2023-01-15
as for BTC’s value proposition as a store of value…
I’ve had some thoughts about this. BTC has some advantages over gold, e.g., it’s easier to store and transfer, which sounds good. So, is it better than gold?
It seems like the core requirement of something being a store of value is that it’s low risk. Obviously BTC hasn’t been low risk so far, but the question is whether it will ever become low risk…
Bitcoin is 1) borderless money that 2) relies on an ecosystem of exchanges and miners, 3) has massive power consumption requirements, but 4) isn’t particularly useful as a medium for daily value transaction.
(1) It has little to no capacity to be used as a lever by which the government can manage the economy. For example, it can’t be used for quantitative easing, the reserve bank can’t set interest rates on it, and it’s practically impossible to place export controls on.
For this reason, it seems likely that no government with a functioning banking system would allow bitcoin to grow enough to represent a large portion of the financial system. The coming rise of China is also important to consider here because crypto is basically banned there
(2) Something that’s nice about gold is that gold continues to exist when nobody’s looking at it, or even thinking about it. Bitcoin’s continued existence, on the other hand, relies on a lot of expensive maintenance and continual attention. The incentive to perform this maintenance depends on the public’s persistent engagement and investment in Bitcoin. Once that disappears, the price drops, then mining operations need to be scaled down. This isn’t a problem in itself, but it does make the mining ecosystem vulnerable to centralisation.
Scaling down creates an over-supply of mining hardware which can be bought cheaply. It is easy to imagine this situation being an opportunity for big players to increase their control of the Bitcoin mining network and thus further centralise it. Because the rationality of Bitcoin relies on it being de-centralised, this situation is probably not good for the longterm outlook of the stability of Bitcoin.
The other part of the ecosystem are exchanges. Here there are problems with centralization too. Additionally, exchanges are the main point of weakness when it comes to circumventing government restrictions. Hence, they are likely to outlawed if and when governments want to reign in crypto currency. Bitcoin’s reliance on these exchanges is a source of increased risk.
(3) The obvious one: The power requirements of crypto currency make it necessarily unacceptable if global society is serious about preventing climate change. This fact isn’t likely to change, which is yet another reason that governments will (hopefully) want to put an end to it.
(4) After more than 10 years of cryptocurrency existing, it’s been slow to take off as a medium of daily transaction. It’s hard to see any reason why it hasn’t taken off other than the fact that it’s just not a very good option. It turns out that people simply don’t want to be their own banks. It’s too much responsibility and inconvenience. And then there’s the high transaction costs and slowness of transactions. Transaction costs are currently about 2.4 USD per transaction and were as high as 60 USD in April last year simply because more people were using the network at the time, but still far fewer people than would be using any one of the major payment vendors like VISA or PayPal on any given day.
Without its use as a regular medium of transaction, the bulk of transaction volume is related to speculation. Once that is gone, all that will be left is money laundering, scam payments, and other shady activities. Unless the governments of the world are willing to allow a financial system to exist that almost exclusively services criminal activity, then we can expect BTC trade volume to disappear eventually. Once this is gone, there is little incentive for miners and exchanges to exist.
The bottom line is that I’m having a hard time convincing myself that holding bitcoin is rational. There are probably some strong counter arguments that aren’t considered above. One could make the case that Bitcoin is a reliable store of value because it is theoretically out of reach of governments, provided you can make use of black or grey marketplaces for its exchange. This unfortunately doesn’t seem to be a practical option for most people.