Bitcoin as a store of value for the rich

The commonly used analogy for Bitcoin as a store of value is Gold. When you consider the concentration of Bitcoin ownership, this may actually not be true.

In 2014, When Marc Andreessen wrote this article, Bitcoin was supposed to become the medium of exchange of the internet. To quote the article:

Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.

What kinds of digital property might be transferred in this way? Think about digital signatures, digital contracts, digital keys (to physical locks, or to online lockers), digital ownership of physical assets such as cars and houses, digital stocks and bonds … and digital money.

Over the past two years, the price of Bitcoin has skyrocketed and it is no longer viable as a decentralised medium of exchange. It has come to be considered as a store of value and the most commonly used analogy for Bitcoin is gold. Trust in gold as a store of value is ubiquitous across the world. About 3 billion people in India and China own gold even though the underlying metal does not exactly have any value. The ownership of gold has been propagated by myth and stories that gives it value. Myths are essentially propagated by ownership and a sense of belonging. For example if you believe in god, you have more incentive to make other people believe in god. If you own an Apple product, you are more likely to defend the products that apple makes. Ownership gives you skin in the game. Bitcoin has a myth of its own but it is not as ubiquitous as gold, primarily because about 4% of bitcoin addresses own 97% of Bitcoin in circulation

Source: Credit Suisse report on Blockchain

This can probably mean two things for the future of Bitcoin:

1. The minority that owns 97% of Bitcoin will dictate its future because they have the most skin in the game. They have the leverage to fluctuate the market and hence they will veto any move that goes against their interests. It is probably safe to say that price of bitcoin going below a threshold where it can be used a medium of exchange is not something they will want. Read more about how intolerant minorities control decisions.
2. The 4% addresses that own bitcoin are probably far removed from the industry of mining of coins. Historically, the price of a store of value is directly proportional to the distance from the source where the store of value is founded. The summary of Nick Szabo’s article on store of value is quoted below (emphasis mine)

Collectibles involved a unique interplay of supply and demand whereby demand was based in large part on a predictable constraint in supply. A common way cultures met this constraint was by using collectibles that originated in a very distant region and percolated into the local region via a relatively constant stream of transfers (which could be long-distance trade, but could also be a series of transfers themselves as injury compensation or bridewealth). Collectibles flowed from relatively plentiful at the origin to relatively scarce in the region they are used as collectibles. For fungible and divisible collectibles such as dentalia shells, they worked best as money where a geographical balance was struck between sufficient scarcity for value density and sufficient abundance to allow for its divisibility and fungibility. Such a collectible could be put to best use as money in a “Goldilocks region” in between where it was overly scarce and where it was overly abundant.

At the moment, this “Goldilocks region” does not exist for Bitcoin because of its high price and concentration of ownership, and hence it may never be used a money/medium of exchange.

This concentration of ownership also prompts other store of value analogies apart from gold. This Economist article about why people buy art may as well apply to someone who hodl’s:

Many sellers suffer a measure of remorse when they sell an artwork. They feel “conflicted” and even “guilty”. Selling is so uncomfortable, particularly among collectors who socialise with artists and shop with the “primary dealers” (who represent artists and sell work fresh out of the studio), that they prefer to speak of “de-accessioning” rather than selling.

Bitcoin, in its current state, without any large scale applications and with its concentration of ownership might as well be considered high art. The kind that people buy for psychological and sociological reasons apart from utility. It is not abundant enough to be analogical to gold.

So who might it help if Bitcoin continues it current trend?

Mining consortiums that are the origin of this store of value and hardware manufacturers that aid bitcoin mining will definitely profit. In all likelihood there would be new industries around utilising the psychological and sociological aspects of owning Bitcoin. The obvious one is networks that require you to have Bitcoin to be part of them. From Tres Comma Clubs to Hedonic pricing models for the price of Bitcoin.

P.S: My overall view of the future of blockchain and cryptocurrency is not this bleak. I hope this prompts people to look outside Bitcoin and Etherum to other tokens and products that are trying to solve problems for end users