The Bitcoin Bullish Thesis

When the price of bitcoin reached new records in 2017, we might think that the bullish thesis for investors was too obvious to merit development. However, at the same time, it might seem stupid to invest in a digital asset that is not backed by any tangible good or government and whose price rise has made it compare with the bubble of tulips or dot com.

Neither of the two positions is correct. Bitcoin’s bullish thesis is convincing, but far from obvious. There are significant risks when investing in bitcoins, but as we will see, there is also an immense opportunity.


Never in all history had it been possible to transfer value between distant people without trusting intermediaries such as banks or governments. In 2008, Satoshi Nakamoto, whose identity is unknown, published a nine-page solution to an acquaintance: the Problem of the Byzantine General. The solution of Nakamoto and the system that it constructed starting from the same one, allowed for the first time to transfer value of fast form, to great distance and without needing to trust an intermediary. The ramifications of the creation of bitcoin are so deep for the economy and for computer engineering that Nakamoto should be the next person to win a Nobel in economics and also a Turing award.

For an investor, the most outstanding fact in the invention of bitcoin is the creation of a new and scarce digital good. Bitcoins are transferable digital chips that are created within the bitcoin network through a process known as “mining.” Bitcoin mining is somewhat analogous to gold mining, except that production follows a pre-established schedule. By design, only 21 million bitcoins can be “extracted”, and most of them have already been mined (approximately 16.8 million when I write this). Every four years the number of bitcoins produced by miners is reduced by half and by 2140 the production of new bitcoins will have stopped completely.

Inflation of bitcoin in time

Bitcoins are not backed by any physical good, nor guaranteed by any government or company, which raises the obvious question of any new investor: How can they even be worth anything? Unlike stocks, bonds, real estate or commodities such as oil or wheat , bitcoins can not be valued using cash flow analysis or demand for the manufacture of other products.

Bitcoins are part of a completely different category of goods, known as monetary goods, whose value is established by game theory: each participant in the market values it by estimating the valuation of the rest of the participants. To understand this characteristic of monetary assets we must explore the origin of money.

The origins of money

In the first human societies, trade between groups was carried out through exchange (or barter). The terrible inefficiencies of barter drastically limited the scale of trade, both in quantity and geographically. A big disadvantage is the (double) need for both parties to agree on what they want to exchange. If an apple collector wants to trade with a fisherman, but at that moment the fisherman does not want apples, the barter will not come true.

Over time, humans evolved a desire to treasure things because of their rarity or symbolic value. Examples include shells, animal teeth and flint pieces. In fact, as Nick Szabo argues in his brilliant essay The Origins of Money , the human desire to collect pieces gave primitive man a certain evolutionary advantage over his closest competence: homo neanderthalis.

The primary (and evolutionary) function of collectibles was to serve as a means to store and transfer wealth.

The pieces of collection served as a kind of “proto-currency” making possible the trade between tribes that would otherwise be enemies and allowing the transfer of wealth between generations. In any case, trade and transaction of collectibles were not too frequent in Palaeolithic societies; the pieces were used, mainly, as “deposit of value” and much less as “medium of exchange” which is the function that we normally grant modern money. Szabo explains:

Compared to modern money, primitive money had very low speed, that is, changed hands only a few times during the average life of a person. However, a durable piece, what today we would call a family heirloom, could last for many generations, enabling transactions and accumulating a substantial added value in each of them.

Primitive man faced an arduous dilemma of game theory when deciding what collectibles to produce or treasure: What objects would be desirable to other humans?Properly anticipating which objects would be demanded by their value as collectables gave the possessor a huge advantage to trade and acquire wealth. Some tribes of American Indians such as the Narragansetts, specialized in the manufacture of collectibles that had no value other than their usefulness for commerce.

It is interesting that the sooner the future demand of a collectible item is anticipated, the greater the advantage for the possessor who will be able to acquire it cheaper and benefit more from the increase in commercial value as the population that demands it grows. Moreover, acquiring a good in the hope that it will become a future deposit of value accelerates its adoption for that purpose.

This apparent circularity is really a feedback loop that pushes society to converge rapidly into a single store of value. In game theory, this is known as “Nash Equilibrium”. Reaching a Nash equilibrium over a store of value is a great advance for a society, since it facilitates trade and the specialization of work, cementing the road towards civilization.

Over the millennia, as human societies grew and developed trade routes, the value deposits established in different cultures had to compete with each other. The merchants and merchants had to decide whether to store the fruit of their labor in the warehouse of value of their own society, in that of the one with which they traded, or even part in each. Keeping savings in a deposit of foreign value facilitates trade with that company, but in addition, people who own foreign money have an incentive to encourage their adoption within their own society, as this increases the purchasing capacity of their savings.

But it does not end here; adopting a deposit of imported value benefits not only the importing merchants, but both countries as a whole. Two companies converging on a single deposit of value would benefit from a substantial decrease in the cost of bilateral trade and the consequent increase in wealth from such trade.

Moreover, in the nineteenth century for the first time most of the world coincided in a single deposit of value: gold. This period enjoyed the greatest expansion of commerce in history. Lord Keynes wrote about this Golden Age

What an extraordinary episode of human progress was that time […] for any man with a capacity or character superior to the average, middle or high class, to whom life offered at low cost and with little effort, benefits, comforts and amusements beyond reach of the richest and most powerful kings of other times. The inhabitant of London could order by telephone, taking his morning tea in bed, different products of the whole world, in the amount he deemed convenient, and assume that they would be delivered promptly at his door.”

Vijay Boyapati

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