no incentives, you have the materials and a plan, but no one to build it. The token reward would be paying workers to execute on the plans and put the materials together. No payment, no house.

Next time someone tells you that they are excited about blockchain but not Bitcoin, ask them about the incentives. Why would someone secure this system. If the answer is they will get paid by a central authority, then they probably should not be using a blockchain in the first place.

Skeptic #2: Bitcoin is not scarce

A common argument I hear from skeptics is that bitcoin is not truly scarce because there are so many cryptocurrencies. The argument goes: All crypto is the same, we can technically create infinite cryptocurrencies so there are infinite amounts of crypto coins. Downtown Josh Brown explains this theory here.

This theory has a few problems.

Not all crypto is the same. Silver doesn’t make gold valueless. Metals have different properties and are easily distinguishable, crypto is the same. Ethereum and Bitcoin both use proof of work, but similarities end there. I will concede that unlike gold, crypto source code can be easily copied, which leads to the second point: The top 10 cryptocurrencies have different properties. Of the top 10, only 2 are Bitcoin quasi-clones (LTC, BCH) and arguably one of them is private money and not decentralized, which makes it significantly different. This diversity indicates that at least for the early years of crypto, there is complimentary variety, but not duplication you would expect if Josh’s argument was correct. Currencies are networks. Networks have interesting properties, and one of them is that the value of a network is proportional to the square of its size (Metcalfe’s Law). The consequence of this value equation is that network markets tend to be winner take all. If networks are similar, but incompatible, the largest one will win out and the rest will disappear. Applying this to crypto, I expect a single bitcoin-like currency to have the vast majority of the value.

Skeptic #3: We’re in a bubble — something, something, something tulips

Bitcoin is up roughly 15X this year. That sounds pretty insane and too good to be true (If you’re a HODLer). Nothing should appreciate that quickly. And most people putting money in today don’t look like the most sophisticated investors. All the red flags seem to be there.

Except… What is happening is exactly what we would expect if we think bitcoin will be the future store of value of the world, which is what enthusiasts and early adopters have been saying, well before the current run up. If we assume bitcoin is scarce (see skeptic #2), and we assume that in the future it will be a better store of value than gold, we should expect it to eventually replace gold. If it does, it needs to go up really quickly. Remember, it needs to go from less than a penny in 2009 to over $370K per coin to match gold’s market cap (the wonders of limited supply).

Let’s do some math:

Bitcoin started in early 2009. Let’s assume it will replace gold in 2030. That’s 21 years. Assuming the initial price was $0.01 (it can’t be zero), then bitcoin would need to go up 122% annually to have the same value as gold by 2030 (0.01*2.22²²). Think about that, 122% annual return. Absolutely bubbly, tulips for sure, right?.

Well, bitcoin has actually been better than that.

The annual growth rate has averaged 400%. Maybe our 2030 estimate was pessimistic? Possibly. More likely than that, like most networks (like we said previously, Bitcoin is a network) bitcoin does not have a constant growth rate. It’s growth rate is closer to an S-Curve. This means it starts slow, rapidly accelerates during adoption, and then flattens towards the end of adoption. We can model it as logistic curve, with K=1.87 and a max value of $7.8 trillion (Market cap of gold). If we plug in these numbers, we get that at the start of 2018 the price of bitcoin will be $11K (we’re not that far off). The model predicts bitcoin will be over $60K by the end of next year. I know that sounds pretty crazy, but again this is what we would expect if we think bitcoin will match gold’s market cap by the end of 2030.

See all the numbers here.

Skeptic #4: Bitcoin will never be used for day-to-day transactions

Currently, Bitcoin transaction fees are hovering above $10. Obviously, buying a $3 coffee is probably not a great use case for bitcoin. Transaction fees have only increased since Bitcoin’s inception, so given that we have finite block space, I don’t expect fees to go down in the long run. Therefore, critics say, Bitcoin (the network and/or token) will never be a currency.

This one is possibly my favorite. I wonder what Alan Turing would have thought of the internet. Or Snapchat. Or Oculus. More importantly, it’s nice he was not as pessimistic about his work (given the electronic and hardware limitations of his day) as people are about crypto’s ability to handle everyday transactions. I believe this myth is born from a lack of imagination. Imagining things as they are instead of what they might be.

Let me illustrate:

As they exist today, blockchains are not efficient data structures when it comes to storing individual items. Actually, they are terrible at it. Instead, they do one thing really well: decentralized timestamped proof of existence. Those are a bunch of words, what do they mean and why should you care?

Imagine a world where Bitcoin can prove that a coffee transaction took place. Maybe it can validate the existence of every transaction you did this week. What about every transaction this year. Let’s go further: every transaction your bank did. Your city. All banks. All countries. Everywhere. Since the beginning of time.

That’s quite a lot right?

Well, Bitcoin can already do this. Using a clever data structure called Merkle Trees, we are able to timestamp (prove the existence at a point in time) of data of any size, without violating anyone’s privacy. Using payment channels and trustless settlement networks (Lightning Network) we’re able to similarly keep most transactions off the the blockchain, without incurring counterparty risk (that last part is essential, it’s what makes Lightning different from Paypal or ACH).

With just a bit of imagination, you can think about ways to pay for coffee that don’t need to be recorded directly on the blockchain, but still use the blockchain for security. If you have a receipt, and the blockchain tells you it is real, you don’t have to burden the blockchain by storing your data on it, you can store it yourself, and use the blockchain as proof. The next step is to do this for all small transactions. As long as you have a single secure blockchain, all of this is possible.

A few last words: