Payment method or digital value store?
The debate about whether Bitcoin is primarily a store of value or a method of payment has been around since the beginning. Although individuals are completely free to use Bitcoin for payment and not for other purposes, in the final analysis, there is still a need for someone to hold Bitcoin. Because if no one is willing to hold, then the value of Bitcoin cannot be maintained. By the same token, those cryptocurrencies that are designed only for the purpose of a medium of exchange and do not consider scarcity are unsustainable in the long run. This kind of digital currency generally adopts some kind of inflation or uncertain monetary policy, neither of which can attract potential holders.
There are other reasons that prevent the long-term popularity of “cryptocurrency only as a medium of exchange”. First of all, the idea of using one asset as a store of value and using another asset for payment negates the basic concept of money. If currency is an intermediate commodity for realizing transactions, then why introduce a second intermediate commodity (that is, cryptocurrency only as a medium of exchange) to increase transaction friction?
Is it wiser to use a single asset to store and transfer value instead of two assets (one for value storage and the other for payment)? A brand new asset has price discovery and liquidity barriers, exchange rate fluctuations, and initial network effect issues, all of which will lead to higher overall transaction costs. Although a certain cryptocurrency may exhibit low fees and high capacity, only reducing transaction costs in the narrow sense cannot maintain the long-term value of a currency.
To further illustrate, let us review the case of international payments. Assuming that Bitcoin is the preferred medium of exchange for cross-border transfers, but the sender and recipient just use it as a tool currency and do not want to keep it as a cash balance, then someone else must intervene and be willing to keep it. These people play this role because they think Bitcoin is a good (at least potential) store of value.
But if there is no such value proposition (Bitcoin is a good store of value), why would anyone want to hold it? Will others eventually need it as a bridge currency? Would anyone risk holding an asset just because someday a third party wants to use it briefly to transfer value across the globe? Why would someone risk holding this asset instead of using a payment system that does not require other currencies?
These open questions are why XRP (Ripple) is inherently absurd. It reverses the economic principles of why you need a commodity and want to hold it as a cash balance. Ripple expects that its tokens will be held just because they can be used as an international transfer tool. This is actually a causal reversal. Bitcoin can be used as a tool for international transfers because it is a valuable asset that can be held.
All this shows that if Bitcoin is to gain attention and adoption rate, then it must stand out in the form of a store of value, not just a payment mechanism, instrument currency, or a temporary medium of exchange (which can be narrowly understood here as a A commodity that is used for trading, but an individual will not hold it for more than the time required by a particular exchange). That is to say, any other cryptocurrency that competes with Bitcoin will only succeed if it beats it in terms of store of value, not the payment network.
Technologists, such as Kyle Samani, managing partner of Multicoin Capital, prejudice that it is unnecessary for Bitcoin to maximize the value storage utility. Other functions or “utilities” are more important, and Samani proposed the “utility hypothesis” (“utility hypothesis”) for this. I did not belittle these features, but I think it makes no sense to program these features as a new cryptocurrency, rather than integrate them into a more liquid or established currency. Similarly, if it is separated from the value store design, these utilities alone are unlikely to give cryptocurrency long-term value.
Similarly, OpenBazaar developer and BCH supporter Chris Pacia suggested: “Bitcoin’s main innovation is peer-to-peer value transfer, not’limited supply’.” Although this statement makes sense, it ignores a key factor: What is the source of “value” in this value transfer? In essence, Bitcoin is just a peer-to-peer UTXO transmission system. Value is not within the agreement, but exists in each individual subjectively, and the limited supply is part of the equation. Without scarcity, there is no value to transfer, and Bitcoin may not survive in the first place. Therefore, you cannot separate them from each other.
Chris questioned the view that Bitcoin is a “sound base currency”. He believes that Bitcoin cannot be used for on-chain transactions due to high handling fees, and the second-layer payment network will be “easy to control and manipulate”, which will lead to Satoshi Nakamoto’s invention as a failure of the gold standard. “What I want is a currency that can resist censorship and unregulation.” He added: “Re-verification of failed gold standard experiments in digital form will not produce different results.” There is some truth to this statement. However, he seems to have overlooked the important difference again. The gold standard did not fail just because of “corrupt intermediaries.” In fact, it is precisely because it is a sound currency and an obstacle to the implementation of inflation policies that it will be kicked out of the monetary order. Governments can do this feat because gold cannot resist censorship. This is the difference: Bitcoin is not only a sound currency, but also an uncensorable digital sound currency.
So, what is or will Bitcoin Cash be? This is not a rhetorical question. Considering that Bitcoin Cash supporters hate transaction fees, they have no choice but to turn to inflation to motivate miners. The irony is that Bitcoin Cash supporters like Chris may end up adopting the same inflation standards as the central bank in order to avoid the new gold standard in digital form, only this time in digital form.
In short, I believe that sound currency is a prerequisite. Privately produced currency must be sound to succeed, and sound money will inevitably defeat less-sound or inflationary legal currencies.
Is it possible that Bitcoin is mainly used for transactions?
What if Bitcoin can never be used primarily as a medium of exchange? What if it becomes a store of value that is rarely used in daily transactions? What if it takes longer for liquidity to grow and gain wider acceptance in trading? In addition, what if the government imposes strict restrictions on daily commercial use? Can Bitcoin retain any purpose?
These are important issues and deserve serious consideration. Depending on the individual’s opinion of Bitcoin, the answer may be very different.
If you, like a Bitcoin Cash supporter, treat Bitcoin primarily as a medium of exchange (such as a payment mechanism), it may become useless in the future if it cannot be used in exchanges. Interestingly, this view is similar to the criticism of Bitcoin made by some Austrian economists a few years ago, who argued that if it is not currency, it is worthless. The economist Peter Šurda calls this kind of comment a “money or waste fallacy.” For Bitcoin Cash supporters, the only difference is the time frame: if Bitcoin is not used as a medium of exchange in the future, it will be worthless. Bitcoin either becomes currency (i.e. a general medium of exchange) or it is meaningless.
On the other hand, if you agree with the theory of value storage, then you will realize that pure digital assets have their own utility. The concept of digital scarcity is powerful and groundbreaking. Even if Bitcoin takes longer to obtain liquidity and is not primarily used for trading, it is still very useful as a digital version of gold.
It is undeniable that the premise of a practical store of value is that it can be transferred without incurring high costs or unreasonable delays. However, it does not require immediate payment confirmation or extremely low transaction fees. However, it does require secure transfers and final certainty of payment.
Therefore, just like gold today, Bitcoin can exist as a store of value. This situation may last longer than enthusiasts expect, possibly decades. Of course, if it can be adopted as soon as possible, improve liquidity, reduce price fluctuations, and thus be used more as a medium of exchange, so much the better. However, we cannot deny that confidence takes time to accumulate, and regulation may hinder the use of Bitcoin as a “currency.”
Chris Pacia strongly disagrees with this view and believes that people who hold gold now are not because gold is largely regarded as a store of value. On the contrary, “excessive demand comes from speculators who are betting that new use cases for gold will appear at some point in the future.” Speculators, such as the gold bugs, expect that the inevitable currency collapse will make gold the standard of the future monetary system again. Pacia claims that if these “new use cases” cannot be realized, then the demand for gold will enter a significant downward trend.
It is undeniable that some Golden Beetles do hold this kind of investment logic. However, this group of people is far from the main source of demand for gold. Pacia seems to ignore the other inherent characteristics that make gold a unique asset in the world. It is a commodity with a history of thousands of years. It is naturally scarce, cannot be copied, and is generally regarded as valuable. Gold cannot be overissued, forged or breached. It is not a liability of anyone, and there is no counterparty risk.
These outstanding attributes push gold to the ultimate asset status, and all central banks in the world are hoarding it. After all, the monetary authorities of each country do not trust their counterparts. Paper currency is a political treaty. Even if it is protected by institutions and the constitution, the central bank will not take the risk of making its currency 100% backed by another country’s paper money, because other countries’ paper money also faces unpredictable inflationary pressures.
53 years have passed since the Bretton Woods system collapsed. However, compared with 1971, official gold reserves have only decreased by 8%. This is a strong proof of confidence in gold as a store of value. Therefore, pure digital value storage is possible, and Bitcoin can serve this purpose well, even if it is only occasionally used as a medium of exchange.
