We are living in hyperbitcoinization, a process which is basically repricing the world in Bitcoin. This is because Bitcoin is actually much better than gold as a store of value. For the same reasons that many people like holding gold, I think it’s a reasonable proposition that Bitcoin will wind up being valued at least as highly as gold.
Imagining the future
It’s hard to convince others of this because most people have a hard time imagining a world they don’t currently live in. They can’t envision how the future is going to be different from today. They can’t picture the impact of new technologies. They dismiss them or write them off as bubbles or Ponzi schemes.
Look at other technological changes. In the early 1900s, everybody used horses. Your options for transportation were a horse, a horse and wagon, or a carriage. And within a decade or so, we were using mostly cars for transportation with very few horses. In my life, we’ve seen typewriters disappear and get replaced by computers. Calculators came around and slide rules disappeared. We evolved from using film to digital pictures. Technology evolves. It’s hard for people to understand how quickly these things can take place.
We used to use gold and precious metals as our only money. They have significant drawbacks though. Gold has a fundamental security flaw: It’s heavy and hard to carry around. And you can only do business with gold with face-to-face transactions. Also, there are issues with its extensibility; it’s very difficult to conduct small transactions with gold.
So how did we solve these issues? We created banks as a technological solution to the problems that existed with precious metals. Once you had banks, you could deposit your gold with that bank and that banker could then say, “This person is good for this money.” That made it easier for you to conduct business.
We created banks as a technological solution to the problems that existed with precious metals.
More recently, stock certificates came along as a technological solution to problems that existed with investing. They made trading a much smoother process. So we see that the financial system also benefits from technological evolution.
Money as a simple machine
We don’t think much about the money we use. People think, “I use money all the time. Why do I need to think about it?” But there are certain simple machines we use all the time that we don’t think about either. The wheel’s a very simple machine. We use it all the time, but we never think about it. It’s the same with pulleys, levers, screws, wedges, the inclined plane, etc. Money is an essential simple machine that gets ignored too. It’s core to our human existence.
Related link: Shelling Out: The Origins of Money by Nick Szabo
However, the money we use today is fundamentally flawed. Here’s a thought exercise: Decide on a sum of money that seems significant to you (you can decide whether it’s $10,000, $10 million, or something else). If you had to hold that amount of money for 20 years in just one asset, which would you choose? Cash? Treasury bills? Money market fund? Gold? Stocks? Real estate? The one loser that people would not want to own is cash. We may not know how the other assets will perform, but we can be pretty certain that, if we hold a cash for an extremely long period of time, it is going to become worth less over that period.
The money we use today is fundamentally flawed.
Ideally, money would be a riskless asset that doesn’t deteriorate over time. It ought to be the thing you can hold for a long period, without having to spend it on a consumption item or invest it in something like real estate. The great thing about money is it gives us optionality. So it’d be great if you could hold your money in a way that is riskless while maintaining that optionality.
Choosing the best ladder
Money may not be physical, but it’s still a good and people judge it by certain qualities. An analogy to consider: a workman’s ladder. What are the qualities which might cause a workman to choose one ladder versus another? Height, weight, strength, durability, design, materials, etc. People choose a ladder based on those qualities and if 1,000 workmen all choose the same ladder, they make that decision based on the qualities of that ladder and how well it fits their needs.
Yet we don’t think of money this way since it’s just been dictated to us. We don’t see the process of how money became money. But like the ladder, money also has certain qualities as a good. Based on our observations and judgments, we decide to use a certain currency. Money is also a tool. It’s just become so much a part of us that we don’t actually think about it that way.
So let’s examine the qualities we’d want in an ideal money; it would be scarce, impossible to replicate, reusable, portable, highly divisible, easy to secure, and easily transactable (even at a distance). All that sounds a lot like Bitcoin. To go back to our analogy, Bitcoin is the ladder we want.
Over time, everyone will end up buying Bitcoin because of its outstanding qualities. And the more people come to understand this, the more they’re going to want to hold it.
Over time, everyone will end up buying Bitcoin because of its outstanding qualities.
A conservative investment
I think of Bitcoin as a conservative investment because it’s so superior to gold. The value of it should wind up at least equal to gold’s value. Different types of people will pay successively higher prices for it though; skeptics will overcome their objections first, then the cynics, and then the haters. And the haters will end up paying the highest price. In the end, Bitcoin will wind up being adopted as the world’s one and only money.
Some skeptics argue, “The government is going to stop the use of Bitcoin.” And the government could certainly be an impediment since it could make purchasing Bitcoin difficult. But think about when the internet first came around. There were those who opposed it back then, but banning it clearly would have been a bad idea. Instead, laws were passed to make it easier to use the internet and conduct online transactions in a way that was more trustworthy and business friendly.
If instead of passing those laws, a country had just banned the internet, it would have suffered in competition with other nations. The same will be true for Bitcoin. The disintermediation that Bitcoin has on the financial system will happen regardless of whether certain countries actively oppose it. Any government that tries to ban it will wind up in a disadvantaged position.
Any government that tries to ban it will wind up in a disadvantaged position.
Bitcoin as Gold 2.0
“As a thought experiment, imagine there was a base metal, a scarce of gold but with the following properties: it was a boring gray in color. It was not a good conductor of electricity. It was not particularly strong, was not ductile, or easily malleable either. It was not useful for any practical or ornamental purpose. But it had one special magical property. It could be transported over a communications channel. If it somehow acquired any value at all for whatever reason, then anyone wanting to transfer wealth over long distance could buy some, transmit it, and have the recipient sell it. Maybe you could get an initial value circularly, as you’ve suggested by people foreseeing it’s potential usefulness and exchange. I would definitely want some.”
I agree with Satoshi. I think of Bitcoin as being Gold 2.0 or digital gold. The payment technology aspect of it is still in its relatively early stages, but its value as a scarce item, an item which you can hold, easily secure, and use to transmit value is undeniable. Saifedean Ammous, who wrote the Bitcoin Standard, talks about the idea that the most important trades that we do are the trades we do with our future selves. Bitcoin’s value is clear whether you’re passing wealth along to a future generation or just passing wealth along to your future self.
So, in the next decade, even if Bitcoin can’t be used to, say, buy coffee, there’s more than enough value there that you should buy some for yourself. And then, as other people come to recognize the qualities inherent to Bitcoin, you can sell off little pieces of it as its value goes up.
Related link: The Bitcoin Standard: The Decentralized Alternative to Central Banking by Saifedean Ammous
People who buy Bitcoin are putting their own personal skin in the game. These people understand all the qualities mentioned earlier and that Bitcoin is money you can hold outside of the financial system. It’s money you control yourself (if you control your private keys). It’s money that, essentially, cannot be taken from you.
As people come to understand the properties of Bitcoin, they’re going to want to own some. I think you’ll see Bitcoin reach a value that is unimaginable. I think most people can’t imagine Bitcoin being valued at half a million dollars in 10 years. My guess is it’ll be a lot higher than that.
This article was condensed and edited from this Bitcoin Magazine podcast with BitcoinTINA with permission.