(Full disclosure: I’m building Coinbits.app, a bitcoin banking platform.)
Last week, Wall Street Journal columnist Jason Zweig published a piece on bitcoin that questioned whether it has the staying power that many bitcoin enthusiasts assume that it does.
After all, he argues, there have been other long-standing assets that lost value when circumstances changed. The price of pearls crashed when processes were invented for culturing them at low cost.
Bitcoin is also a digital technology, and we have witnessed many digital technologies be disrupted and replaced. Perhaps it will meet the same fate as Atari, BlackBerry, and Myspace – strong incumbents unseated by disruptive upstarts with superior solutions.
These arguments don’t survive scrutiny, but understanding why requires going beyond the assumption that bitcoin is just a technology – it’s also money.
Money as a concept is not intuitive. And yet, money itself is changing so quickly that many people who would otherwise be able to ignore this topic need to reckon with it. As philosopher Robert Breedlove has said, “What is money? will be regarded as the defining question of our time in history.”
What gets Zweig into trouble in both these cases is the mapping of bitcoin onto another domain using a conceptual metaphor. That is, when you begin reasoning about bitcoins as if they are pearls, you are likely to take the comparison too far and wrongly assume that bitcoins and pearls have more in common than they actually do.
The metaphor “bitcoins are pearls” feels insightful because both are created using a proof of work algorithm – a computer science term that means anyone can see verifiable proof that some amount of effort has been expended in order to generate a result.
The very existence of a pearl is proof of work. Whether in nature or cultured in lab conditions, it takes a mollusk anywhere from 6 months to 4 years to create one.
Natural pearls require much more work since people must spend time and energy to harvest them in the wild. Kokichi Mikimoto, a Japanese entrepreneur, figured out how to circumvent the work required to harvest pearls in the wild by culturing them instead, which allowed him to shift resources away from labor intensive harvesting toward capital intensive culturing.
Pearls became cheaper to make and less scarce, which cratered the price. Similar stories played out with other forms of money, such as wampum beads.
The Bitcoin protocol was designed by computer scientists who understood this history of monetary media. That’s why bitcoin’s proof of work was designed to rely on cryptographic proof, which mathematically cannot be circumvented without trillions more hours of computing power than anyone could muster.
Without an understanding of the computer science and game theory behind bitcoin’s proof of work, the pearl metaphor can lead to the wrong assumption that, if the proof of work of pearls was able to be circumvented, the same must be true of bitcoin.
Like the pearl metaphor, the BlackBerry metaphor also breaks down fast.
Comparing bitcoin to BlackBerry is misleading because BlackBerry is a firm that exists to make decisions in order to maximize profits. Its behavior is shaped by the need to allocate capital and labor, and it will only continue to exist as long as internal transaction costs are lower than external transaction costs.
Bitcoin isn’t a firm. It has no marketing team and no figurehead. It is a global network of millions of people who voluntarily run open-source code. It has more in common with the internet itself.
In contrast to the ease with which consumers can adopt new apps and devices, the choice of which money to use depends on that money’s liquidity, scarcity, and universal acceptance.
Bitcoin is open source software that people who do not know each other choose to run on hundreds of thousands of computers across the planet. It is not an app or a platform but a digital money protocol. It can be audited by anyone at any time for free. And it has achieved such scale that it is widely recognized as money and, by some estimates, used by hundreds of millions of people.
These runaway network effects will make it very difficult, if not impossible, for anything else to catch up.
This is challenging material. Yet, to understand bitcoin, one must dig into the details of monetary history, game theory, and the computer science that makes it all work. Metaphors may seem to make bitcoin easier to understand, but over-reliance on them leads down a trail of flawed logical consequences.
