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The Bullish Thesis of Bitcoin (III)

The evolution of money

There is an obsession in the modern monetary economy with the role of money as a means of payment. During the twentieth century, states monopolized the issuance of money and continually undermined its use as a store of value, creating the false belief that money is primarily a means of payment (or “currency of exchange”). Many people have criticized Bitcoin because its price is too volatile to function as such, but that is putting the car ahead of the horse. Money has always evolved in stages, and the value deposit function precedes that of means of payment. One of the fathers of the marginalist economy, Stanley Jevons, explained that:

Historically … it seems that gold has served, in the first place, as valuable raw material for its decorative utility; second to store wealth; third as means of payment; finally as a way to measure the value.

Using modern vocabulary, money always evolves following these four stages:

Collectable. During the first phase of its evolution, money is desired only by its particular properties, often being a mere whim of its possessor. Shells, beads and gold were collectable goods before moving on to fulfill the best known roles of money.

Deposit of value: When a sufficient amount of people want to collect it, money begins to have utility as a means to treasure value in a lasting way. As the good is widely recognized as a good store of value, more people want it, and therefore increases its purchasing power (the value of the things we can buy with a unit of the good in question) The purchasing power becomes stable over time, when practically everyone already uses it to store their wealth and the influx of new entrants who wish to buy the good diminishes.

Means of payment: When money has been established as a store of value, its purchasing power stabilizes. At that time, the opportunity cost of using the good to conduct business decreases to a level that allows it to be converted into a means of payment. In the early days of Bitcoin, many people did not understand the tremendous opportunity cost of using bitcoins to buy things instead of as a store of value. The famous story of the person who exchanged 10,000 bitcoins (approximately 11 million dollars as I write this) for 2 pizzas illustrates this confusion.

Accounting unit. When money is widely used as a means of payment, all products and services have an assigned price in that money. That is, there is an established exchange rate for any good. It is a common mistake to believe that today there are prices in bitcoin for most of the goods. It is possible to buy a coffee with bitcoin, but its price is not in bitcoin; it is actually the amount of dollars that the seller wants to charge, “translated” into bitcoin using the current exchange rate in the USD / BTC market. If the bitcoin price fell against the dollar, the seller would ask for more bitcoin proportionally. Only when sellers accept bitcoins as payment without taking into account the exchange rate with fiat currencies (USD, EUR …) can we really think that bitcoin is an accounting unit.

Monetary assets that are not yet an accounting unit can be considered “partially monetized”. Today gold fulfills that role: it is a store of value but has been stripped of its roles as a means of payment and accounting unit by government intervention. It can also occur in the case where a good fulfills the role of means of payment while a different one fulfills the other roles. This happens in countries with dysfunctional governments as in the cases of Argentina, Venezuela or Zimbabwe. Nathaniel Popper, in his book “Digital Gold”, says the following:

In the United States, the dollar perfectly fulfills the three functions of money: it serves as a means of payment, as a unit to measure the cost of other goods, and as an asset to store value. As an opposite example, during the hyperinflation in Argentina, although the peso was used as a means of payment (for daily transactions), nobody used it to store value. Saving in pesos was like throwing money away. People changed all their savings into dollars that kept their value better than the peso. The weight was so volatile that people memorized prices in dollars, which served much better as a stable unit of measure.

At this moment Bitcoin is in the process of transition between the first and second stages of monetization. It will probably take several years for Bitcoin to complete its evolution from an incipient way of storing value to becoming a true means of payment.The journey to get there is fraught with risks and uncertainty; It is surprising to think that gold took centuries to complete the same transformation. No living person has seen the monetization of a good in real time as is happening with Bitcoin, so it is difficult to predict what path that monetization will take.

Dependence of the road

A monetary asset in the process of monetization will see its purchasing power increase enormously. Many have commented that the rapid increase in the purchasing power of bitcoins seems like a “bubble”. Although the term is used in a derogatory way to defend that Bitcoin is an overvalued good, it turns out to be an appropriate description. A common characteristic of all monetary assets is that their purchasing power is higher than can be justified simply by their usefulness. There are many currencies in history that never had any use. We can think that the difference between the purchasing power of a monetary good and the value it would have exclusively for its usefulness as a raw material is the “monetary premium”, that is, the value that money has because it is accepted as such. As a monetary good evolves between the stages of monetization discussed in the previous section, the monetary premium increases. However, the premium does not move in a predictably linear way. A good “X” that is in the process of monetization can be overcome by another good “Y” more apt as money and the monetary bonus of “X” can fall or even disappear. The monetary bonus of silver disappeared almost completely at the end of the 19th century when governments all over the world abandoned their use in favor of gold.


Even in the absence of exogenous factors such as government intervention or competition from other monetary goods, the monetary premium of a new currency will not change in a predictable manner. The economist Larry White observed that:

The problem with the narrative of the bubbles, of course, is that it is consistent with any path that the price follows, and therefore does not provide any explanation for a particular path.

Game theory proposes a model to understand the monetization process: each participant in a market will try to anticipate the aggregate demand of the rest of the participants in order to estimate the monetary premium. Since monetary premium does not depend on its intrinsic utility, market participants tend to rely on past prices to determine whether a good is cheap or expensive, or whether it is time to buy or sell.The connection between current demand and previous prices is known as ” path dependence ” (or historical dependence) and is, perhaps, the greatest source of confusion in trying to understand the price fluctuations of a monetary good.

When the purchasing power of a monetary asset increases as its adoption grows, the subjective perception of the market changes over how expensive or cheap it is.Likewise, when the price of a monetary good collapses, expectations may change with the general perception that previous prices were irrational or inflated. The historical dependence on money is illustrated by the words of the renowned Wall Street fund manager, Josh Brown:

I bought [bitcoins] like at $ 2300 and it immediately doubled in my hands. Then I started saying “I can not buy more” as I went up, even though that is an opinion biased by the price at which I bought. Then, when it fell last week due to the intervention of the Chinese in the exchange houses, I began to say to myself, “Oh God, I hope you annihilate it so you can buy more.”

The truth is that the notions of what is “expensive” or “cheap” are meaningless when they refer to monetary goods. The price of a monetary asset is not a reflection of its cash flow or utility, but a measure of the adoption for each of the roles of money.

To further complicate the nature of historical dependence on money we have the fact that market participants do not act simply as observers trying to buy or sell in anticipation of the next movements of the monetary premium, but also actively participate as evangelizers. Because there is no objectively adequate monetary premium, proselytizing highlighting the superior characteristics of a monetary asset is more effective than if it were another type of asset, whose value at the end of the day depends on its cash flow or demand and utility. The religious fervor of participants in the Bitcoin market can be seen in any of the many online forums where those who have Bitcoin actively promote the benefits of it, and the great gains that can be obtained by investing in it. Leigh Drogen says the following about the Bitcoin market:

It can be seen as a religion, a story that we tell each other and with which we agree. Religion is the adoption curve in which we must think. It’s almost perfect, as soon as someone new comes in they tell everybody and they start to evangelize.Then his friends enter and also begin to evangelize.

Although the comparison with a religion can suggest an irrational faith bias, for an individual who has Bitcoins it is completely rational to preach so that the whole society adopts this improved money as a standard. Money acts as the basis of trade and savings, so the adoption of a superior form of money has great multiplicative benefits in the creation of wealth for all members of a society

Form of monetization

While there are no pre-established rules regarding the path that a monetary good will take while being monetized, a curious pattern that has arisen during the relatively short history of Bitcoin monetization can be observed. The price of Bitcoin seems to follow a fractal pattern of increasing magnitude, where each iteration of the fractal resembles the classical form of Gartner’s cycle of euphoria (or overexploitation) but each greater than the previous one.


In his article Speculative Bitcoin Adoption / Price Theory , Michael Casey argues that Gartner’s growing euphoric cycles represent phases of the classic S-curve of adoptionthat have followed many revolutionary technologies as their use is implanted in society.


Each Gardner cycle begins with an outbreak of enthusiasm for the new technology;the price grows pushed by the purchases of the investors involved in that iteration.The first buyers of the cycle of euphoria are usually totally convinced of the disruptive potential of the technology. Over time the achievable enthusiasts in this iteration begin to be overtaken by the speculators more interested in quick benefits than in the transforming power of technology; the market heats up and the price shoots up.

After exceeding the maximum, prices fall quickly and speculative fervor is replaced by despair, public derision and the feeling that technology was not so much. Over time, the price hits bottom and forms a plateau in which the new cohort of investors able to withstand the pain of price collapse joins pioneers convinced of the long-term value of technology.

The plateau lasts a long time and forms what Casey calls “a stable and boring minimum” During this phase the interest of the public diminishes, but it continues to develop as the number of believers grows slowly. The foundations of a new iteration of the cycle of euphoria are forming as the market observers see that the technology does not disappear and that the investment may not be as risky as it seemed during the downward phase of the cycle. The next iteration of the cycle attracts a broader set of users-investors-believers and its magnitude is much greater.

During the explosive growth phase of a Gartner cycle, very few people can successfully predict the maximum price that will be reached before the next fall. The price usually reaches levels that seem absurd for many of the investors who bought at the beginning of the cycle. When the cycle changes phase, the media look for a cause, a credible narrative. The “culprit”, for example the security failure of an exchange market, may have acted as a catalyst, but it is not the fundamental reason.The cycles of euphoria collapse because the market agents who are likely to participate in that cycle are finished.

It is revealing that gold followed the typical pattern of euphoria of the Gartner cycle from the end of the 70s to the beginning of the 2000s. One could speculate that the euphoria cycle is a social dynamic inherent to the monetization process.


Gartner Cohorts

Since trading began in 2010, the bitcoin market has surpassed four major Gartner cycles. With the advantage of historical data we can accurately identify the price range of these cycles. We can also qualitatively identify the cohorts of investors associated with each iteration.

$ 0 – $ 30 (2009-July 2011): The first cycle of euphoria in the bitcoin market was dominated by cryptographers, computer scientists and cypherpunks who were already prepared to understand the importance of the revolutionary invention of Satoshi Nakamoto. They were the pioneers, ensuring that the Bitcoin protocol did not have technical failures.

$ 30 – $ 250 (July 2011-April 2013): The second cycle attracted both early users of new technologies and a steady stream of ideologically motivated investors excited about the potential of a free currency from state control. Libertarians such as Roger Ver were attracted by the anti-system activities that would be possible with broad adoption of nascent technology. Wences Casares, a brilliant and well connected entrepreneur, was also part of the second cycle of euphoria and it is publicly known that he evangelized Bitcoin to the most important technologists and investors in Silicon Valley.

$ 250 – $ 1100 (April 2013-December 2013): The third cycle brought in the first retail and institutional investors, at least those who dared to navigate the complicated liquidity channels in which bitcoin could be acquired. The main source of liquidity during this period was MtGox, an exchange market based in Japan and run by the well-known incompetent and embezzler Mark Karpeles, who would later serve time for his role in the collapse of MtGox.

It is worth mentioning that there is a correlation between the rise in the price of bitcoin during the mentioned cycles and the increase in liquidity and the ease with which investors could buy bitcoins. During the first cycle there were no exchange platforms and the ways to obtain bitcoins were restricted to mining or buying directly from someone who had mined them. In the second cycle, rudimentary exchange platforms became available, but obtaining and securing bitcoins in them was too complicated for almost everyone, except for the most tech savvy. Even in the third cycle there were significant barriers for investors who wanted to transfer money to MtGox to acquire bitcoins. Banks were reluctant to work with the platform and third parties facilitating transfers were often incompetent, criminal or both. To make matters worse, many of those who managed to transfer funds suffered heavy losses when MtGox was pirated and later closed.

Only after the collapse of MtGox and a calm of two years in the market price of bitcoin were established deep and mature sources of liquidity; examples include regulated exchange platforms such as GDAX and intermediaries for large transactions (OTC) such as Cumberland mining. By the time the fourth cycle began in 2016, buying and securing bitcoin was relatively easy even for small investors.

$ 1100 – $ 19600? (2014 – ?) :

When I write these lines, the bitcoin market is going through its fourth cycle of euphoria. The participants in this cycle are mainly those that Michael Casey calls ” early majority” of the retail and institutional investors.


With deep and mature sources of liquidity, large institutional investors now have the opportunity to participate through regulated futures markets. The availability of these futures markets paves the way for the creation of a bitcoin ETF which in turn, in the next cycles of euphoria, will attract the “late majority” and the “laggards” (” late majority ” and ” laggards ” ). “On the graph).

Although it is impossible to predict exactly the magnitude of the current cycle of euphoria, it is reasonable to speculate that the cycle reaches its zenith between 20,000 and 50,000 dollars per bitcoin. A much higher price would mean that Bitcoin would have reached a significant fraction of the total capitalization of gold (for gold and bitcoin to have the same capitalization today, a bitcoin should cost about $ 380,000). Most of the market capitalization of gold comes from the demand of central banks, and it is not likely that these or the nation-states will still participate in this cycle of euphoria.

The entrance of the nation state

The final cycle of Gartner will happen when some nations begin to accumulate Bitcoin as part of their currency reserves. The capitalization of the bitcoin market is still too small for the option of adding it to the reserves of most countries can be considered realistically. However, as the interest of the private sector increases and the capitalization of Bitcoin approaches a trillion dollars, there will be enough liquidity for most of the states to enter the market. The first nation to officially add bitcoin to its reserves will likely unleash a stampede from other countries willing to do so. The states that adopt it before will be the ones that will see greater benefits in their financial balances if Bitcoin ends up becoming a global monetary reserve.Unfortunately, it is likely that the states with strong executive powers (dictatorships such as North Korea) are the fastest to accumulate Bitcoins. The desire not to favor the enrichment of the countries mentioned and the inherent weakness of the executive branches of Western democracies will cause a paralysis by indecision that will make them linger in the accumulation of bitcoins for their reserves.

It is ironic that the US is currently one of the most open nations in its regulatory position towards Bitcoin, while China and Russia are the most hostile; The US is the one that suffers the most risk that its geopolitical position will be degraded if Bitcoin ends up replacing the dollar as a world reserve. In the 60s Charles de Gaulle criticized the “exorbitant privilege” enjoyed by the US for the international monetary order that originated from the Bretton Woods agreement in 1944. The Russian and Chinese governments have not yet realized the geostrategic benefits of Bitcoin. as a reserve currency and are more concerned about the effects on their domestic markets. Like de Gaulle, who threatened to restore the gold standard in response to US privilege, the Chinese and Russians will see, over time, the advantages of a long reserve position in a store of non-sovereign value. The Chinese state has a significant advantage in its potential to add Bitcoin to its reserves, and that is that the highest concentration of Bitcoin mining power is in China.

The US prides itself on being a nation of innovators, with Silicon Valley being the jewel in the crown of the American economy. So far Silicon Valley has dominated the conversation about the position that regulators should take regarding Bitcoin.However, the financial industry and the US Federal Reserve have begun to realize the existential threat that Bitcoin represents for US monetary policy if it were to become a global reserve currency. The newspaper The Wall Street Journal, a well-known Federal Reserve spokesman, published the following comment on the threat that Bitcoin represents to the American monetary policy:

There is another danger, perhaps more serious, from the point of view of the central banks and regulators: Bitcoin could not collapse. If the speculative fervor of the cryptocurrency is only the precursor of its wide acceptance as an alternative to the dollar, it will jeopardize the monopoly on money held by central banks.

In the years to come there will be a battle between the entrepreneurs and innovators of Silicon Valley, who will try to keep the Bitcoin free of state control, and the financial industry and central banks, who will do everything in their power to regulate Bitcoin and prevent the The power of your industry and your ability to issue money are affected.

The transition to means of payment

A monetary good can not become a means of payment mostly accepted (the standard definition of money) before being widely valued, for the tautological reason that an unvalued good is not acceptable as payment. In the process of becoming widely valued, and therefore a store of value, a monetary good multiplies its purchasing power, creating an opportunity cost when using it as currency.

In particular, a monetary asset becomes convenient as a means of payment only when the sum of the opportunity cost plus the cost of the commercial transaction falls below the cost of the transaction without using the good.

In a society based on barter, a monetary good can be used as a means of payment even while the good continues to be appreciated, because the barter transaction costs are very high. In a developed economy, where transaction costs are low, the use as currency of a deposit of value in development and that is quickly appreciated as Bitcoin, is possible but in a very limited way. One example is the illegal drug market, where buyers are willing to sacrifice the opportunity to keep their bitcoins in exchange for minimizing the risk of buying drugs using fiat currency.

There are, however, great institutional barriers for a nascent deposit of value to become a widely accepted means of payment in a developed society. States have a powerful tool called taxes to protect their monetary sovereignty from being displaced by the competition of a new currency. An official currency enjoys the advantage of a constant demand since taxes are paid with it, but in addition, the profits of other monetary goods that are appreciated incur taxes when sold. The latter causes a significant friction for the use of a deposit of value as a means of payment.

However, this disadvantage of private monetary assets is not an insurmountable barrier. When people (the market) lose confidence in an official currency, their value collapses in a process known as hyperinflation. In this process, the value of the currency plummets first against the most liquid assets available in that society: gold or foreign currencies such as the dollar. When there are no liquid assets available or the supply is scarce, the currency will collapse in front of another type of property, such as real estate and raw materials. The image that best sums up hyperinflation is a grocery store without products on the shelves because consumers get rid as soon as possible of the state currency that loses value in their hands.

In the end, confidence in the currency is completely lost, nobody accepts it and society will decline to barter if a different currency has not been implemented. The replacement of the Zimbabwe dollar with the US dollar in 2008 is a good example of this process. Substituting an official currency for a foreign currency is complicated if there is a shortage of the incoming currency and no international bank provides liquidity.

Vijay Boyapati

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