Bitcoin’s market price continues to soar — despite competition from alternative versions of itself (forks) and alternative implementations of cryptocurrencies (alts) more generally. A definitive, singular explanation for the meteoric rise is most probably hopeless. There are many factors at play — chief among them, acknowledged by many, being speculation and interest from institutional investors. These explanations aren’t easily refutable.
There is another explanation that is gaining traction, though, and it is more readily dismiss-able: simplicity. The gist of the argument is that Bitcoin’s simplistic design and singular use-case actually increase its valuation proposition as a store of value.
In my very humble opinion, this will eventually be exposed as flatly false.
The Purely Technological Side
From a technological perspective, this “simplicity” argument is a nonstarter. Rapid technological advancement has come to be expected. There is a constant demand for new features and new technology. If you’d like a concrete example — the market demand for pagers, pocket calculators and point-and-shoot cameras has been on a steady decline. All of those have been made largely irrelevant by the technological marvel of the smart phone.
BUT! Bitcoin isn’t really hardware… true, very true. (It has certain hardware dependencies, but those are provably open to evolution.) In the most literal sense, Bitcoin is simply software. Recall Netscape Navigator, anyone? I can anticipate the protests now — Bitcoin isn’t anything like ancient client-side software! Fair enough. It is software used as part of a network, providing functionality for users on that network. In some sense it’s very much like… Myspace? or, no, wait, Kazaa?
WAIT! I know that you may be appalled by comparisons between legacy tech and booming Bitcoin but, these “legacy” technologies were once wildly in vogue.
The point is this: technologically speaking, neither hardware nor software is immune to rapid technological advancement rendering it less valuable.
Aside From Software
Of course, in some other important sense, the idea of Bitcoin exists aside from hardware or software — it came into existence as hardware and software that can replace money. The latter part of the idea cannot simply be left unconsidered or regarded as unimportant. Replacing money was decidedly more central to the “essence” of Bitcoin than either hardware or software.
In fact, if humans were a little smarter, faster, and intelligent — or if there were simply a handful of us — we wouldn’t be at all dependent on hardware or software to implement Bitcoin. Because…
Bitcoin was really created just as a recipe for decentralized money — a protocol for the trust-less exchange of value. Protocols are quite resilient indeed. Some of the technologies that make up your cell-phone might not have existed even a year ago, but it employs decades-old protocols routinely. The longest-lived protocols turn out to be those that are flexible enough to build upon.
Now for the bad news if you’re a Bitcoin die-hard: the most useful protocol that was extracted from Satoshi’s whitepaper isn’t Bitcoin itself — it is the broader implementation of a blockchain. Unlike Bitcoin, the blockchain is almost universally regarded as world-changing and highly adaptable to different use-cases.
The blockchain protocol will likely outlive any specific implementation.
Admittedly, this, alone, doesn’t mean that Bitcoin is in any danger.
Money vs Store-of-Value
Before we start connecting dots, let’s acknowledge one more thing. The $7,000 (USD) Bitcoin on the market today is not widely considered money. It lacks the requisite stability — but it also has costs far too high for most every-day purchases to remain on the blockchain. This is not a secret, it has already resulted in several forks, off-chain scaling solutions, and a switch in narrative from the original idea of Bitcoin. It is rarely claimed to be money at all. Instead, it is regarded as digital gold — “the ultimate store of value.”
This changes the dialogue. People expect money to be stable, widely usable, and have low transaction costs. They don’t require these properties from a store-of-value. Instead, they want the asset to — surprise — maintain or appreciate in value relative to the goods and services in their economy.
Money has taken many forms in a relatively short period of time. Credit cards, checks, cell-phone minutes, coins, bills — what functions as money appears to be somewhat flexible. Money is plentiful and usually kind of hard to hype-up, frankly.
Compare that to gold — renowned for its scarcity and undebatably valued for centuries (at least). No wonder Bitcoin fans have changed the narrative. “Digital gold” sounds incredibly resilient to obsolescence. And, hey, Bitcoins are scarce (never-mind the forks and resultant explosion of cryptocurrencies sharing the Bitcoin prefix).
Safe and Sound
Bitcoin as a store of value appears to be catching on. In fact, it’s actually a stored-value multiplier! I jest, well, kind of. Institutional money and “the herd” all have their eyes on Bitcoin. They cite its proven security and stability as the oldest blockchain, its simplicity of design as the safest choice for storing value, and its excellent track record when it comes to appreciation.
Are they missing anything? Is Bitcoin really it?
Connecting the Dots
Let’s cut to the chase. If someone wanted the most proven store of value, then they wouldn’t pick a technology less than a decade old. If they wanted to store value in such a way that they didn’t have to trust anyone, they would buy a safe and some gold, and bury those in their yard. If they wanted stable passive appreciation they would buy stocks. With any of these options, they wouldn’t have to worry about losing passwords, being hacked, or depending on electricity and an internet connection.
Here’s the truth: the demand for Bitcoin was a result of its technological innovations. People liked its tech, they liked its features. They liked that it could do on its own what nothing else that they trusted could do by itself. When it failed to function as money, it was re-branded as a store of value and technological (off-chain, second layer) upgrades were planned. The price skyrocketed.
We are left with two possible explanations for that: either people are really excited about and are beginning to trust “upgradable” digital money and/or stores of value… or they’re simple chasing returns.
If it’s the latter, we can only guess how that ends. If it’s the former, then other blockchains, such as Ethereum, already make a whole host of features possible that Bitcoin can’t touch. As soon as people are confident in more advanced blockchain tech — then they’re going to upgrade. We all know from experience what that does to the value of older technologies.
TL;DR Bitcoin introduced the world to digital money. It was adopted as digital money and faltered. It was then re-cast as a store of value. It tested the idea of upgradable features for a trusted digital asset — and its price exploded. Money and stores of value in particular had been immune from rapid technological progress before Bitcoin. The acceptance of their digitization will cause them to lose that immunity and subject them to the rules of all technology:
Innovate or face obsolescence. People value reliability — they also value features.