Bitcoin is money – Episode 2
Yes it’s true, money is just a social contract. Money is whatever we agree should be used to facilitate trade, but there are many things of value we trade all the time: art, sports cards, classic cars, precious metals, jewelry… Yes, bitcoin is easily divisible which makes it a better unit of account than random collectibles, but no better than dollars. The ability to divide something by a billion is not a meaningful advantage, and even if it was, you can’t defeat the incumbent by only being 10% better.
In fact the volatility of Bitcoin’s price makes it a pretty terrible medium of exchange, who will want to receive Bitcoin as payment for goods and services if by the time they pay their bills the value has dropped 10%? The reality is that very few people are using bitcoin to pay taxes, buy burritos or finance their homes.
In the end, it all comes down to being a store of value. Anything is worth whatever someone is willing to pay for it, but history is littered with things that had value one day and none the next. It reminds me of a story Nassim Taleb tells in The Black Swan, a turkey can live its entire life thinking humans are their best friends: taking care of them, keeping them safe from predators, feeding them… then one day, Thanksgiving arrives.
Calling bitcoin money isn’t enough to make it money if it doesn’t meet any of the criteria for something to be money and if it’s not being used as money in the real economy.
Market cap is the solution
It seems all Bitcoin debates ultimately end in a case for increased market cap because the volatility will end with more liquidity. The problem is that we can’t say a higher market cap is justified just because we want it. A higher market cap can only be justified by increased use, usefulness and adoption of the technology. The promise of value comes first, market cap comes second.
Bitcoin’s genius is its ability to convince people that market cap alone is the desired outcome, not value, and price is the only lever to influence market cap — providing a self-serving argument for those pursuing speculative returns to pretend they have altruistic motives; simultaneously arguing for a better new de-centralized world while begging whales for “pumps” and manipulation to drive the price higher.
Ultimately the best way to get more liquidity in the market is to increase volume. The best way to increase volume is to make Bitcoin useful for something other than gambling. Bitcoin mania behaves exactly like we would expect a massive collaboration (conspiracy?) to defraud the public would behave.
If it looks like a duck…