“Zero Money”: First Principles Thinking About Monetary Value
Change the Money, Change the World (18)
Part 5(B) — Adoption of Bitcoin as store of value
I will be posting five entries Part 5A-5F concerning adoption of, adaptation to, and politics and protest emerging with the advent of digital currencies in general, particularly as to the algorithmic properties of Bitcoin. The first part was about the range of digital currencies in general, including Bitcoin, but with emphasis of how digital fiat and other cryptocurrencies adhere or not to core Bitcoin properties. I discussed those properties in the previous entry so presently the topic is the actual adoption, specifically of Bitcoin, that has been occurring. However, if the reader has not read the previous entry it would be better to review first some details about Bitcoin properties at:
Adoption of Bitcoin as a store of value has been demonstrating inexorable growth for over a decade, yet it still has a minuscule market share of the world store of monetary value. In a purely superficial way this growth is driven by the fact that it has spectacularly outperformed all other asset classes as a stored investment, including gold and stocks. There is much more incentive for adoption than simply this. Some idea of the history of adoption is useful, but a look at who is investing and how much is being invested in the most recent history is very telling in the adoption rate story. Now we have entered the 2020s. I plan to conclude this essay with a compendium of recent news to date that will be undergoing continued amendment. This substantiates what I am saying about adoption, if it is not already obvious to the reader. Of course this essay is time stamped, but I think that is useful too, as the reader can see what these trends in adoption have grown into at the time of reading.
Adoption of Bitcoin is an established fact after many years of buyers realizing and befitting from demonstrated truth of its low stock to flow rate: no other asset has had a self imposed cap and rate of production towards a continuing restriction and final supply, while at the same time continuing to increase its relative value to other stores of value. A more general understanding of fiat weakness among all classes of investors has accompanied the recent surge in fiat printing. Buyers have been more and more attracted to Bitcoin freedom from government predilections for prohibiting private parties from issuing their own currency, and for increasing the supply of monopolized fiat mainly benefiting political donor classes. Understanding grew from a small number of computer programmers to other individual technology investors grasping it was not merely an interesting innovation, but a true store of value countering fiat inflation. Now that understanding has gone mainstream.
Mining, the actual production of Bitcoin became a profitable enterprise, and that continues because of demand, even in the face of increased difficulty adjustments and the halving of block rewards every four years. Besides the algorithmic functions of the lowering by half the reward for mining each coin and making continued mining more mathematically difficult, not only is scarcity enforced but adoption is accelerated. As fewer and fewer Bitcoin is produced and the total amount of Bitcoin approaches the 21 million cap on units, the FOMO effect becomes accentuated. In late 2020, fear of missing out became not just a feature of retail buyers of Bitcoin as was the case in the post-halving period of 2016. After the halving of 2020 a number of billionaire investors and large hedge funds starting quietly buying regularly paced but cumulatively large volumes of Bitcoin (to avoid price spikes). Soon the FOMO started in the population of big ticket buyers along with widespread increased interest in the general population, especially as banking on-ramps began to appear. Suddenly anyone could easily buy Bitcoin through their own bank, cash aps, Paypal and others. Large Bitcoin exchanges began qualifying for banking licenses and even setting up Bitcoin denominated services (in Wyoming as ground zero for what will no doubt be a trend for other states).
Overall, through hyperbolic price increases and smaller yet still large price crashes, this volatility of earlier years has continually generated price growth spectacular compared to other assets, increasing wealth for miners, and for new and continuing investors. Volatility can be a feature more than a problem in the eyes of many, seeing the demonstrated trend of prices as the overall amount of mining has already produced over 18 of the 21 million Bitcoin. Investment in an increasing limited remaining production driving demand will not level out until the 2030s. The performance and projections are transparent to investors by design. There are some factors that affect production plus or minus a Bitcoin every 10 minutes, but the last Bitcoin will be mined around 2040. Clearly the race in on in the retail market to be able to buy just one Bitcoin before it is too expensive for the middle income investor.
Adoption, as I have outlined, is beginning to suggest a parabolic rise during the period following the halving and difficulty adjustment of May 2020. This will in all probability track a less sustained parabolic rise in prices, followed by some profit taking, the price following a demonstrated stock to flow model. Volatility is welcome when the longer trend is proving more profitable than all other asset classes for storing value. The mind-blowing rate and volume of money printing, ushered in with the decade, in the culmination of financial crises, is not to be ignored as a devastating debt burden. Fiat expansion is not a source of hope through its continuance. As will be discussed in the next section, Bitcoin will need to adapt to the legacy system in the interim, but also the legacy system is adapting to digital money already. Bitcoin has proven its salability, easily sold to interested buyers, though it has yet to reach mass adoption or a market cap garnering attention like the FANG stocks, gold or real estate. Now, more so than ever, Bitcoin is being added to the portfolio of large financial market players buying millions of dollars converted to Bitcoin.
Adoption began from a community mainly of programmers. It moved to a larger community including investors in technology innovation. Smaller individual investors seeing appreciation of other forms of saving diminish along with their retirement portfolios, or the retirement funds of their employers, or former employers, began to think their chances would be better with Bitcoin, to maintain what little wealth they have, and grow it. It was not big enough yet to attract bigger investors. Now, quite recently, Bitcoin is getting the attention of billionaire capitalists, hedge fund managers, major banks, and a huge new community of venture capitalists and a brain drain of financial experts deciding to begin diversifying from the legacy financial industry. The news is filling with this story on a daily basis, more than just in news about the new high-roller class of Bitcoin investors. I am speaking about the adaptation to digital money by legacy institutions, the too big to fail banks, the Fed itself, various governments, and international financial institutions. This part of the adoption story, however, is deeply in the context of first principle thinking about monetary value as it stands in contrast to “Zero Money” properties, and the superior utility of Bitcoin.
Digital money has good potentials, but Bitcoin as a member of the set of digital money is the one that reflects absolutely the properties congruent with the first principle of scarcity. More important to the desire to “change the world”, is that the trend towards a growing class of investors realizing “Zero Money” principles is about more than the adoption of Bitcoin. This monetary transition embodies needed social awareness elevated to political activism for pan-national movements with an interim economic strategy for a novel paradigm to emerge. Such activism is not just to counter corruption, it is about supporting growth of adoption, and some aspects of legacy adaptation to digital money. It is also about resistance to some aspects of legacy adaptation of digital money that are too false to be accepted. What I mean by that is made clear in the next part, 5C, of the present series of posts, particularly in the moves underway by the IMF and the World Bank.