Bitcoin and cryptocurrency and value

Toffler in 1980 about an alternative currency

” … should remind us that when we seek to bring something new to a culture, one must adapt the idea to the culture.

It doesn’t work the other way.”

Clotaire Rapaille

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So. Last week I was on a podcast talking about bitcoin. I am fairly sure that podcast will never be aired. While invited on to talk because I talk about value all the time, they were unspoken bitcoin evangelists and I am a bitcoin skeptic. Needless to say, they didn’t exactly like the way the discussion veered nor did they like the questions I asked of them (or maybe they felt uncomfortable with their own answers).

Let me say upfront:

 

    • I am a cryptocurrency believer. I think digital currency is inevitable.

    • I am a blockchain ‘hoper.’ I think blockchain has massive potential.

    • I am a bitcoin skeptic.

 

It is the last, the skepticism, which I will explain today.

I’ll do so in three sections – gamification, value creation vs wealth creation and Value.

 

Gamification.

At its core Bitcoin (and all existing digital currencies) are an output of the gamification of finance. Conceptually, a bitcoin is no different than the tokens my 89-year-old mother earns when she plays some game on her Kindle which can eventually gain enough ‘value’ she can leave Australia and get to another country to play the game. Sure. There has always been some version of gamification in finance, arbitrage, hedge funds, ‘shorting’, etc., but all that gamification has not been a product in itself. All that gamification has been a reflection of ‘gaming of existing value.’ Bitcoin is a game in & of itself. The value is generated from the game and in the game. It is an attempt to create something from nothing. I would be remiss if I didn’t point out, as I did in the podcast, that while today’s financial market is not tied to Gold, the value was established BASED on gold. At some point, when base value was established within the market, currencies ‘unpegged’ from a tangible asset to let the market drive the value derivatives. Which led me to point out to them that currencies are now pegged to millions of market transactions which, if digital currencies want to become a global currency, will dictate the value of any future currency (see full explanation under ‘Value’ below).

Anyway. I would note that basing value, or grounding value, from nothing but some smart game is a dubious way to create a resilient system.

Getting Bitcoin evangelists to accept this, let alone think about this, is next to impossible.

 

Which leads me to.

Value creation versus wealth creation.

Bitcoin is a fabulous tool for wealth creation (as long as its value maintains some significant level and it has some growth potential). At the moment it has no value creation. What I mean by that is it has no labor, it makes nothing tangible, it is created from nothing tangible, and, excepting some few cases, cannot be transacted INTO something of value (Tesla is attempting to change that formula). It is currently solely wealth creation and mainly speculative wealth creation (wealth invested to create wealth). Value creation is grounded in labor, or work, in creating some value to the marketplace. Or, as Mariana Mazzucato would suggest, something that contributes to a GDP and something that does not (Bitcoin does not). this is an important discussion because Bitcoin evangelists talk about becoming THE global currency and what they are today is light years away from what they say they want to be.

 

Which leads me to.

Value.

This is where the rubber hits the road in this entire discussion. What is the future of cryptocurrencies like Bitcoin? As a global currency or as a speculative investment?

Bitcoin evangelists speak of it as a ‘global currency.’

I speak of the future of bitcoin, and cryptocurrency, as inextricably linked to its future relationship with value (which inevitably will circle back to the outcome the evangelists always espouse & desire). Currently the value is easy to see because it resides in the hands of investors. But that is speculative value. At some point for cryptocurrency to cross the Rubicon it must make its value appealing, and discernable, to the productive masses (the value creators as it were). It must go beyond Tesla and start being used in a way that its true market usable value can be discerned. Its pathway to becoming a currency is to actually act like a currency and not an investment.

I would note, oddly, this is both good & bad for Bitcoin people. Good in that it gains a more tangibly viewed value. Bad in that, in most likelihood, the market value will appear quite close to the gold standard driven market value. Yeah. This is where the rubber hits the road. The market, what people consume, has been established and millions of products & services have established their current value. And, unfortunately, the value has been established via euros, yuan, dollars, drachma, etc. Here is where that nasty marketplace comes into play. For Bitcoin to become a currency people will immediately associate it with $10,000, 1,000,000 rubles, 100,000 yuan. You get it. And it will not be an exact one-to-one negotiation (so its possible that a Bitcoin gets valued higher than a dollar value) but, in the end, the Bitcoin will get dragged kicking and screaming value-wise from the investment speculation market to the real market where people have to spend WHAT THEY HAVE EARNED. I imagine my main point to them was the market will establish the value, not them, if it is to become a global currency.

 

Look.

As I told them in the end. I do not have a crystal ball and many of the things Bitcoin advocates talk about are quite appealing. It is quite possible I am missing something, but I will also say that I hear a fairly naïve view of the transition from a speculative investment tool to a value exchange tool. That transition will not be a simple liminal space, but rather, more likely, a jarring event to the existing value of the Bitcoin. Why? Because the existing marketplace value, existing country currencies (fiat) and existing marketplaces values (prices) and existing mental values (people attitudes on what to pay) have a significant grip on Value.

This doesn’t mean that Bitcoin cannot become a ‘use case’ currency (global companies who transfer significant exchanges of wealth between each other and would like to avoid the financial systems), but the thought of Bitcoin as a ‘gold standard’ or THE global currency remains beyond my current grasp of what could be. And, yes, that could simply be a lack of imagination on my part but for the moment I’ll stick with what I do know a lot about – Value. And through the Value eyes Bitcoin has a tough gauntlet ahead of it especially the day the US, China, Euro, etc decide to establish a digital currency version of the tangible currency.

Lastly.

Here is why this discussion is important. If you are holding Bitcoin you will have to make a decision at some point. Is it a speculative generating asset or is it a value generating asset? And watch what Bitcoin does because at some point they will make that decision for you. It is at that point you decide – cash out or hold on. Ponder.

Written by Bruce