Bitcoin and the Technological Evolution of the Financial System
We are living in hyperbitcoinization, or the repricing of the world in Bitcoin. Bitcoin is a better store of value than gold. For the same reasons people hold gold, Bitcoin will be valued at least on par with gold.
We live in hyperbitcoinization, a process basically repricing the world in Bitcoin. This is because Bitcoin is much better than gold as a store of value. For many of the same reasons that people like holding gold, I think it’s a reasonable proposition that Bitcoin will wind up being valued at least as highly as gold.
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 will 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 with precious metals. Once you had banks, you could deposit your gold with that bank, and that banker could 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 with investing. They made trading a much smoother process. So we see that the financial system also benefits from technological evolution.
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 straightforward 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 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?
Money market fund?
The one loser that people would not want to own is cash. We may not know how the other assets will perform. Still, if we hold cash for an extremely long period, it will become worth less over that period.
“The money we use today is fundamentally flawed.”
People don’t understand that dollars lose value. This reduction in purchasing power is due to inflation. Bitcoin cannot be inflated. Bitcoin’s fixed supply and inflation resistance make it a superior store of value.
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 spending it on a consumption item or investing 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 riskless way while maintaining that optionality.
Money may not be physical, but it’s still good, and people judge it by certain qualities. An analogy to consider: a workman’s ladder. What are the qualities which might cause a worker 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.
Credit: Dave Dugdale
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 become so much a part of us that we don’t think about it that way.
So let’s examine the qualities we’d want in 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 will want to hold it.”
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 more trustworthy and business-friendly way.
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.”
“As a thought experiment, imagine there was a base metal, a scarce gold but with the following properties: 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 for whatever reason, then anyone wanting to transfer wealth over a 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 its potential usefulness and exchange. I would definitely want some.”
— Satoshi Nakamoto
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. Still, its value as a scarce 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 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 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 increases.
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 will 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.
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