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An in-depth look at what happens when you undermine utility.
I want to fully analyze the talking point that "Bitcoin is a store of value," because it's one that I see very frequently and people have different views on how the value of an asset is generated. This one is also fun because I get to put on my Economist hat instead of my Computer Engineering hat which has always been a strong secondary interest of mine. Please buckle in, because this is a longer read, but if you have any doubts about how value is generated, I really think it's a worthwhile one. Other Assets that Bitcoin is Frequently Compared To I'm going to (mostly) skip some of the more common comparisons of cryptocurrency to (Beanie Babies, Tulips, Pets.com, etc.). I'll only briefly address it here in saying: Beanie Babies are a poor comparison because they had only had perceived scarcity in the way they were distributed so they were heavily undermined from the supply side. Tulips have a debatable history in general as far as the magnitude of purchase, and even if that history is fully accurate, their utility was only really derived from a brief social fad... not a continuing stable utility. Lastly, Pets.com is closer to being apt, except that they arguably had no major utility from the start in that it was (almost) always more expensive and slower to order through their service as opposed to going to the local pet store. The Basis of the "Store of Value Argument So the main argument of "Bitcoin [being] a store of value" is rooted in Bitcoin being scarce... with utility not playing a major role. The counterpoint against this view is that it takes both scarcity and utility to give a premium value to a good or service. So let's try to separate out the two factors. We'll first look at a good that has premium value due to both utility and scarcity where neither factor has been undermined. Utility Plus Scarcity We'll start by taking a look at a good that has both utility and scarcity. I think the one thing in the world that best exemplifies this status, (and my friends over at /magicTCG can attest,) is the Black Lotus. This is the mack-daddy of all Magic cards and as of this year, a mint condition version from the earliest set can fetch a six digit price point. First, let's talk about the Lotus' scarcity: Wizards of the Coast has a strict reprint policy where no card functionally identical to the Black Lotus may be reprinted. That means with the rare exception of an undetected fake, the pool of Black Lotuses will never get larger, and in the case of damage or destruction, will certainly get smaller. Next we'll talk about the Lotus' utility: As arguably the most impactful card in the game, anyone wanting to play Vintage format on a competitive level absolutely needs to have a Black Lotus as well as (almost) every other power-nine card. If you want to see people still playing with pieces of cardboard worth over $10,000+ each, you absolutely can. Even though these cards have utility for only a select few and the price outpaces their direct value-earning potential, the fact that they also have maintained utility means that someone will very likely be willing to purchase this card down the road at the same or higher price than the person that owns it now. Because utility is maintained, the value willcontinuallyincrease. I'm not saying this price rise will continue forever though; Something could happen to undermine the utility or scarcity of MTG cards. The pool of people playing Vintage, or MTG at all could shrink, Undetectable counterfeits could surface, WotC could suddenly change the reprint policy. Etc. In fact, if you would like further information about the Black Lotus from an economic standpoint, I recommend listening to the Planet Money episode: The Curse of the Black Lotus Scarcity with Shrinking Utility What about a good that is still just as scarce as it ever was, but has experienced a reduction in utility? The best example of this phenomenon is probably the New York Taxi Medallion. Taxi Medallions were first introduced around the great depression where less than 12,000 were made. That number has increased to somewhere in the mid 13,000 range today. Regardless, this is clearly a scarce commodity - especially with the extreme growth of NYC itself and thus, the increased demand for cabs. NYC enforced the medallion law relatively strictly for many years, but the introduction of Uber and Lyft also came with less enforcement of the Medallion law. That has caused the value to plummet. I strongly recommend two podcasts that deal with this exact topic: The first is another Planet Money episode: "The Taxi King" The second is a New York Times Daily titled "The Taxi Driver's Plight" If you don't want to listen to the entirety of each episode, I think the most poignant take-away is in the Planet Money episode at timestamp 13:40:
"You can understand where the banks are coming from, they were lending Friedman money based on the rarity of the Taxi Medallions. Those precious taxi medallions. But now, if you can operate something that works pretty much exactly like a taxi without a medallion, the banks are figuring that these medallions are not worth as much as they used to be."
The banks absolutely understand that even though the rarity has not changed at all, their value is based quite heavily on their utility. With less utility comes less demand, and the price has, in response, suffered greatly. In fact, in the update to that podcast, they note that the price of a taxi medallion is now below $200,000 and they not it doesn't look like things will be better anytime soon. Value Requires Both Utility and Scarcity It is pretty clear that value is not based upon scarcity alone. I hope that users entering this space take a long look at what each cryptocurrency they are buying is useful for. Cryptocurrencies that do the best job of maximizing their utility while remaining relatively scarce will do quite well. Cryptocurrencies that don't increase or expand their utility will certainly have their value proposition undermined. TL;DR: Value clearly comes from both utility and scarcity. Invest responsibly. Edit - ty for the gold, it's much appreciated. From here on out I would prefer tips as I am attempting to spur crypto adoption in my community. Now that BCH has good PoS solutions, it's great to have demo / tiny giveaway balances.
The NPR Planet Money team, for their podcast on Bitcoin a few weeks back, interviewed the Harvard economist Benjamin Friedman. As another economist that I recently wrote about, in arguing that Bitcoin will ultimately fail, he appealed to the role the government plays in bolstering and securing the widespread adoption and use of the US dollar. According to the argument, Bitcoin will fail ... C. Bitcoin prioritizes #2 and #3. You can hold bitcoins with no counterparty risk and the money supply is fixed / predictable. What you lose is #1 - Bitcoin's value will fluctuate against any given national currency and unit of account. D. Old-fashioned commodity money like gold is closest to Bitcoin in this regard. Planet Money The economy, explained, with stories and surprises. Imagine you could call up a friend and say, "Meet me at the bar and tell me what's going on with the economy." Now imagine that's ... I think you guys are being a little harsh on the Planet Money folks. Sure, this story was pretty weak and they totally left out some of the key components of the story that make it interesting and less one-sided. But I truly doubt this was intentional bias on their part. I listen to the podcast all the time and granted it's pretty mainstream and light on details, but the stories are generally ... Planet Money The economy explained. Imagine you could call up a friend and say, "Meet me at the bar and tell me what's going on with the economy." Now imagine that's actually a fun evening.
Kryptos im Blick. Spezial: Bitcoin, das trojanische Pferd der Finanzelite?
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