Bitcoin As A Medium Of Exchange Or Speculative Assets?
The question in the debate today is whether Bitcoin is a medium of exchange (MOE) or a speculative asset?
‘Bitcoin: Medium of exchange or speculative assets?’ is the name of the research paper published by elite researchers sometime back. This paper dismisses Bitcoin as a speculative asset with no real usecase based on its empirical formula driven findings.
The same thing Chainalysis says in its research:
Research by Chainalysis finds that only 1.3% of Bitcoin transactions so far in 2019 came from merchants. The remaining 98.7% of volume is all on the exchanges.
That means almost no one is using Bitcoin to buy things.
— Crypto Sara (I also like Bitcoin so GFY) (@AltcoinSara) June 1, 2019
But, I don’t care what they say? Actually, nobody does. (Bitcoin intellectuals, I mean)
Bitcoin exists, and that’s enough, for them and me too.
The first time in the history of humankind when we are so hyperconnected we are witnessing the monetization of a monetary good.
The good in question is Bitcoin.
But before I answer whether Bitcoin is a MOE or speculative asset? I want you to understand how something gets valuable and exchangeable.
For starters, just think:
Anything that isn’t valuable, can it be a medium of exchange?
Will you accept rotten tomatoes if I give you the plumbing service you gave me the other day.
I guess NO !!
Thus anything that isn’t valuable will not be accepted as a medium of exchange.
Then how anything becomes valuable. Value is subjective. One thing that might be valuable for me might not be valuable for you. But in the realm of money, this subjectivity doesn’t work.
For money to do what it is supposed to, it should be valuable for both parties involved- the giver and the receiver. The value that’s why comes from scarcity and speculation.
In words of Vijay Boyapati:
There are four stages that all market-based monetary goods pass through in their evolution to becoming a fully fledged money:
- Collectible
- Store of Value
- Medium of exchange
- Unit of account
However, a thing to note there is anything that becomes collectible should be scarce, and that scarcity is what makes it valuable in the beholder’s eyes to accumulate more. This puts demand pressure, increasing the value. Thus value starts getting captured by the collectible under question.
So in the collectible phase, the theory of subjective value works because for some, the collectible might be valuable, and for some, it might not be.
But as the collectible starts getting valuable for more and more people, it keeps accruing value as I explained previously. The accruing of value is what is called monetization.
But the monetization (or demonization) of any money never happens in a smooth, orderly way. It occurs in a series of speculative cycles because in each cycle new beholders join. For some, it is valuable, for some, it is not, and for some, it is valuable to an extent only !!
So when these complicated behavioral patterns come into play the asset or collectible under question becomes a so-called speculative asset.
But without these speculative cycles, any asset will not become valuable, forget about becoming money. And because the asset in question is trying to become money, it is reasonable for it to be speculative.
Don’t forget the asset is Bitcoin.
The more speculation you get, the more transactions you’ll see on the Blockchain and when people get in to Bitcoin as new store of value holders, each one has to activate a transaction to their wallet.
— Murad (@MustStopMurad) January 8, 2019
Also, the more the speculation, the more its adoption will be. Speculation makes prices volatile. For better or worse right now price is the only thing that matters in Bitcoin.
Price is what attracts people.
Once they fall in the rabbit hole, most of them take rebirth after having some foundational understanding of what money is? This is the most important thing right now.
According to this Lindy effect chart, we are amidst the speculative bubble. I cover this in my Newsletter as well on one of the Tuesdays
Speculation happens —–> Store of value follows next —–>leading to the medium of exchange——> finally enforcing unit of account status a global currency.
This is how Bitcoin will move in the future as well.
Now, I think there is no need for me to answer whether Bitcoin is a MOE or speculative asset?
Bitcoin’s volatility is expected. It is normal, and it will stay here for some time. To ignore volatility and dismiss speculation in the early days is not to understand Bitcoin.
If you liked this article, do share it with your friends and family who are still confused about Bitcoin volatility and speculation !!
