in Musings

Bitcoin and The Stages of Money

Bitcoin skeptics often point to the fact that Bitcoin isn’t widely used/accepted for everyday purchases as an indication of its failure.

“How can bitcoin be ‘worth anything’ if I can’t use it to buy a coffee?” they say. Or “Why would I spend any BTC if it’ll be worth double that amount a day later?”

Reasonable arguments,¬†but what if we just aren’t there yet in the product cycle?

The economist William Stanley Jevons wrote that money evolves through stages:

The use of esteemed articles as a store or medium for conveying value may in some cases precede their employment as currency. Such a generally esteemed substance as gold seems to have served, firstly, as a commodity valuable for ornamental purposes; secondly, as stored wealth; thirdly, as a medium of exchange; and lastly, as a measure of value.

In other words:

1) Collectible
2) Store of value
3) Medium of exchange
4) Measure of value

If we follow this model, Bitcoin is currently in between stages 1 and 2. The wild fluctuations in price, then, are partly due to the fact we are still in the price discovery phase. The market is attempting to value this revolutionary asset with relatively unsophisticated models, infrastructures, and tools. If and when BTC fully reaches stage 2 as a store of value, its volatility will be low enough such that the opportunity cost of spending it will be closer to 0, allowing it to easily transition into a medium of exchange.

It’s important to note that Bitcoin could still be valuable even if it never makes it to the medium of exchange stage. Rare items such as baseball cards, shoes, and of course art are merely collectibles but can be valued in the millions. While I’m hopeful that Bitcoin eventually does become widely usable as a currency, if the market decides it is better served to simply store value akin to gold, its price would still be “justified.” Whether it satisfies Satoshi’s original vision is another debate.

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