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Bitcoin: The Path To and Beyond Digital Gold

By Connor Brooks on ALTCOIN MAGAZINE

Brooks
Brooks
Apr 24, 2019 · 9 min read

A few weeks ago, The Economist published an article called “ The Madness of Crowds,” which focused on the subject of Bitcoin and cryptocurrencies. Needless to say, the article was not in favor of cryptocurrencies having a bright future, claiming that “the flaws revealed by the cryptocurrency bust make a lasting revival unlikely.”

The article followed with a slew of negative news, citing the closing of CBOE’s Bitcoin futures, Bitmain’s decision against going public, and how a significant portion of Bitcoin transaction data has been overrepresented. They finish by quoting expert knowledge that “cryptocurrencies are unlikely to ever achieve mass adoption.”

The article could be summarized as a collection of common attacks on Bitcoin and cryptocurrencies, which has been reinforced by the lack of positive market movement in the past few months. However, as mentioned in previous articles, skeptics will often jump from one disbelief to another, helping strengthen the idea that the space as a whole will not survive.

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Full-size image at https://imgur.com/a/SdDZFLh

The core problem I find with these articles is a generalization of the space. Bitcoin, blockchain, and cryptocurrencies all need to be treated separately, with different paths and obstacles to becoming adopted, and with certain milestones being fundamentally necessary before others can occur.

If you neglect this fact, it allows you to criticize aspects of this technology which will not be feasible as a competitive alternative to current systems until other achievements of scale are met. The simple truth is that technology and currency adoption take time, and what Bitcoin has managed to accomplish within 10 years is significant, to say the least. However, many news sources won’t be found citing achievements, instead, they may harp on the fact that Bitcoin is a poor payment method and isn’t having widespread use by merchants. This is a perfect example; Bitcoin has not reached earlier milestones, like becoming a universally accepted store of value, so how can we expect the markets to use it as a medium of exchange?

An under-recognized yet vital piece of knowledge to understanding Bitcoin’s adoption is how money transforms. Outstanding literature has already been written in this space, with articles like Nick Szabo’s “ Shelling Out” and the opening to Vijay Boyapati’s “ The Bullish Case for Bitcoin” among others.

In short, what we can derive from these readings is that throughout history money normally goes through a transformation as it becomes more widely accepted. An early critical step is moving from a collectible to a store of value. Whether it be stamps, Bitcoin, or seashells, most non-fiat forms of money originate because of their scarcity. However, scarcity alone does not account for others valuing these items — I could create and sign 100 IOUs, though other’s would not necessarily recognize this as valuable. If I want to store my savings, it’s best that I find a store of value which others find valuable as well, reducing barriers to trade and increasing liquidity. Over time, certain features surfaced that improved trust made a good store of value, in other words “hard money,” leading to gold becoming the longest standing store of value in history.

I will finish paraphrasing Boyapati with his comparison of gold to Bitcoin (and to fiat) as a store of value. Overall, it becomes clear that Bitcoin’s competency as a store of value is objectively superior to gold’s, and far outweighs any fiat currencies.

As others have mentioned, Bitcoin is currently going through its monetization phase, at the moment moving from a collectible to a store of value. With the historical context of money in mind, it should be understood that it’s highly unlikely we will see Bitcoin act as a successful competition to payment services like Visa (as The Economist criticizes) before we see it become more of a universal store of value.

Attempting to become a unit of exchange before becoming a store of value is counterproductive for the two parties exchanging. If someone engages in a trade where they want to sell Bitcoin for something in exchange, there is an opportunity cost to giving away that Bitcoin. They must believe that the value of whatever they’re receiving is greater than the speculative value of holding onto their Bitcoin. When comparing today’s market capitalization of Bitcoin to gold, let alone fiat currencies, the potential upside outvalues nearly any trade that comes to mind.

It also means that the merchant would need to value Bitcoin and feel comfortable using it as a store of value themselves. This is not the case today, where merchants accept Bitcoin primarily to broaden their customer base, with most instantly converting the Bitcoin back into fiat. This doesn’t create any aggregate upward demand for Bitcoin and, in agreeance with skeptics, is an inferior method of payment than traditional financial systems today.

It’s for this reason that we shouldn’t be looking towards merchant adoption and becoming a financial system as Bitcoin’s success factors, yet. First, Bitcoin needs to achieve greater adoption as a store of value before it can really look to tackle the world’s payment problems.

I wasn’t surprised to see the Economist article make the ever-classic comparison to the Dutch tulip bubble of 1636. Bitcoin has already gone through several similar bubbles to the most recent one around 2017–2018. With Bitcoin being a technology going through different stages of adoption, these bubbles should be considered more as waves of adoption — what’s not considered enough is the bottom to each of these market crashes, showing that each time, a new and larger base is formed. The path to becoming a global reserve currency is not done linearly, it is through wave upon wave of adoption and speculation.

Unfortunately, articles like the one written by The Economist don’t help Bitcoin’s future and create a vicious cycle. Adoption is achieved through speculation, though with every negative or misinforming headline read by a potential speculator/investor, the chances that they buy and speculate with Bitcoin is reduced, leading to less Bitcoin adoption.

Despite its challenges, if and when Bitcoin becomes a global reserve currency akin to gold, there will be a further crossroad to face: what SHOULD Bitcoin be? Should it stay as a universal store of value, or transform further into a true medium of exchange?

There’s certainly enough challenges that Bitcoin would face beyond becoming digital gold. It calls into question whether Bitcoin should become anything further. Below are some of the obstacles Bitcoin faces in becoming a universal store of value, and further becoming a medium of exchange, which I find are under-discussed and need to be considered more:

  1. Bitcoin is political and gets messy at times, with different stakeholder groups including miners, speculators, governments, and exchanges. Because of it’s free and decentralized design, Bitcoin’s future has been left to the interpretation of the majority. This has been called into question in the past, with notable events like the Bitcoin Cash fork and SegWit adoption which fragmented different parties based on their beliefs and interests.

In conclusion, there are a few things to keep in mind as Bitcoin progresses:

  1. Bitcoin’s primary use case is speculation at the moment, narratives about payments hurt it because it creates vicious cycles for its adoption as speculators learn to distrust Bitcoin’s system.

For those that don’t believe in the value of having a universal store of value, especially as fiat currencies continue to inflate, consider this recent article. Gold purchasing of large governments is at an all-time high. Visualizing it may help as well (source: https://tradingeconomics.com)

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Further Reading:

Winklevoss twins, ‘Bitcoin Jesus’ head the list of people getting very rich from the cryptocurrency — CNBC

5 of the World’s Top Bitcoin Millionaires — Investopedia

Bitcoin Data Science (Pt. 1): HODL Waves — Dhruv Bansal

A Primer on Bitcoin Investor Sentiment and Changes in Saving Behavior — Adamant Capital

Originally published at http://connorbrooks.ca on April 24, 2019.

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The Capital

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Written by

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Learn, apply, repeat. 🍁

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The Capital is a financially incentivized social micro-publishing business platform

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