As for its use as a unit of account, it's important to recognize that it need not function as a unit of account for day-to-day transactions in retail for it to have immense value. History is replete with examples of an asset functioning as a unit of account for batch settlements among large entities (governments, central banks, commercial banks and multinationals) while ordinary currencies continue to function as the day-to-day medium of exchange and unit of account for retail purchases by regular folk.
This is, essentially, what the gold standard was, after all. Nobody priced day to day purchases of goods and services in gold even when we were on a strict gold standard. But countries, central banks, commercial banks and multinationals settled batched transactions/debts with gold. That’s why the US had to close the gold window in 1971 (its gold reserves were being drained too quickly in batch settlement of foreign debts as it ran constant trade deficits with foreign nations).
And it's also how the Euro evolved. For years before goods and services in Europe started being priced in euros, the euro was used as the standard unit of account between countries and central banks. Ordinary people still transacted in pounds or francs or marks, but nations, central banks, commercial banks and multinationals settled debts among themselves with euros.
Some seem be oddly unaware of bitcoin’s adoption trend and its increasing number of use cases (current uses, not to mention in the future ones). Its adoption trend has continued at a predictable and well-understood pace (witness before with many other information technologies) for over a decade now. Its being adopted at a pace faster than the Internet itself was adopted. Adoption is doubling every few months.
And at this point bitcoin is only one or two doublings away from reaching the “tipping point” (8% adoption) worldwide and has already passed the tipping point in the world’s leading western nations, including the US. Given that it's being adopted at the fastest pace of any technology in history, and given that this adoption has continued uninterrupted for over a decade now, any disappointment that anyone has that it’s not “more widely used” or hasn’t “lived up to its promise” has to be a function of such a person's entirely unreasonable expectations and not a failure or flaw of the technology itself.
There are precious few historical examples of a network effect information technology passing the tipping point in adoption only to then fail prior to reaching saturation point. And there are precious few historical examples of such technologies reaching saturation point only to then be quickly and suddenly abandoned. Network effect lock-in (and lock-out) is a very real thing, and it really begins to take hold in earnest after the tipping point is passed.
Even once the saturation point of adoption is reached, bitcoin’s value can continue to increase indefinitely as new use cases are discovered or developed. If we found new and important uses for oil every year or five, you’d have no trouble understanding that its value could continue to increase indefinitely due to rising demand and limited supply.
Well, finding/developing new use cases for a physical asset like oil isn’t easy or particularly likely, but finding/developing new use cases for an programmable, open-source, network effect, information technology like bitcoin is…de rigueur. This is especially true once you consider the various layers being built on top of it (such as the Lightning Network), the coming smart contract layer, and its eventual ability to interoperate with other blockchains and protocols.
Does what I say above mean that bitcoin will go up forever? No. But it might, and that’s enough to refute any contentions that bitcoin “can’t” keep rising indefinitely, that its price “must” collapse once saturation point is reached, that it must be accepted in local retail stores for it to have value, etc, etc., etc.
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At this point I would argue that the scenario I describe (price increasing indefinitely with adoption and new uses) is, if not very likely, at least reasonably likely, or it will be if/when the worldwide tipping point of 8% adoption is reached. That will happen within the next year to four or not at all, so we should know shortly. If you’ve not gotten at least some bitcoin exploration before the tipping point you’ll definitely want to do so immediately thereafter, so…pay attention!
A few relevant maxims that explain why I think bitcoin’s prospects are all but assured after the tipping point is reached:
- “After the tipping point (third doubling from 1 percent), exponential growth patterns in technology and biology don’t just stop of their own accord until acted upon by some sufficiently capable outside force or until saturation is reached.”
- “Once any exponential process reaches 1 percent penetration/adoption, you’re only 7 potential doublings away from 100 percent. And once it achieves 8 percent (the tipping point), you’re only four doublings away and the odds of saturation are all but certain.”
- “Network effects are very antifragile. Trust them early (but protect your downside, at least until the tipping point).”
If I’m right, then the upside of gaining a small amount of bitcoin exposure and holding it indefinitely is indescribably enormous. By contrast if the naysayers are right the downside of doing so is…comparatively tiny. Consequently, even if the odds that I’m right are small and the odds that the naysayers are right are huge, the upside is so large for my side and the downside so small for theirs that only a fool would decline to be a bitcoin holder (“hodler”) of some sort.
If bitcoin does what I think it will, the adverse impact on anyone late to adopt will be beyond severe. Quite simply, they will either be bankrupted for their oversight or they will eventually become owned by those who exhibited much greater foresight.
So, if you’re a rational person and you give bitcoin only a 1% chance of doing what I think it will, then you have no choice but to take a small position in bitcoin as a hedge against that possibility (say…1% of your assets). And since making that choice has such little downside (worst case is you lose 1%), most rational actors will make it and are making it.
But because bitcoin’s supply is perfectly scarce, 1% of rational everyone’s assets moving into bitcoin must send its price yet higher. Much higher. And that much higher price will then be interpreted by most rational people as evidence that what I (and others) think will happen with bitcoin is happening. And that will cause them to have to hedge even more. Eventually even the less rational folks will be forced to ape in. And each person that does eventually drives the price higher, requiring yet more hedging.
That’s the game theory dynamic behind bitcoin, and it’s incredibly compelling.
So even if the naysayers are right and there’s only a trivial chance that bitcoin will do what I think it will, game theory will in my opinion force it to achieve saturation point adoption even if as only a hedge against that possibility. Because bitcoin is perfectly scarce (the only asset in the world that is), the need to hedge against the possibility that it becomes dominant dictates that it will become dominant. I don’t see any other game theory stable scenario as to how this can play out. This is the Prisoner’s Dilemma that the whole world faces with bitcoin.
And due to Metcalfe’s Law, this means that bitcoin’s value must be much greater than merely six figures as it approaches saturation point adoption (for any reason, including just hedging) over time. Remember that under Metcalfe’s Law the value of a network grows exponentially (not linearly) with adoption, and this phenomenon should be amplified immensely when the thing being adopted has a strictly limited supply.
What happens then?
What happens if/when all the world is forced to adopt bitcoin as a hedge only to then discover, after saturation and as is the apparent (and I think short-sighted) view of some, that it has no real use case other than speculation/hedging? Does it then crash and bring everything else down with it?
Mmmmm, maybe. But I doubt it. By that point it becomes a self sustaining thing. As pristine collateral, the consensus needed for it to remain valuable forces it to remain valuable (much like gold works today).
But even if it does subsequently crash and bring everything down with it at some point, the heights that it may achieve before doing so boggle the mind, and the only effective way to hedge even against that eventual crash is to (1) acquire and hold the asset asap and (2) then hope you time your eventual exit reasonably well. This too forces increased adoption.
Once you realize that everyone is eventually going to be forced to hedge by acquiring some small stake in a perfectly scarce asset, the only rational thing to do is to be among the first of them to do so. And the *last* the thing you can risk is to be among the last.