Segregating Bitcoin’s value systems

I hate to bore people with more Bitcoin stuff. But I need a platform to express a point I’m trying to make on Twitter long form.

I appreciate this is only my opinion. Given it contradicts the opinion of someone like Marc Andreessen — who is obviously a much better authority on monetizing digital protocol systems than me — I appreciate it’s going to be hard to digest by some people.

But the point I’m trying to make is that Bitcoin’s “store of value” value is entirely disconnected from the value of the Bitcoin open-ledger system.

The former’s value is transitional – the product of speculative inflow into a scarce synthetic asset that has no utility, or mutual interest holding users together other than its capacity to be pumped & dumped via the conventional speculative ponzification effect.

This value is entirely dependent on wider economic conditions. If interest rates on conventional currency go up to 5 per cent, the risk of sitting in a zero-yielding asset like Bitcoin begins to outweigh the potential benefits. It’s an economic preference game. End of.

It’s true that unlike gold or commodities, Bitcoin’s value cannot be disrupted by new supply. This gives it a theoretical advantage. But that advantage is meaningless because there’s nothing stopping substitution into a different asset altogether if and when the price gets too high. Just because Bitcoin regulates its own supply doesn’t make it immune to the laws of supply and demand, and those laws state when something gets too pricey demand falls, and substitution begins to make sense.

Seigniorage flows to a new asset entirely.

In something like a currency system that incentive is heightened if the distribution of wealth within the original system gets more unequal over time. After all, it makes much more sense to take a punt on pumping and dumping a new substitute at a certain price level, for much larger relative rewards, than being a late entrant into an overly pumped network.

Anyway, I’ve discussed all these flaws on numerous occasions.

Ultimately, if the zero rate environment persists, bitcoin will be diluted by ever more currencies that come to market. When there are so many altcoins in circulation that the whole thing becomes farcical .. we will see a collapse in confidence in the whole altcoin system. After all, an economic environment where anyone can get purchasing power just by imagining an altcoin meme that then becomes popular enough to create a worthwhile network, is the equivalent of a free money effect. I’ve also called it endogenous money supply explansion, via a form of decentralised QE.

It’s not the government printing money, it’s citizens printing their own money instead. Except that all this company competes over the same underlying goods and resources.

I’m a believer in abundance, but I don’t think we’re at the point of “free stuff for anyone with an imagination and an ability to create a meme” just yet.

Consequently, as more and more altcoin units compete for purchasing power of real-world stuff, you’ll get a) a potentially destablising inflation effect and b) a gresham’s law side-effect. To be able to draw seigniorage, new coins will have to offer something more than existing zero-backed coins. You’ll consequently get issuers promising redemption against all sorts of things. Until finally you begin to replicate the Weimar notgeld system.

Of course, it’s possible the economy can stand the broad money expansion associated with altcoins for a relatively long time before. But the moment money supply overexpands relative to the number of goods and services available, the moment people will withdraw from altcoins in favour of superior stores of value or those that guarantee redemption of something concrete.


The real economic value of Bitcoin is associated with the open ledger system. But this is not something which IMO can be successfully monetised by the Bitcoin system or any altcoin system. If and when the asset value of Bitcoin collapses, so does the value of the open ledger system because its value is entirely social.

This is because the open ledger system does not have independent value outside of the underlying asset it is applied to. It is a universal gift. It’s like the benefits associated with living in a country that has a fairer and more equitable constitution than one that has a less fair one. A democratic constitution versus a sovereign totalitarian one. People have simply agreed to do things a better way in one country than the other.

The ledger system is a method for passing around pre-existing value units. It is not comparable to Twitter or Ebay or whatever platform.

A) it is not proprietary  b) it cannot be monetised with advertising  or data sales (because the data is openly available to everyone) c) because any attempt to monetise it depends on reducing the collective benefits of the system to users and passing them over in concentrated form to specific parties.

Remember, what makes the ledger system attractive in the first place is that it takes out the middlemen who skim a nice revenue (or rent) from every transaction conducted in the digital transaction economy.

At the moment these middlemen operate like highway robbers, or toll keepers, demanding a cut of every transaction/passage made.

What Bitcoin does is circumnavigates these guys by making it appear that it’s created its own exclusive alternative infrastructure network. You get to pass through the protected corridors of Bitcoin, thanks to a collaborative protection network.

At the moment those corridors are funded via exclusive membership rights to that network. Because the network will only ever have x amount of membership rights, that makes the network appear very valuable. It’s making access scarce.

BUT!! that means the more people want to use the network, the more diluted the membership rights for new entrants get. Their equity in the system eventually becomes entirely insignificant compared to those who were able to obtain full rights. That creates a hugely unequal system which arguably renders many users worse off on a relative social basis than when they were being exploited by the highway robbers.

But here’s the thing! It turns out the ability to dodge the highway men isn’t dependent on an exclusive right to a parallel corridor network at all. It’s dependent on a collaborative camouflage technique that’s available to anyone who bothers to organise themselves and adopt the system. There is no exclusivity to the system. Anyone can learn how to dodge the highway men.

That means you can use your pre-existing value system as usual, and dodge the highway men accordingly without turning to the Bitcoin corridor network. Let’s say hypothetically being able to do so depends on everyone agreeing to sing some sort of siren song that sends the highway men to sleep. As long as everyone is singing, everyone is protected.

Importantly, you can’t monetise this system unless you try to make it somehow exclusive to a small group. But this is impossible because once people know about the system, anyone can adopt it. Thus all value based on the idea of “exclusivity” is false. Also once you start skimming profits from the system, you’re just reintroducing the inequity of the highway men to begin with.

The system either benefits everyone or provides zero innovation. This is why IMO it is not monetisable.

What’s valuable is being able to teach everyone the song that needs to be sung to dodge the highway men, and have them agree to keep doing so via a shared mutual interest that rewards all equally.

It’s a network solution to a problem. As soon as any part of the network is rewarded to a greater degree than another part of the network, the incentive to stay committed to the network diminishes. And yet you need as many people to be committed to the network as possible to draw the maximum benefits. Thus, an equitable distribution is in the network’s interests. It’s game theory.

Any attempt to exploit users or rent extract, collapses the system.

The likes of MA say they aren’t invested in Bitcoin but in the supporting infrastructure and the scaleability of the networked approach. But this doesn’t make sense either. There is no monetisable scaleability. It’s a collaborative and thus entirely non-monetary (i.e. voluntary) economic eco-system. There is no competitive rivalry advantage.

The same doesn’t apply to Twitter or Ebay, because these guys are actually hosting and building a proprietary network corridor and drawing value not from network membership rights or the technique but the usefulness of their exclusive networks to advertisers, data gatherers, merchants, and those who are prepared to pay for more dominant exposure within their corridors/infrastructure. Or outright pay for access, but not on membership/equity grounds, but on a use basis.

It’s an entirely different model to say the least.



22 thoughts on “Segregating Bitcoin’s value systems

  1. Challenging stuff to think about, but the tendencies you’re describing pull multiple ways… implying more varied outcomes than a “no store of value” or “can’t monetize” conclusion for Bitcoin.

    The ‘store of value’ argument seems malthusian: cryptocoins will be so successful attracting value, so popular and interchangeable and diverse, that they’ll then lose all their value in an extinction.

    Yet if many altcoins draw experimentation, and most prove to be transient, then the last few – or one – standing will have a more convincing claim to uniqueness and longevity. Via a sort of Lindy-Effect – in technologies, the old get older still – such a survivor coin could roll up all the collectible/’store-of-value’ interest that also-ran coins attracted, but could not sustain.

    There’s a plausible argument that Bitcoin, with its early start, public mindshare, rivalrous mining-power defenses, and supporting community/ecosystem can uniquely thrive against later entrants. (Its head start in these dimensions can’t be copied as easily as the source code blueprints.) But even if the winner isn’t Bitcoin, when a parade of indistinguishable mostly-alikes provides less value to a market than one focal standard, a champion tends to arise – arbitrarily if need be.

    Regarding how Bitcoin’s voluntary, communal nature makes the system impossible to monetize via usage tolls, that’s of course absolutely right. However, that’s the same constraint applying to all open source software projects – and those still drive rapid innovation, and enable profitable businesses.

    The key is to build excludable complements to the necessarily-shared communal tech: adjacent services that were never before possible or economical. And indeed, that sounds like the “fourth side” of Bitcoin’s network effect that MA emphasizes as “particularly important”: “developers and entrepreneurs who are building new products and services with and on top of Bitcoin”. For these people, the difficulty of interposing new tolls on the core Bitcoin network isn’t a problem: it’s what they’re counting on.

    • Don’t think it’s a question of arriving at an end point. THat’s like saying the last viral meme is the meme that maintains lasting value. Altcoins will be in constant development. This isn’t the case of being on a path to ultimate winner takes all scenario. In a private market there is always going to be disruption and competition. IF you have a winner takes all view, then you might as well subscribe to a totalitarian fiat system. What’s the difference between being under the yoke of an altcoin system and that of a fiat currency? You have an incentive to stay in the system for as long as it serves your interests. If there’s too much inequity, the incentive to jump ship increases. ALtcoins, unlike fiat currencies have very little ability to anchor interest and will always be vulnerable to shifting flights of fancy, trends and fads. Banks figured this out ages ago, hence why all the credit money they issue is meticulously pegged to the value of the fiat currency. Because that makes it durable.

      There isn’t a need for a “Winner”. Not in the store of value game. Money is a wealth allocation mechanism. System ration wealth between users, and according to their purchasing power in the world of real tangible goods and services.

      • Winner-take-all dominance with regard to an open communal standard is much preferable to a totalitarian fiat system! We’ve had non-compulsory but very-powerful focal de facto standards arise organically all over digital/network economies: operating systems, network protocols, interchange formats. They don’t last forever – like fiat currencies themselves don’t – but do last long enough to build (and now perhaps hold) immense wealth.

        So the “yoke of an altcoin system” is a non-sequitur, at least if a winning coin mimics Bitcoin in its consensus governance. Who would select an altcoin with a ‘yoke’ when an older, open one is already understood, secured-by-computing-power, and structurally-locked-in to supporting services?

        I think the lessons you’re drawing from the contestability and proliferation of historical bank issues are important… but not dispositive in this hyper-networked era, where the lessons of digital goods (OSes, protocols, formats) are more relevant. There’s a better return (and returns to scale) in using the standard system – an incremental dollar spent or hour devoted to working with the standard returns more than from any younger, incompatible alternative. No one has to (or especially wants to) use any improvisational ‘notgelds’, except for the wanna-be currency issuers themselves, who via their transience quickly train people to prefer the oldest/largest issue(s). The painful “lessons learned” that historically led to reliance on government-backed fiat money – because the government was the only long-lived, large-jurisdiction institution on which to peg any confidence – can now trust instead the globally-observable flocking consensus and technological/contractual commitments of actors who, even if indifferent to most cryptocoin meme/feature particulars, prefer that there be “one”.

      • that’s not true at all. A winner takes all system even if it’s based on a decentralised ledger that allows anyone to collect fees if they desire to invest in computer infrastructure (which btw applies to the current system as well) is equally oppressive if it has no capacity to adjust for inequities in the system. Which it doesn’t.
        Once the stock of bitcoins is done expanding, we’ll end up with a hugely unequal distribution of bitcoins within the system. And then to keep the economy expanding you’ll have to end up re-lending those coins mimicking the old system entirely. Creating just as much leverage. Except with no capacity to regulate supply to economy fundamentals or to adjust for volatility in the price.
        Bitcoin has some capacity as a risky speculative investment. Its open ledger system is appealing for transparency and for removing the double-spending problem for all sorts of asset markets that overly depend on middlemen, and closed structures as a result. But it is not a viable alternative for government fiat. Fiat is the result of decades of monetary evolution. And it’s as decentralised a system as bitcoin because it’s subject to a democratic system which votes out prevailing regimes that don’t look after the interests of the masses. You can’t eliminate the inequities in Bitcoin in the same way at all. Fiat currency can adopt exactly the same network system for distribution, and kill off the dominance of payments intermediaries. And it should. But there is no free system. And even Bitcoin isn’t a free system. It’s just more competitive. At the moment. It’s unclear how competitive it will be when miners will have to compensated entirely by fees.

      • [Hoping this appears at bottom after the “that’s not true at all..” reply]

        To be clear, I’m not suggesting that Bitcoin must (or likely will) displace everything else, including fiat currencies, as the singular dominant money and store-of-value. Instead :

        (1) this niche of decentralized cryptocurrency, despite arbitrarily-many experimental fringe entrants, will tend towards one champion (or perhaps a few), for long periods. That’s common with this kind of returns-to-scale/network-effect/open-platform tech.

        (2) because of that, for meaningful periods the champion(s) will work somewhat as a store-of-value. It will still be quite volatile, so likely not as good as the best-managed fiat currencies. But it won’t be rapidly trending to zero value – upstarts/copycats/altcoins will overwhelmingly seem dodgy and stay small, ‘penny currencies’.

        (3) the champion could only become ‘oppressive’ if it really did conquer other monies to become dominant, in concentrated hands, and unadaptable to the larger communty’s monetary needs during downturns. But I don’t see that sort of pyrrhic triumph as likely, and even getting close to that outcome would then create openings to contest the champion’s dominance with tweaked systems.

        That is, I suggest it’s possible that some tiny number of these coins spend notable time in some middle place, in dynamic tension between zero-value-via-proliferation and oppressive-inflexible-monopoly-of-all-activity.

        There’s also many more permutations of both the ledger idea, and the tokens-on-that-ledger, to be tried. I expect government-issued cryptocurrencies. I expect transparent cloud-ledger cryptoequity/cryptodebt markets. It will be as cheap and easy to deliver a vendor a fractional TBill, or a trillionth-of-the-Wilshire5000, as it is to tip someone a half a cent in dogecoin. Software agents can negotiate trades of unlike assets and perpetually rebalance personal portfolios. So I’m not sure what we’ll be using like ‘money’ in a few more iterations… I just expect some Bitcoin-like systems to be part of the transitional mix.

      • The transition is just a path to the reestablishment of the old system but with a new elite at the top. Bitcoin is reinventing the wheel for the purpose of shifting power to new areas.

  2. I like this macro economical and sociological point of view. It changes from financial and shop owner’s ones that we ear too much. But can you tell me why, long ago, gold became the money for exchange and not other metals or shells or whatever ? Isn’t it the same kind of consensus we are seeing actually ?

    • Gold didn’t become the medium of exchange. I’m actually an ancient historian and there endless examples of various stores of value. The units were used for representations of debts and favours owed to people. The things that tended to be used were things common to the area, rare-ish but fairly uniform. Shells, Yap-stones, rare feathers, all sorts of metals, precious stones. Tally sticks. They were all representing value. The value is derived from a favour/debt system or an equity system (a surplus that someone has an interest in sharing). Debt precedes commodity money. This has been the case througout history. EVEN the romans did not use gold for daily transactions. They had a very developed credit system and most of their coinage was very low value metal. Gold was used exclusively for trade with strangers and foreigners. And even then it couldn’t be guaranteed. Technology is a better transaction medium with strangers than gold. If you arrive on a desert island where the value system is based on rare shells, it’s not clear at all whether you will be able to barter more successfully with gold or with medicine/technology. A primitive people would be much impressed with an ipad than with gold.

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  4. Interesting. Do you think Ripple applies the useful parts of bitcoin (decentralized block chain, open ledger, etc.) to other (including fiat) currencies?

    If I understand your argument, you are saying that the central contradiction of MA is that the bitcoin network as a technology cannot be monetized unless the bitcoin currency as a speculative store of value is sustained indefinitely, which is unlikely due to the relative ease of creating new meme alt currencies. But isn’t MA investing in the companies that are building the pipes, and who could theoretically deploy those pipes to use other stores of values and/or monetize their product/service in other ways? Take the colored coin project, which as I understand it would be allow a bitcoin to be broken into infinitesmally small pieces that could represent ownership of any digital asset, like a trust, stock, etc. Couldn’t a company that was facilitating a decentralized stock market of sorts using colored coins make money independent of the value of bitcoin the store of value? Perhaps the relevant comparison is not to Twitter, but to Cloudera or Red Hat, companies that have built successful businesses around open-source networks that they have no direct control over.

    You seem like you have made a compelling argument for not owning the currency for the long-term, but isn’t innovating in the “decentralized network of trust” space still an interesting proposition?

    • I think Ripple is a much better model. But the way it operates is like a cross between an ETF issuer and Paypal. It’s not collateralised. But it’s great you can trade different currencies on its network. The Ripple coin itself makes more sense. Ripple is the central bank of its own currency and regulates supply to ensure the value is stable. I much prefer that. Paypal does the same thing, it just achieves stability by pegging to the fiat currency, rather than trying to improve on the stability of the fiat.
      There’s definitely room in the market for Ripple. I like the concept, and it’s far superior as a payments provider as a result. But really no reason why a central bank can’t adopt the Ripple system for itself. That way at least we’re not beholden to the control of a private company but a government agent that works for the people and in our interests, and controls the money supply according to our best interests.
      The anti-fiat movement is mainly dominated by the rich who are upset that the central bank is trying to debase away their deflationary (and hugely toxic for the rest of the economy) financial gains. They seek a system that will allow to be maximum exposed to deflation when it happens, and preserve their tyranny over others in society that are less wealthy or worse than that leveraged to them.

      I have always recognised Bitcoin’s innovative decentralised mechanism for tracking transactions. I hate its ideology and the community’s insistence that the dollar is a flawed market.

      The only reason we have leverage in the system is because PRIVATE banks (Not the central bank) played the dollar system exactly the same way that Bitcoin zealots want to play the Bitcoin system. The ONLY difference is that at least private banks could issue their own units (credit) to those they were lending when the economy was expanding and there wasn’t enough units going round. Bitcoin aims to be a full reserve system. Which is fine, providing there are enough reserves to go round, which there aren’t.

      When you get to the point that Bitcoin supply stops expanding, people will Bitcoin will be inclined to lend to those without Bitcoin for interest. This will create an interest rate for Bitcoin. Because there are so few bitcoins around and the chance of appreciation is so high, it will be an extremely difficult market to develop. Who would borrow bitcoin if they think that by the time they have to pay it back the relative wealth effect of the debt will have got so much bigger.

      Unlike private credit markets which issue their own units, and then insure each other, you would not be able to have monetary competition within the system. There would be no fungibility. Hence if there are not enough Bitcoin units to satisfy demand and the deflationary cost of borrowing is too high, people will just enter rival systems.

      And that’s the thing, because Bitcoin is not proprietary, the actual innovative bit — the CLEARING methodology — can be adopted by almost ANYONE. It doesn’t have an edge at all.

      • “The anti-fiat movement is mainly dominated by the rich who are upset that the central bank is trying to debase away their deflationary (and hugely toxic for the rest of the economy) financial gains.”

        …and the fiat status quo is mainly dominated by powerful governments who are upset that an alternative system would impede their ability to inflate away their financial liabilities which by definition (although increasingly not in practice) are supposed to benefit the government’s constituents and not the government apparatus or individuals within it per se.

        There is also a very good case to be made that since 2008 the dominant rich have become that much (and yes, macro-toxically) more so as the direct result of central bank activity.

        It’s easy to skid off the economic rails and into purely political concerns (which arguably is a much more permanent problem of the human race) with the alt-currency issue because so many aspects of it are so closely connected to long standing debates over exactly which areas of life the individual or state should be the primary sovereign of.

        Obviously any anonymous/opaque/purely physical currency system is a boon for criminals and illegal activity but there is a considerable amount of valid, good faith concern across a fairly wide spectrum of society that designations such as “criminal” and “illegal” are increasingly becoming more arbitrary, less transparent and the product of processes now uncomfortably deep in the zone of blind trust and further from informed consent.

        In other words, it is perhaps a bit too glib at this particular, high-speed point in history to stand at the vanguard of such developments and assert, defend or promote certain actions with a blanket justification along the lines of: “central planners are tasked with advancing the public interest and they are part of the government which is directly accountable to the people”. Such premises have led to massive human tragedies before and well within living memory.

        That said, as I am not (yet!) an expert in the alt-currency matters I have very much appreciated your fine efforts in this area along with the work of others which you have chosen to highlight or reference. So, thank you. I always look forward to your next post.

      • Central bank activity is flawed cause of the problems associated with distributing QE and because people are trying to dodge debasement. But money printing spreads wealth in a deflation. The problem is you have to hand it to someone, and that’s why we need more fiscal spending to redistribute the wealth to those who have none!

        And btw, I would rather a democratic government that i VOTE for was in charge of the money supply than an algorithim which can’t change no matter what, and which concentrates wealth for ever more in the pockets of a new elite!

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  6. Think of Bitcoin only as a payment system – a low-cost and fraud free means of transferring payment. This is the point from which your argument should begin.

    • You’ve obviously not read a single word. The whole point is that I do think of bitcoin’s main positive innovation being the payments improvement, which can be applied to any asset and is not exclusive to bitcoin. But I also don’t think it’s something that can be monetized because the advantage comes from the social and voluntary structure. Once you try to monetise it the decentralized nature will fade because new concentrations will build up. Also, once you take the seigniorage away fees will jump and the whole thing will begin to replicate the old system. The only real advantage is the open ledger and substituting a central clearer for a group clearing system, and as a result not depending on identity for confirmation.

      • You’ve said it yourself — “The only real advantage is the open ledger and substituting a central clearer for a group clearing system, and as a result not depending on identity for confirmation.” That has the promise of being a very big advantage. Stick with analyzing Bitcoin as a payment system and stop confusing yourself with monetization for now.

      • You miss the point once again! I do recognise the two respective value systems. My point is that all conventional “value” is linked to the store of asset side. The payments system is impossible to monetise, even though it is valuable, because it is a product of social collective action. Just like Facebook is, which is why efforts to monetise Facebook equally undermine the social synergies that make facebook valuable in the first place. It is a paradox. If you attempt to extract value from the decentralised — aka social — structure of Bitcoin, you recreate the old system, and thus by definition lose the efficiencies of scale that allow you to compete with the incumbent payment providers. The value of Bitcoin is in the social infrastructure. This can be applied to any pre-existing value system, but it does not have value in and of itself. The same way no-one can make money out of Bittorrent or Napster. Collective efforts destroy value in the conventional sense by disrupting our need to be dependent on a provider.

      • Bitcoin, in considering it purely as a payment system, would compete with existing providers by eliminating the risk of creditworthiness and associated costs of collection and credit verification. The real question therefore is whether Bitcoin itself is fraud proof. Who can guarantee that the system is impervious to fraud?

  7. Bitcoin, in considering it purely as a payment system, would compete with existing providers by eliminating the risk of creditworthiness and associated costs of collection and credit verification. The real question therefore is whether Bitcoin itself is fraud proof. Who can guarantee that the system is impervious to fraud?

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