Cryptocurrency flight: Why funds are leaving Bitcoin

Author: Pillage Capital; Source: X, @PillageCapital; Translated by: Shaw, Golden Finance

Bitcoin was never the future of money. It was merely a battering ram in a regulatory war. Now that war is nearing its end, and the funds that fueled Bitcoin's growth are quietly withdrawing.

For 17 years, we have believed that the magical internet currency was the ultimate form of finance. This is not the case. Bitcoin is a regulatory battering ram, a siege weapon specifically designed to destroy a particular barrier: state-sponsored intolerance of digitally held assets.

This work is largely complete. Tokenized US stocks have begun to be issued. Tokenized gold is legal and growing. The market capitalization of tokenized dollars has reached hundreds of billions of dollars.

In wartime, the battering ram is priceless; in peacetime, it is merely a cumbersome and expensive antique.

As the financial system has upgraded and become legalized, the narrative of Bitcoin as "Gold 2.0" is collapsing, returning to what we truly wanted in the 1990s: the tokenization of real assets. I. Bitcoin's Past: E-gold To understand why Bitcoin is becoming obsolete, we must understand its origins. It wasn't a smooth ride; it was born in the shadow of repeated failures of digital currencies. In 1996, E-gold launched. By the mid-2000s, it had approximately 5 million accounts and billions of dollars in transaction volume. This proved something important: the world needed digital assets backed by real-world value. However, the state stifled it. In December 2005, the FBI raided E-gold. In July 2008, its founder pleaded guilty. The message was clear: destroying a centralized digital gold currency was easy. Just knock on a door, seize a server, sue someone, and it was all over. Three months later, in October 2008, Satoshi Nakamoto published the Bitcoin white paper. Prior to this, he had pondered these issues for years. In his writings, he pointed out that the fundamental flaw of traditional currencies and early digital currencies lay in their excessive reliance on central and commercial banks. Experiments like E-gold demonstrated how easy it was to attack these points of trust. Satoshi Nakamoto witnessed firsthand the stifling of a genuine innovation in the digital currency field. If you want digital assets to survive, you cannot allow them to be so easily killed. Bitcoin was designed to eliminate the attack pathways that led to E-gold's collapse. It was not designed for efficiency, but for survivability. II. The Regulatory War: The Necessary Illusion Early on, introducing users to Bitcoin was almost like magic. We simply told them to download a wallet to their phones. When the first Bitcoins arrived, you could see their moment of realization. They felt as if they had opened a financial account and instantly gained value, without any permission, documentation, or regulatory oversight. This was a devastating blow. The banking system suddenly seemed outdated. You realized you had been suppressed without even knowing it. At the Money 20/20 conference in Las Vegas, a speaker displayed a QR code on a large screen and held a live Bitcoin raffle. Audience members sent Bitcoins, accumulating a prize pool in real time. A man next to me, working in traditional finance, leaned over and told me that the speaker had just broken about fifteen laws. He might be right. But nobody cared. This is precisely the point. This isn't just a financial issue; it's a rebellion. A top-ranked post on Reddit in Bitcoin's early days perfectly encapsulated this sentiment: Buy Bitcoin because "it's a powerful blow to those swindlers and robbers trying to steal my hard-earned money." This self-funding mechanism is flawless. By fighting for this cause, posting, promoting, debating, and recruiting new users, you directly increase the value of the tokens in your own wallet and your friends' wallets. This revolution benefits you immensely. Because the network couldn't be shut down, it continued to grow after each crackdown and negative publicity. Over time, everyone began to act as if "Magic Internet Money" was the real target, not a stopgap measure. This illusion intensified to the point that mainstream institutions joined in. BlackRock applied to issue a Bitcoin ETF. The US president discussed making Bitcoin a reserve asset. Pension funds and universities invested in Bitcoin. Michael Thaler persuaded convertible bond buyers and shareholders to fund the company's purchase of billions of dollars worth of Bitcoin. Mining scaled up to the point that its electricity consumption rivaled that of a medium-sized country. Ultimately, with over half of campaign funds coming from cryptocurrency, calls for cryptocurrency legalization were finally heard. Ironically, the government's crackdown on banks and payment processing institutions spawned a three-trillion-dollar behemoth, forcing the government to yield.

III. The Road to Success: Profits Ruined Trading

Infrastructure Upgrades, Monopoly Breaking

Bitcoin's advantage has never been just its resistance to censorship, but its monopolistic position.

For years, if you wanted tokenized holding value, Bitcoin was the only option. Accounts were closed, and fintech companies were terrified of regulators. If you wanted the benefits of instant, programmable money, you had to accept all of Bitcoin's terms.

So we accepted it. We liked it and supported it because there was no other choice at the time.

That era is over.

You can see what happens when multiple available trading channels exist by looking at Tether (USDT). USDT was initially issued on Bitcoin trading channels, but later most of its circulation moved to Ethereum because Ethereum had lower fees and was easier to use.

When Ethereum transaction fees skyrocketed, retail investors and emerging markets turned to Tron for issuance. Same dollars, same issuers, different trading channels. Stablecoins are not loyal to any blockchain. They treat the blockchain as a one-off channel. The asset and the issuer are key; the channel is merely a combination of fees, reliability, and connectivity with the rest of the system. In this sense, the "blockchain over Bitcoin" camp has actually won. In the early days, horse-drawn carriages were widely used to ridicule banks' reports on blockchain technology. Once you understand this, Bitcoin's situation changes dramatically. When there's only one channel, all assets are forced to rely on it, and you might confuse the value of the asset with the value of the channel. But when there are many channels, value flows to those with the lowest cost and easiest access. This is where we are now. Outside the US, most of the world's population can now hold tokenized equity in US stocks. Perpetual futures, once the killer app for cryptocurrencies, are being replicated domestically by physical exchanges like the Chicago Mercantile Exchange (CME). Banks are also starting to offer USDT deposit and withdrawal services. Coinbase is evolving into a combination of banking and brokerage accounts, allowing users to send money, write checks, and buy stocks while holding cryptocurrency. The network effects that once protected Bitcoin's monopoly are gradually crumbling, replaced by general-purpose network infrastructure. Once the monopoly is broken, Bitcoin will no longer be the only way to generate returns. It will become just one of many products, competing with regulated, high-quality goods and services that better meet people's original, genuine needs.

Technological Reality Test

During the war, we overlooked a simple fact: Bitcoin is a terrible payment system.

We still transfer funds by scanning QR codes and pasting long strings of meaningless characters. There are no standardized usernames. Transferring funds across layers and across chains is as difficult as passing through a game. Once you can't figure out which address corresponds to which account, your money is gone forever.

“The Currency of the Future”

By 2017, Bitcoin transaction fees had skyrocketed to nearly $100. A Bitcoin café in Prague had to accept Litecoin to stay afloat. While having dinner in Las Vegas, paying with Bitcoin took half an hour because people were frantically fiddling with their mobile wallets, and the transaction kept getting stuck.

Even today, wallets frequently experience basic glitches. Balances wouldn't display, transactions stalled, people sent money to the wrong addresses, resulting in lost funds. Early on, almost everyone who received a free Bitcoin lost it. I personally lost over a thousand Bitcoins. This is commonplace in the cryptocurrency space. Pure on-chain finance on a large scale is terrifying. People click a "sign" button in their browsers, even though they can't read or understand the code. Complex operations like Bybit can still be hacked, resulting in billions of dollars in losses with no effective recourse. We used to tell ourselves these user experience issues were temporary growing pains. A decade later, real improvements in user experience haven't come from some sophisticated protocol, but from centralized custodians. They provide people with passwords, account recovery, and fiat currency access. Technically, this is the crux of the problem. Bitcoin has consistently failed to learn how to truly function without recreating the very intermediaries it claims to replace. Trading is no longer worth the risk. Once infrastructure improves elsewhere, all that's left is trading. Look at the returns over the past four years (a complete cryptocurrency cycle). The Nasdaq has outperformed Bitcoin. You've taken on existential regulatory risks, endured devastating drops, and survived constant hacks and exchange failures, and your returns are less than a typical tech index. The risk premium has vanished. Ethereum is in even worse shape. The portion that should have brought you the greatest returns through risk-taking has now become a direct drag on performance, while the lackluster index is only rising slowly. Part of the reason lies in structural issues. A large number of early holders have their entire net worth in cryptocurrencies. Now they are older, have families, real expenses, and a normal desire to reduce risk. They sell some coins every month to maintain a comfortable lifestyle. Thousands of holders sell every month, adding up to billions of dollars in "living expenses" sold off. New inflows are quite different. ETF buyers and wealth management institutions mostly allocate 1% or 2% for compliance purposes. These funds are stable but not aggressive. These modest allocations not only have to contend with continuous early holder selling but also with exchange fees, new coins issued by miners, fraudulent tokens, and hacking attacks, just to barely keep prices from falling. The era of reaping huge rewards by taking on regulatory risks is over. Developers are sensing the stagnation. Developers aren't stupid. They can sense signs that technology is losing its edge. Developer activity has plummeted to 2017 levels.

Weekly developer commit logs across the entire ecosystem

Meanwhile, the codebase has practically stagnated. Decentralized systems are designed to be difficult to change. Those ambitious engineers who once saw cryptocurrency as a cutting-edge field have now turned to robotics, aerospace, artificial intelligence, and other fields where they can do things far more exciting than simply playing with numbers.

If transactions are poor, user experience is even worse, and talent is being lost, then the future is not hard to predict. IV. Error Correction Mechanisms are Superior to Pure Decentralization Decentralization believers tell a simple story: code is law, currency is uncensored, and no one can block or reverse transactions. Most people don't actually want that. What they want is well-functioning infrastructure, and they want someone to fix it when problems arise. This is evident in how people treat Tether. When funds are stolen by North Korean hackers, Tether freezes those balances. If someone mistakenly sends a large amount of USDT to a contract address or burn address, as long as they can still sign from the original wallet, complete KYC verification, and pay the fees, Tether will blacklist the frozen tokens and mint new tokens for the correct address. While this involves some paperwork and time delays, at least there's a process, a management team that can acknowledge mistakes and fix them. This is counterparty risk, but it's the kind of risk people value. If you suffer losses due to technical glitches or hacking, at least there's hope for recovery. On-chain Bitcoin is different. If you enter the wrong address or sign an incorrect transaction, the loss is permanent. There are no appeals, no customer service, and no second chances. Our entire legal system is built on the opposite intuition. Courts have appeals. Judges can overturn judgments. Governors and presidents can pardon criminals. Bankruptcy exists to prevent a single wrong decision from ruining a person's life. We prefer living in a world where obvious mistakes can be corrected. Nobody really wants a system vulnerability like the Parity multi-signature vulnerability, which froze $150 million in Polkadot funds, leaving everyone to shrug and say, "Code is law." We now have far more trust in issuers than we did in the past. Back then, "regulation" meant early cryptocurrency businesses losing their bank accounts because banks feared regulators would revoke their licenses. We watched as some crypto-friendly banks collapsed in a single weekend. Governments felt more like executioners than referees. Today, the same regulatory mechanisms have become a safety net. They mandate disclosure, audit issuers, and empower politicians and courts to punish blatant theft. Cryptocurrency and political power are now intertwined, and regulators can't simply destroy the entire sector; they must regulate it. This makes coexisting with the risks of issuers and regulators far more sensible than living in a world where losing a mnemonic phrase or a malicious signature hint could bankrupt you beyond repair. Nobody really wants a completely unregulated financial system. A decade ago, a broken regulatory system made the chaos of unregulated systems seem appealing. But as regulations have modernized and become more functional, that trade-off has reversed. People's preferences are clear. They want robust infrastructure, but they also want a referee. Bitcoin has fulfilled its mission. It was like a hammer blow, breaking down the barriers that hindered E-gold and all similar attempts. It made a permanent ban on tokenized assets politically and socially impossible. But this victory also brought a paradox: when the system finally agreed to upgrade, the high value of this hammer blow vanished. Cryptocurrencies still have their place, but we no longer need a three trillion dollar "rebel." Hyperliquid developed prototype features with just 11 employees and forced regulators to respond. Once a feature worked well in a test environment, traditional finance (TradFi) copied it under the guise of regulatory compliance. Today, the primary strategy is no longer to invest the majority of net worth in "magic internet currencies" for a decade in hopes of appreciation. This only makes sense if the financial system collapses and the returns are extremely attractive. "Magic internet currencies" have always been a strange compromise: a flawless financial system wrapped around assets supported only by a story. In subsequent articles, we will explore what happens when these financial systems embody claims to truly scarce assets in the real world. Capital is already adjusting. Even the unofficial central bank of cryptocurrencies is shifting. Tether's gold holdings on its balance sheet have surpassed those of Bitcoin. Tokenized gold and other real-world assets are growing rapidly. The era of "magic internet currencies" is ending. The era of tokenized real-world assets is beginning. Now that the door is open, we can stop worshipping Bitcoin and start focusing on the assets and transactions that truly matter on the other side.