Why do we need bitcoins, if they can not boast? It is impossible to show off the chain or watch with bitcoins. And you can’t hang a bitcoin on a wall. Because of the high degree of divisibility and convertibility, Bitcoins cannot become a worthy collectible. It is impossible to collect a complete collection of bitcoins or surprise people with a story about the special role of bitcoin in the history of mankind or about how some bitcoins differ from others.
These restrictions are the only reason bitcoins are a unique means of storage.
We often think that gold has a high value, because people appreciate gold jewelery and works of art for their beauty, for their place in history, in the master’s creative baggage. People collect old coins because they consider them beautiful and amazing, they are driven by the human instinct to collect rare and meaningful things.
It is the aesthetic, historical and cultural properties, as well as the rarity and human desire to collect that give these things value. However, bitcoins do not have these properties. Bitcoins are not supported by the government or central banks, which can create demand, as they do with ordinary money. Bitcoins also do not bring income, as it happens with stocks.
Where does bitcoin have any value, if they don’t have all these properties, there are no institutions behind them and they don’t bring income? Is it really just a huge bubble that will inevitably burst someday?
Firstly, in this article I argue, largely agreeing with the theory of the money bubbles of Moldbag, that although Bitcoin is a large speculative bubble, this bubble is stable.
Secondly, in contrast to the well-established opinion, I argue that most of the value of all the items I mentioned above — gold, fine wines, works of art, and so on — is also a bubble.
The only feature of bitcoins is that they are a unique example of a bubble mechanism. This mechanism explains most of the value of works of art, fine wines and gold, but all of these items have a certain consumer value. The value of bitcoins is due only to the bubble. Other cryptocurrencies are based on the same principles, for example, Ethereum.
Value of the medium of exchange
One of the most common answers to the question of where Bitcoin takes its value from is the ability to use it as a medium of exchange. Bitcoin allows people to transfer values - value in the form of bitcoins themselves - from one person to another subject, person or company in a fast, cheap and safe way without the participation of third parties. And there is something in it, although Bitcoin transactions are not as cheap and fast as before.
On the other hand, today bitcoins are rarely used just as a medium of exchange. It is difficult to compare these two facts, and the limited use of bitcoins only as a medium of exchange does not explain their current high value.
Everything changes when we begin to consider the future of Bitcoin as a medium of exchange. If we can solve the technical problems of scaling Bitcoin, to provide more fast, cheap and secure transactions, its value may increase. The bright future potential can explain the high value of bitcoins today.
There is undoubtedly something in this, but one cannot conclude from these assumptions that the function of bitcoins as a medium of exchange justifies their high value. The problem is that in order to use Bitcoins as a medium of exchange, they must have original value. Only due to its potential, Bitcoin could become something valuable from nothing, could initially turn into a medium of exchange.
Although the Bitcoin blockchain cannot process a large number of transactions (ed.: After all, second-tier networks have already been developed and are being successfully implemented), a fast, cheap and secure payment system (or several systems) can be created on its basis. Transactions of such a payment system will not move bitcoins themselves - they will be used only in the basic system of settlements.
In this case, bitcoins will not be used as a medium of exchange for regular daily transactions. Thanks to the technology and tools created on the basis of Bitcoin, the payment system will be built, and the bitcoins themselves will not often move.
In this case, bitcoins will acquire high value, even though there will be no high demand for them as a medium of exchange. To be more precise, bitcoins will have value due to their blockchain, which ensures the security of the payment systems created on it, as well as the ability to use bitcoins in the system of mutual settlements.
Feedback causation
All our attempts to explain the value of bitcoins failed. Bitcoins do not have the properties that traditional storage means have such as gold, genuine works of art, fine wines or collectibles. And in order to use bitcoins as a medium of exchange or the basis for mutual settlements in the payment system, they must initially have value.
I think the reason why we cannot explain the source of Bitcoin’s value lies in the inverse causal relationship that we create when we think of gold, works of art, fine wines, collectibles and bitcoins as a means of storage.
Of course, gold is brilliant and durable, and works of art are beautiful and significant, old coins connect us with the history of all mankind and so on. But gold has value not because it is used in jewelry, on the contrary - jewelry is made of gold, because it already has value. Gold jewelry allows you to show off in front of others, or, as Drake argues, even in front of themselves.
The main reason Bitcoin is valuable today is that people believe in its growth in the future.
The role of culture
Speaking of such traditional means of storage as gold, works of art and fine wines, we usually create a reverse causal relationship. The process of its creation is immersed, veiled and complicated by social, cultural, aesthetic, epistemological norms, values and traditions that always accompany, explain and, it would seem, justify the value of an object.
For example, the likelihood that a picture painted by a five-year-old girl will cost $ 100 million is extremely small. This picture will not have aesthetic and historical properties that can inspire people and touch them for the soul. Art critics will not include it in catalogs, write articles and books about this picture, museums will not exhibit it at exhibitions, and art historians will not even try to place this work in (its) historical context.
At the same time, a good copy of Rembrandt may have many qualities of the original, but it will never be sold for more than a few hundred dollars, because it does not have the historical properties of the original, it does not have the same exclusivity. All this makes a copy of a hopeless candidate for the satisfaction of our desire to collect. The wine from the supermarket can taste just as good as the 1947 Cheval Blanc, but it will not have the history and exclusivity, the lyrical descriptions with which the experts try to express the alleged authentic properties of this wine.
Importance of speculative factor
Perhaps the original value of such items is explained by their intrinsic qualities, but it is through the speculative mechanism that they acquire a significant part of their value in the market. People value these items because they believe that in the context of cultural, social, aesthetic norms, values and traditions, other people will appreciate these items in the future. So these items both retain (and often increase) their value, while people in the meantime can sell or display them, capitalizing that value. It is the speculative mechanism that gives these objects a higher value than their consumer properties do.
Take this example. Imagine what effect on the cost of genuine works of art would make the law, according to which, after the death of the next owner, the work of art must be destroyed. In this case, the current and next owner will directly benefit from the product (apart from understanding that they will not leave such an inheritance to their descendants), but the value of the item as a means of storage will be lost. Such a law will seriously change the assessment mechanism, and the price of the product will drop significantly.
Or imagine that you are not allowed to show works of art or jewelry to other people, or you cannot even say that you have them. You can safely buy works of art and jewelry in anonymous markets and enjoy them alone at home, but nobody can show them. Such a law also breaks the assessment mechanism mentioned above and provokes a serious price drop.
Despite the fact that the rich cultural context in which such means of storage as gold, works of art, fine wine are found is the most important condition for giving value to these objects, the main property of the means of storage is speculative. Now these items have value, because people believe in its future. But the speculative mechanism is becoming increasingly vague and confused due to the complex social, cultural, aesthetic, epistemological norms, values and traditions, which, apparently, explain and justify the value of objects.
Value rationalization
Of course, experts sing the praises of the 1947 Cheval Blanc's unsurpassed qualities or the incredible sound of the Stradivarius violin, but in reality projection and rationalization rule the ball.
People project the high market value of these items onto the items themselves due to their perceived exceptional aesthetic qualities. And all because we need good stories, reasons for explaining, or rather, rationalizing the high value of these items, much of which is in reality due to speculation.
That is why the results of research and blind tests, when specialists cannot distinguish expensive high-quality wines from other wines or Stradivari's violin from other violins, have almost no effect on the prices of these items.
There is one drawback to these serious and reasonable experiments. People want to believe in the stories and descriptions of supposedly exceptional qualities that explain the high value of objects, even if there is empirical evidence that these descriptions and explanations are wrong. Stradivarius violin does not sound better than new high-quality violins. But if we admit this fact or decide to test it in practice, we will learn the unpleasant truth, we will reveal the mechanism of speculation, which all this time has been the reason for the high value of such items.
It is really strange that it is precisely the pretense element inherent in such a cultural context that helps to maintain the high value of these objects, hiding the mechanism of speculation, which in fact creates a large part of it.
People have to take all these stories and descriptions seriously and literally, and at the same time they cannot behave as if they really take them seriously and literally: in this case, for example, they could be deceived by a fake.
In this area, a surprisingly delicate balance of seriousness and frivolity is easily maintained. And only outsiders, among whom are the most honest researchers, from time to time unsuccessfully trying to upset this balance.
Beauty of pretending
Despite the fact that all the above thoughts sound critical in relation to this type of activity and state of affairs, in reality this situation cannot be called reprehensible or incorrect. The desire to accept, maintain, enjoy such items, create and maintain norms and rituals associated with them is a harmless human desire, as is the desire to collect rare and meaningful things or what makes rational people rejoice when “their” favorite football team wins, or get upset in case of her defeat. In all this there are elements of pretense, it is a half deliberate choice not to analyze something as long as it exists.
At the same time, those who turn a blind eye to this aspect become incredibly serious and rational when it comes to something else: when the alleged 1947 Cheval Blanc wine or the Stradivarius violin turn out to be fake, they instantly lose value. When it comes to fake, people begin to take the situation literally and seriously.
It can be concluded that the main interest for collectors and speculative mechanism are rarity and originality, and not obvious superior aesthetic qualities.
Bare value
Unlike the items described above, Bitcoin has an amazing property: it exists almost outside the context of established cultural, social and aesthetic norms, values and traditions.
Bitcoin is the purest example of a bubble speculative mechanism that turns it into a storage medium. People buy bitcoins not because others write books about the beauty of a particular bitcoin, and not to show off bitcoins at the club, but because they believe that this bitcoin - or any other bitcoin - will become more valuable in the future.
That is why Bitcoin proves that in order to become a valuable means of storage, an item is not enough and you do not need to have (presumably) certain qualities that fine wines, works of art, and so on. The value of Bitcoin is due only to speculation. This is a simple bubble. Bitcoin does not need to pretend that its value is due to its internal properties.
It should be recognized that this statement is somewhat exaggerated. In the history of Bitcoin, there were aesthetic, cultural and ideological factors that may have influenced the people who bought the bitcoins. Some admired the beauty of the Bitcoin code, others were fascinated by the way it works, bought bitcoins to try and use or study them on their own. Perhaps they endowed Bitcoin with value, because they believed that it could change the political sphere, or because they liked the humane aspect of Bitcoin, which allows each person to directly participate in the transfer of values to anyone anywhere in the world. People bought bitcoins to support these processes, not for their own benefit.
In order for Bitcoin to begin its development, a broader motivational context was required, although speculation could play an important role here. Without such a context, pure speculation about the future of Bitcoin could not have been optimistic enough for it to grow.
It is also possible that in the future around Bitcoin a richer context of cultural, aesthetic, social and other norms, values and traditions will be created. Perhaps someone will find a way to show off the Bitcoins in front of others as effectively as a gold chain.
It is possible that despite the interchangeability inherent in bitcoin, some bitcoins (or some of them) will become more valuable than others, due to the presence of some unique properties. Perhaps people will pay, for example, five bitcoins per transaction with one bitcoin from Satoshi’s early blocks. Again, bitcoin divisibility can complicate this process, because bitcoins in Satoshi’s blocks could be divided into billions of parts, which hardly gives them some kind of exclusivity. Even if the bitcoins from the early blocks could somehow become collectable, it would still not explain the value of all other bitcoins in circulation.
Stable bubbles
I argued that the storage medium based on its non-use value is a bubble. This is the mechanism by which people endow objects with value, expecting others to continue to value these objects in the future. I believe that non-consumer value constitutes a large part of the value of assets such as gold, works of art, fine wines and collectibles, and in particular bitcoins.
But don't the bubbles burst? If Bitcoin uses this mechanism in its purest form, does this mean that bitcoins are just a bubble that can burst at any moment?
Not. Not all bubbles burst. The consistently high value of the items discussed in this article - gold, works of art, fine wines, collectibles - is proof that the bubbles of the storage means can be stable, that they should not be unstable or not doomed to failure.
As for Bitcoin, yes, it is mathematically proven that its value cannot continue to grow at the same rate indefinitely. There is simply not enough value in the world to continue such growth for decades. However, a slowdown in Bitcoin value growth may mean that it will cease to be a high-risk speculative asset, but the loss of value does not mean that the asset will disappear.
This is what Bitcoin is fundamentally different from any financial pyramid. The financial pyramid will not live long if it ceases to attract new users who would provide income to already existing participants. Bitcoin, at least theoretically, can survive a stunting due to its transformation into a stable, low-growth storage medium.
Such stability will ever make bitcoins a good medium of exchange. But even if bitcoins are never widely used as a medium of exchange, they will still remain the most real form of storage that has ever existed, because bitcoins have value only because people believe in its future.
This statement has a downside. If people - for whatever reason - stop thinking that Bitcoin will have value in the future, then the value of cryptocurrency will fall.
Bitcoin bubble is not obliged to burst, but it can happen.
