Bitcoin Core (BTC) Doesn't Understand What It's Competing Against
I am struggling to understand the minds of BTC in regards to economics or currencies. For the percentage of people that even care to think about anything but trying to HODL until they get a Lamborghini, which is totally of course how currencies work.
Bitcoin was intended to compete with and perhaps outcompete fiat currencies, if not simply live along side fiat in a complementary way and disrupt some of the power of the state. Like any currency, its purchasing power is derived from supply and demand on the market. Like any currency, some of that determination is by speculative players, although due to market cap and general interest in the currency, most crypto participants are simply speculators.
Ie. That Libertarian guy you know who got excited about Ron Paul in 2007 and has been talking about gold and selling shirts in crypto since 2011 cares about advancing crypto to disrupt fiat currencies and the state. The guy from your high school that is a 'cryptocurrency advocate' who won't stop shutting up about the fact that they HODL'd from $3k to $10k and how you should have bought in is just a speculator, not an investor and not a user. The latter thinks the guy who spend 10,000 bitcoins to buy 2 pizzas in 2010 was a fool, while the former knows that this guy was a pioneer in using a burgeoning new currency.
This is the point of a currency of course - to transact business in. A currency, good or bad, of course has these elements:
- Medium of exchange - transactions are completed in it
- Store of value - purchasing power expected to be relatively stable
- Unit of account - divisible into units as necessary to facilitate the above
Crypto is of course perfect for #3. For #1 it's getting better. For #2, a larger market cap and more widespread adoption for #1 will allow it to gain stability to work as a far better/less volatile store of value, as a feature of being used as money.
Where HODLers go wrong is by thinking HODLing helps #2, or #1. Far more useful for a new currency would be a tatoo artist accepting crypto for services rendered, rather than purchasing crypto to shove under a mattress, hoping the next person pays more for it.
This is of course not how currency works at all - currency is not supposed to make you rich. It's supposed to facilitate the above. The current and popular BTC narrative is that it can simply be #2, on it's way to being #1... some day. That it should be a store of value first, and that at some later date, when the network can scale to super high concurrent levels, it can then be used as a medium of exchange.
Bitcoin was indeed intended to be analogous to gold. It is mined, but there's no shocks to the system like new rich mines being discovered, or an influx of your country's gold based currency base because you've raped and pillaged the next country over. Gold costs money to split into smaller units - however digital currency has that built in. What the Austrian school of economics has been advocating for a long time is fully reserved banking based on gold - which is exactly analogous to what the Bitcoin white paper proposed. However it proposed this gold as money. A currency intended to compete with government fiat. Unlike gold which the government could stop - this internet based decentralized money would be much more robust in the face of government control. To again make this clear, it is analogous to gold as money.
Current BTC does not subscribe to this view; instead it is claimed that Bitcoin Core BTC is a new 'digital gold'. This is where they go off the rails.
If the original white paper simply proposed this, the currency (or just store of value feature of it) would have gone completely nowhere. There would be no real use of it. Gold in a videogame would be more valuable, because at least the in game currency could be used for in game transactions. It has a value as enforced by the game's requirement it be used as purchases. If openly traded, say on ebay, the in game currency would find its USD market rate as well.
What would be the economic reason for anyone to buy a BTC as store of value only however? If it can't be used for transactions, what's the point? Why would anyone put money into it at all? It would be 100% speculation, and few people would even bother to do it. It's a terrible use case. The Bitcoin Cash (BCH) people are upset and went with their fork because BTC felt like a bait and switch, and betrayal of the original idea and vision. BTC now states than rather gold as money, BTC is now new digital gold.
Is it? Is there even any need for that?
- What's wrong with the old gold? It seems to be working just fine. Just like a currency isn't intended to be HODL until rich, neither is gold. Its role is essentially as insurance. It is not supposed to increase purchasing power - it's supposed to protect purchasing power. You can read about this as its role from multiple schools of economic thinking. The Austrian school, certainly the closest in vision to supporting crypto, has noted for a long time that a gold coin would buy one some nice sandals, a belt, and tunic in ancient Rome while today a gold coin would buy you some nice shoes, a belt, and suit in New York. Not that it would buy you a Manhattan condo. Old wall street advice was to keep some of your money in gold - because it basically was cash, but better, in the days where government money was indeed backed by gold. It was intended to protect your portfolio in the case of a down market; your actual hope was it would give you little to no returns as stocks provided the real ones. It is analogous to being in bonds or treasury inflation protected securities today - you're not supposed to expect a fat return on gold or for it to grown in purcashing power - just preserve the purchasing power you have.
- Gold has a special place due to its global monetary history for thousands of years. It is the currency of last resort. It sits in a special seat in banking, as well as human minds for thousands of years. BTC enjoys no such history nor thought. Minds can change - but these minds that do believe BTC is 'digital gold as store of value' don't understand the actual role of gold currently, nor in history, nor the actual way a currency grows - by use, not HODLing. Bitcoin - whether BTC or BCH - isn't going to be replacing gold's special role as an insurance asset/currency of last resort any time soon, if ever.
- BTC has proven to be a terrible store of value. The entire point of that feature of money is to remain relatively stable in terms of purchasing power. Bitcoin, and any crypto, has been incredibly volatile. Going up is not the goal nor a feature of a 'store of value', but BTC investors (speculators) act like that means it is proof it's as good/better than gold. In fact, the price of BTC or its market cap is used to justify all sorts of things; even though it doesn't indicate anything but current sentiment it what is still a largely speculative market. Market cap itself is also a terrible metric for what is supposed to be a currency - which is why currencies around the world don't even try to measure it. It's not because the exact or approximate supply of the currency isn't known - it's because it doesn't matter. Does the forex market give a shit about the US Federal Reserve's money supply estimates, whether M1, M2, or M3?
- Absolutely no one is buying Bitcoin as a store of value anyway. Most people are simply buy and hold speculators. They are not buying it because... they think it's going to do nothing in terms of increasing their purchasing power. They are buying it to HODL until Lambo. There are certainly BTC users who want to see it succeed as currency - but they are still making the economic mistakes of claiming and believing in the things above. That it's the 'new digital gold' and that it's 'store of value first, then medium of exchange eventually' - although medium of exchange might be for only larger fee transactions in their view.
Meanwhile, what a currency really needs is adoption. This is the golden goose which BTC broke, resulting in large fees and massive loss of momentum and adoption. I don't even understand why this path was chosen. Thinking of BTC or BCH as a website, I understand that both can't scale to handle 1 million active users. However, as the original Bitcoin grew from 1 to 10, to 1,000 and 10,000 - why wouldn't one expand the blocks to handle 100,000 while working on the solution for millions? This appears to be what BCH chose to do, while BTC simply shut off the hot new website - but don't worry, it will be great once they build the new super infrastructure. Which by the way is technically new and experimental.
I'm not opposed to segwit or off-chain transactions - however the cardinal sin for a new currency would be anything that harms adoption, the most fundamental thing it requires. We absolutely see this with Bitcoin BTC. Other coins started being substituted for it to escape its fees. The news articles about new merchants accepting Bitcoin turned into announcements of major companies no longer accepting it. They also turned into article simply about the price.
Bitcoin turned from a slowly being adopted cryptocurrency into a FOMO speculation machine. This was not a step forward, although BTC supporters will likely argue that it is because the price got higher. Ignoring the entire point of Bitcoin in the first place - to challenge and outcompete fiat as money - not to make people who hold it wealthy.
Bitcoin is supposed to compete with fiat currency, by being the technical analogy to gold as money.
BTC went on to be transformed with the new narrative being that it competes with gold; that it is a valid competitor for gold as store of value asset and currency of last resort. It does no such thing.
BCH was forked to continue the original mission - compete with fiat currency with the same features of a fully reserved currency based on physical gold.
BTC proponents with more sense than HODLers do want to see BTC outcompete fiat - but they seem to have no problem at all with the adoption destroying code changes made thus far. They don't appear to have a problem with the narrative of 'store of value, first, medium of exchange some time later' - even though no one is actually really using the currency this way, no currency has ever formed this way, and there really is no reason to put your money into something that is based on pure speculation with little use. It's just nonsense.
Maybe BTC will have the hottest infrastructure later - but that doesn't mean BCH can't upgrade its own to reach parity. It certainly doesn't mean any merchants who adopted BTC will switch back over to BCH - the battle for supremacy may have already been lost by then. The technical challenges and complexity for the Lightning Network seem quite real, and there is full faith and effort placed in it lighting the way forward. Each month that goes by where more merchants adopt BCH because BTC is still too high fee or complicated is another nail in the conffin for it. BTC appears to have squandered its first mover advantage. What it currently enjoys most is being something like a petrodollar; whereas it can function as an intermediary between all currency pairs. It also still enjoys the greatest brand recognition.
Merchant adoption and real organic use cases will ultimately decide what currency prevails; BTC, BCH, or something else. The price or market cap today are completely meaningless. What are merchants selling in? What are you offering services in? What are you paying with? What are people escaping currency controls using? What are people sending remittances using? These are the relevant questions for a growing cryptocurrency.
Bitcoin Core BTC doesn't even seem like it's trying to compete in the above market. It thinks it is competing with the current special state of gold in the monetary system. That it can just come in "when it's ready" in some future timeline to compete with currency, like it was originally intended to from day one. It's first mover advantage is strong - but the further away the timeline is of whatever implementation of tech will rescue it into being easy to use, fast, and cheap the less likely BTC is going to able to compete and win.