Crypto’s Risk-Free Asset: A Voyage to Cryptonesia

Volatility is always measured with respect to a reference point. Bitcoin is volatile – typically ranging around 45 to 65 vol depending on conditions – with respect to the U.S. dollar. It is however entirely inert with respect to itself, and generally less volatile than most of the alt-coins, including Ethereum. Nevertheless, it is not risk-free* when exchanged. But if you take Lisa Tan’s concept of crypto-ecosystems as economic islands with exchange rates between them, when we consider the archipelago of crypto, Bitcoin plays a special role, both in the internal exchange-rate mechanism, and in its relationship to the outside world. It is for this reason, whatever your views on Bitcoin as a technology or investment, if you live in this archipelago you have to care about the long-term health of Bitcoin.

This is about more than correlation between Bitcoin and other crypto assets. This is about both the origin of the wealth on-chain, and how it is maintained and recirculated. In 2009, with the Genesis Block, Bitcoin had no financial value (no measurable future cash flows; no business behind it beyond transaction fee collection) though, using Jeff Dorman’s framing, it did already have utility value and social value: you needed to own it to use the network, and you wanted to own it because that meant being part of the small community of cryptographers and hackers who first started playing around with Satoshi Nakamoto’s creation. As that community grew, the social value increased, as did the utility value, and this started to put pressure on the price of entry: the exchange rate between fiat currencies and Bitcoin. This led to a relative increase in value which proceeded shakily and at first slowly, until speculative fervor took hold. So far, so tulip mania. But if that was the full story, you would expect a bubble and crash to zero.

Instead Bitcoin’s market cap rose over time, and at some point – not long before the other islands arose – it got to be valuable enough that the community on-chain got invested in not destroying that value. The numbers were still small, but for the number of people invested, that didn’t matter: it didn’t have to be a trillion-dollar asset class to be worth it to them. And this is the point where Bitcoin starts to look like a risk-free asset in a peculiar economy, the on-chain one. Because as other assets started to be created, primarily exchanged on chain, they needed a point of reference. Furthermore, the wealth creation on-chain itself helped fund some of that development, whether of Bitcoin mining companies or new blockchains or things built atop blockchains like protocols or payment providers  – to this day, it still does. This is the key difference between Bitcoin and its related crypto assets and a classic bubble: tulips are not an economic system, they are an asset. If people stop believing they’re worth anything in Holland, then the relative value of the asset collapses, and everyone feels rather silly.

But what if the asset is Holland?

If the asset is the backbone of an economy, you need to factor in the people in that economy and their interest in it: if it’s your home, you have a stake in it. You can walk away from your delusion that a tulip is incredibly valuable, but it is much harder to walk away from where you live. It may be that the place you live is kind of wild and not filled with amenities, requiring you to maintain residence someplace else and then deal with that volatile exchange rate, but the desire to participate in this other, on-chain economy has proven more sustainable than simple belief in the asset itself. And before you say, well, that’s because the main industry of this decentralized archipelago was criminal enterprise, the numbers don’t hold up: the percent of Dark Web-related transactions has trended down every year, and relative to this economy’s GDP, it is less than the “real world” levels. Government concerns about money laundering, terrorism funding and other criminal aspects should not be dismissed because financial flows that transit this new nation are fast and global, but those flows are not big enough to explain why this economic system has proven sustainable.

Oddly, people seem to want to live in Cryptonesia.

At this point you might be wondering why you should care, even if this is true. What are the implications of thinking about the various crypto assets in this way, as opposed to commodities, securities, real estate, or something else? First, it illustrates why they have value, the lack of which is commonly cited as a reason why crypto assets are uninvestable by traditional institutional investors. Nowadays, you have all major value drivers (financial, utility, social) represented by different crypto assets, because it’s an economy based upon participation, and the utility of the tokens is paying for executing transactions or participating in a protocol – and when there are buy-backs or airdrops returning value to participants, you get something that looks a lot like financial value based on revenues. This is an argument I have been making for years: that the whole “is it a security or is it a commodity?” debate is wrong-headed, because crypto assets have attributes of both. They are participatory equities, bonds and commodities depending on the token. This will require new regulations, new models and new approaches to risk management, but many of the foundations will build upon years of study of macroeconomics, finance and valuation models.

Second, if you think it was hard for a crypto company to open a bank account over the last four years, just wait until you try and open a bank account for your AI agent. Maybe over time there will be frameworks that allow that to happen, but for now, AI agents can only live in Cryptonesia if they are to be economic actors. Their entry on-chain, and the initial capital to buy in, will create additional demand pressure in the coming years as well as enriching the ecosystem. The fact that crypto is not an asset but an economic system makes space for new kinds of citizens.

Finally, there is the stakeholder aspect. Solana bulls, ETH maxis, the XRP Army and everyone else who advocates for the better technology, more vibrant community and overall superiority of their more-recently-developed blockchains still have to care about Bitcoin due to its role as a store of wealth and pricing reference on-chain. Venture capitalists injected more capital into the on-chain economy in various waves, as did the ICO boom, but some funding also came from Bitcoin whales who hit it big early on and turned into angel investors or invested in those funds. As Dan O’Prey and Mas Nakachi wrote about in the 1A1Z essay on funding Bitcoin, Bitcoin Core support is still quite fragile and concentrated. Participants in the crypto ecosystem should care about the risks of this lack of support, because a collapse in Bitcoin, given its central role, could have disastrous effects on the on-chain economy as a whole. I say this as a long-time proponent of the multi-chain world: like many people I came into crypto through Bitcoin initially, but the constant innovation shouldn’t stop with the first blockchain; the diversity of technologies and communities in crypto and the competition between them is a strength not a weakness. 

I hope students of economics, finance and risk management take up the challenge to better understand and model this digital economy – including its very real “24x7, liquid macro” dimensions that connect it to the real-world economy, as we’ve seen recently when U.S. tariff news printed after global exchanges closed moved crypto prices first. The divine comedy of crypto probably will never entirely settle down, but it should be studied seriously.

^{*Note: Use of the term “risk-free” is not to suggest Bitcoin is free of risk, but rather to explain that within the crypto economic system, Bitcoin’s role is analogous to that of U.S. Treasuries in traditional finance.}

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