Let’s continue where we left off yesterday.
Yes, I think Bitcoin has intrinsic value.
However, I don’t believe that Bitcoin will ever turn into the web’s medium of exchange.
Let’s briefly revisit yesterday’s network effects point. Successful currencies – that is, money which functions as a medium of exchange and not merely as a (rather bad b/c inflationary) store of value – have strong network effects: If more people own a certain currency and want to spend it, accepting said currency becomes more attractive because it opens new market segments (which is especially true on the borderless internet). As a result, the utility of the currency increases, which results in a wider distribution, at which point you are pretty much looking at a virtuous cycle.
Alas, Bitcoin does a very poor job as a medium of exchange.
1. The majority of Bitcoin owners doesn’t use it for payments. Instead, most people buy Bitcoin as a (speculative) investment – either they hodle or actively trade it – because they expect its price to increase. On the one hand, the entire crypto market is currently driven by short-term speculation. More importantly, though, there’s a structural reason why people should not want to spend their Bitcoin: because it is designed as a deflationary currency, its price is supposed to go up over time. That might make for a good asset to hold – aka a store of value – but it makes for a bad transactional currency aka money.
2. Most companies don’t accept Bitcoin payments. The combination of day-to-day volatility and, resultingly, rather extreme transaction fee peaks makes it impractical for them to do so. After all, most business costs are due in fiat. Hence, even companies that once experimented with accepting Bitcoin stopped doing so; the most prominent example is certainly Steam.
It’s quite obvious that these two points run counter the establishment of a strong network effect around Bitcoin. The second point might very well just be a short-term issue. It’s not crazy to imagine some scenario in which the Bitcoin price stabilizes over time and transaction fees are kept in check. But currently, it is certainly a real issue that hinders wider adoption.
Worse, though: even if it would be resolved and merchants worldwide accepted Bitcoin payments with a fat grin, the first, structural point would still remain true. Why pay with an asset that will be worth more in the future than it is today? Especially if you have another option at your disposal: your state’s inflationary fiat money!?* Right, you likely would continue to hodl. And many others would too.
However, if that theory turns out to be true, another problem emerges for Bitcoin: If it will never be used for purchasing real-world goods and services at scale, then its price will not be determined like the value of a currency but like an asset’s price. If you have something which you can use to purchase thousands of goods from millions of merchants across the globe, it’s easy to assess this something’s value. It has purchasing power and, thus, value. That something is commonly referred to as money. But Bitcoin is far from money state and might never get there. Which isn’t necessarily problematic: there are many scarce assets which are not money and are not being used to pay for stuff. In these cases, your asset’s price will be subject to supply and demand.
Is that a problem for Bitcoin? Depends on your perspective. I assume that people will find a scarce and programmable digital asset useful. Thus, there will be demand and a price. Unlike in the case of money, that price would not be directly linked to economic productivity. Instead, Bitcoin would purely be a financial instrument. I have no clue what such an instrument would be worth – surely something but I’m not convinced that we would buy it while shouting to the moon.
Time’s up.
(I’ll continue tomorrow)
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* I wouldn’t contest if you said a superior user experience/convenience but if that ever becomes a reality remains to be seen. Especially since it is not only the crypto devs who influence this because the incumbent’s don’t sleep on that front.
A scaled cryptocurrency network which provides real utility – because people use said CC to pay for things they buy from real businesses – would very much have an ‘intrinsic value’. In the case of Bitcoin, though,
Rough Notes 