Bitcoin Is Still Really Confusing, According To Economists


    Bitcoin just hit a massive all-time high price of over 60,000 US dollars, and then dropped again. 

    The narrative surrounding Bitcoin can swing easily between extremes, and it’s famously chaotic to follow. 

    Elon Musk can move the market with a single tweet. And at the same time, you see disclaimers like this in the financial press that say, ‘if you buy Bitcoin you need to be prepared to lose everything’. 

    For the first year of Bitcoin’s life, it didn’t have a dollar price value. Now people are waiting for the price to dip so they can afford to buy in. 

    And after 13 years, there are still big limitations to how much we can actually explain about Bitcoin’s chaotic narrative. 

    The Beginnings Of Digital Currency 

    Understanding Bitcoin can be confusing. But basically, it’s a payment systemand a digital representation of value. It is bits of data moving on a blockchain network, according to a finely tuned system of rules. 

    And it has its roots in the early moments of the internet. 

    Thinking about digital currency started in cryptography and blockchain research in the 70s and 80s. 

    And a subculture of computer geniuses started prototyping and trying to make different digital currency projects through the 90s and early 00s. They were all unsuccessful until Bitcoin. 

    These guys are often collectively called the Cypherpunks, and they were driven by two key ideas. 

    Firstly, they believed a key piece of internet infrastructure was missing. 

    The internet was made for one thing: information sharing. 

    But over time, a huge number of systems that were never designed to be connected to the internet have been layered over the top of it. And that’s left a lot of holes, and a lot of potential for badly designed tech to erode things like our privacy and security. 

    Money’s always been one of these holes because the internet fundamentally wasn’t designed to be a payment platformCredit cards weren’t even designed to be used online. 

    The Cypherpunks were trying to design the mechanism or protocol, that would let us transfer value in the same way we could transfer information through emails. 

    And they also had techno-utopian ideas about broader money reform. 

    They thought that money which was native to the internet, could be free of the things that made government-controlled money so corruptible under the wrong conditions. 

    If money could be programmed to behave a certain way, then people could just trust in the value of that money, instead of having to trust governmental monetary policies to maintain the value of money. 

    And taking that idea of trust further, the Cypherpunks thought it would be better to trust in cryptography that prevented data capture, instead of trusting in privacy legislation that just prevented data being shared. 

    These driving ideas only became more important over time. 

    As the internet became increasingly organised under massive corporations and the market for big data grewAnd as monetary policy around the world caused a series of huge financial crises which made money in the bank less safe. 

    Bitcoin was being coded in 2008, right as the Global Financial Crisis was unfolding. 

    As a response to this, it was designed as a totally finite resource with a controlled release schedule, which meant it couldn’t be ruined by inflation and its value was more likely to appreciate over time. 

    Bitcoin’s design is considered a major innovation because it included rules that would actually make the Bitcoin circulate. 

    And it solved something called the ‘double spend problem’. It made something digital that people couldn’t just copy and paste and share infinitely. 

    The Bitcoin Experiment 

    Bitcoin was designed to provide a service that was ideologically, politically and technically important in the mind of its creators. But a big part of the ongoing experiment has always been: would Bitcoin ever have real world demand? 

    Back in 95, the fist creator of digital currency – a guy called David Chaum – presented at US Congressional hearings about what the future of money should look like. He basically said, the government could either support or stifle the development of this tech, but people would ultimately come to choose it. 

    Since then, we’ve slowly overcome the sense that Bitcoin just wasn’t something people needed, or that Bitcoin was a solution looking for a problem. 

    The creators originally hypothesised that a bunch of different use cases might get people to use Bitcoin. And gradually over the last decade, this is what has played out. 

    It’s also important to recognise that Bitcoin has always seen media-driven price spikes. So as time has gone on, more of its features have become visible and this has driven adoption too. 

    The Silk Road, and other dark web marketplaces after it, drove major early use of Bitcoin and created a media storm around it. It was valuable in these spaces because users didn’t have to know or trust anyone they dealt with, they just had to trust the Bitcoin design. 

    And any time a government-run currency has been mismanaged, it’s also generated a lot of press for Bitcoin, and driven Bitcoin adoption. Like in the 2013 Cypriot banking crisis, and with the hyperinflation that’s been escalating in Venezuela since 2016. 

    All of these use-cases have proven the value in having an alternative system to the banks. 

    But the closer we get to the bitcoin limit of 21million the more visible its scarcity feels, and the more people are treating it like digital gold. 

    Right now, major funds and businesses in America are using it as a new investment vehicle. And Bitcoin is being financialised to facilitate this. 

    Because Bitcoin’s supply can never adjust to respond to demand, this has been driving the price up. 

    Professor Ellie Rennie (RMIT): “Long-term holders are not buying and there are new institutional holders who are snapping up any free Bitcoin on the market. It’s a basic supply and demand thing; there’s a lot more demand than supply right now and, as a result, prices are going up.”  

    As time has gone on, the circular force of Bitcoin’s design has kept it going through all the crazy market cycles and drama. 

    The bitcoin design establishes three rules and makes them all work together like a clock. The rules basically say that any time someone uses Bitcoin, new Bitcoin is made. And as long as people use Bitcoin, this will keep going – like a self-fulfilling prophecy – until we hit the 21million limit. 

    Even though there has been a huge amount of risk around Bitcoin, it’s technically never been Bitcoin itself that’s been risky. 

    The companies built around the Bitcoin network – like the exchanges that help people get money in and out of Bitcoin, and the wallets that help people hold Bitcoin – have exposed users to big hacks and scams. 

    User error has also caused a lot of heartache. 

    But underneath those elements, Bitcoin always keeps ticking over according to its design. 

    And today, the most meaningful thing we can measure about Bitcoin is that it’s still here, when over 1000 other coin brands have failed. And this makes us more certain Bitcoin’s design is valuable. 

    The bigger picture here is that Bitcoin’s continuing survival is being taken as proof that Bitcoin’s underlying tech, blockchain, is really valuable. 

    We now have 13 years of Bitcoin showing that people can self-organise and trust in more efficient ways using blockchain networks. 

    Some academics think blockchain could automate the way we trust, in any industry that relies on record keeping, and that it actually has the potential to spark a new industrial revolution. 

    The Takeaway 

    Ultimately economists can’t say whether or not 60,000 US dollars is a fair price for one bitcoin, because we don’t technically know how to value it in the same way we know how to value stocks or artworks. 

    Professor Sinclair Davidson (RMIT): What we are lacking in the crypto space is that valuation model or that generally agreed valuation model. 

    If you have a look at the Twitter space, you will see all these people making wonderful arguments as to why you should buy, why you should hodl, why you should never sell. That’s all good and well, and they think, they feel, they know that it’s valuable. But what they don’t actually have is a good explanation and understanding of why Bitcoin is the value that it is. 

    So, we might say, I know that Bitcoin is valuable. But I can’t say to you, I know why Bitcoin is currently worth, say 59,000 US dollars per coin. 

    Why it is valuable? How is valuable? What are the drivers of that value, is what we are missing right now. And that I think is where work needs to be done and substantial work needs to be done over the next few years. 

    And that’s because Bitcoin wasn’t just an experiment that started in 2008 and then ended. This experiment is still going. 

    In the future we might see lots of different crypto currencies interacting, where each one has a different monetary policy that’s fit for a specific purpose. 

    But we’re still waiting to see if this will play out, and how this might play out and what Bitcoin’s full potential will look like. 





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