Bitcoin is Just Another Wheel
Why Bitcoin is More Argument Than Element
In a meme-worthy soundbite now amplified endlessly by Michael Saylor and other Bitcoin maximalists (those who believe Bitcoin will one day be one of the top, if not the only, world currency), the elusive author Gigi extolls Bitcoin’s virtues thus:
“Crypto does not compare to Bitcoin. If you want to compare Bitcoin to something else, compare it to fire, the number zero, the wheel, the printing press, or electricity. Yes, it is that important.”
Another maximalist, Knut Svanholm writes in Bitcoin: Everything Divided by 21 Million,
“Satoshi Nakamoto stumbled upon a new element, element zero, by releasing the bitcoin code. Whoever is behind the pseudonym didn’t invent bitcoin. They discovered it.” (Emphasis mine)
Arguing that Bitcoin cannot be replicated due to its “Immaculate Conception”, another Bitcoin disciple maintains:
“One cannot help linking Bitcoin’s origin story to the pervasive religious story of Jesus. Much like Jesus taught his chosen disciples for three years, Satoshi gathered a few core developers that would eventually maintain Bitcoin. And just like Jesus miraculously ascended to heaven one day, Satoshi vanished as mysteriously as they appeared.”
Just in case Bitcoin’s import is not yet clear to us, Svanholm provides us with a clear-eyed analysis:
“Today, bitcoin is nothing short of a global spiritual renaissance. A reclamation of the human soul. An exit strategy for anyone tired of the drudgery of a purposeless career. A pathway to morality, cooperation, and self-sovereignty. An actual shot at saving not only ourselves but the planet we live on, too.”
To a new initiate into the world of Bitcoin, these grandiose claims and messianic pronouncements may seem excessive or even a bit silly. One might be forgiven for dismissing them as merely the hyperbolic enthusiasm of a few techno-nerds geeking out over their latest gadget.
However, for the maximalists, these claims are essential to the story. If Bitcoin is not Neo Money — “The One” who is destined to free us from the matrix of fiat currency and the grift of crypto bros wearing pajamas — then it might be cool technology, but is unlikely to herald a new monetary era.
Hyperbitcoinization
The maximalist argument rests squarely on Bitcoin’s absolute mathematical scarcity paired with the eventual hyperinflation or downright collapse of many or even most other currencies — especially other cryptocurrencies. Only 21 million Bitcoins will ever be issued on the Bitcoin network and if Bitcoin is the only currency on the planet, then each Bitcoin (which is divisible into 100,000,000 satoshis) must then serve as a medium of exchange for a fixed percentage of the entire world’s economic activity.
Maximalists’ opinions vary as to what exactly ought to be divided by 21 million in order to estimate Bitcoin’s future value. At the low end, if Bitcoin replaces USD as the world’s reserve currency, then the 21 trillion USD M2 money supply (cash + savings accounts + checking accounts + CDs), then each Bitcoin would be worth a cool $1M. At the high end, if you add in the value of all gold, stocks, non-USD currencies, debt, real estate, and derivatives and acknowledge that some percentage of the 21 million Bitcoins have already been irrevocably lost, then some analysts think $100M per Bitcoin is realistic. Some maximalists are not even content to stop with the potential wealth of planet earth and speculate that the true value of Bitcoin should rightly be considered as a denominator to the universe — that through a slow (or fast) process of “hyperbitcoinization” as every other currency of any form inflates into oblivion and people begin to colonize the solar system, Bitcoin will become the measuring rod for the galactic GDP.
It’s an extraordinary argument, made even more extraordinary by the fact that it is true if it is convincing. What I mean by this is that if everyone on planet earth believed the argument that Bitcoin was the only money with any real value, then Bitcoin’s price would indeed grow astronomically until it came to denominate everything else of value. If everyone in the world demanded to own Bitcoin and were willing to sell their other monetary instruments to buy it, then (given a fixed supply) $1M per Bitcoin is certainly on the conservative end of future estimates. Bitcoiners are good at math and the math is not the part of the argument that is problematic.
It’s also true that if you happen to own Bitcoin — perhaps quite a lot of Bitcoin — then you’re likely to find the math more compelling. The few hundred bucks you spent on Bitcoin in 2011 might make you a Billionaire in the not-too-distant future. If you (like Michael Saylor’s MicroStrategy) own $3 billion worth of Bitcoin that you bought for $4 billion, the math begins to look truly messianic.
If the maximalists’ argument that everyone will demand Bitcoin convinces everyone to demand Bitcoin then the prophecy will have fulfilled itself.
Element Zero
If, on the other hand, people are convinced that other currencies or cryptocurrencies are a viable alternative to Bitcoin (whether now or sometime in the future) then the maximalist’ argument for Bitcoin turns to shitcoin and “Element Zero” starts to look like a price prediction. Yes, one might say, Bitcoin is limited to 21 million coins, but you’ve got lots of other coins. Maybe Ethereum? Maybe even Dogecoin? Maybe a Central Bank Cryptocurrency? Or maybe plain old USD. If the supply of gold is capped and you want more currency, just use silver, or copper, or even rocks or shells. The maximalist case for Bitcoin’s growth rests on the argument that there is no alternative to Bitcoin because Bitcoin is unique and special. Bitcoin, they claim, is like the wheel, like fire, and like electricity — it is a singular monetary element which perfectly and holistically fulfills the requirements for human currency. Satoshi did not invent (much less engineer) Bitcoin so much as discover it. By this logic, if money were added to the periodic table, it would be listed as BtC. In a twist on the words of Saint Augustine, there is a Bitcoin-shaped hole in the human wallet that only satoshis can fill.
Money, Svanholm claims, “has seven essential characteristics — durability, portability, divisibility, uniformity, limited supply, and acceptability”. Svanholm only lists six items in his list of seven and only five of these criteria appear in the list of 8 essential characteristics of money enumerated by Vijay Boyapati in “The Bullish Case for Bitcoin” (Boyapati adds Verifiable, Established History, and Censorship Resistant but omits Acceptability). According to Svanholm, Bitcoin crushes the competing alternatives in these criteria, forming — as Bitcoiners are quick to point out — “the best money we’ve ever had”. The argument goes that since Bitcoin is the best money — really the only real money since other cryptos are shitcoin and fiat currencies are inflationary Ponzi schemes — then eventually the genuine article will win out over all the fakes. Since Bitcoin’s superiority as a currency is the result of an irreproducible and elemental discovery — not just a eureka moment for money but the eureka moment for money, Bitcoin’s eventual triumph over other currencies is merely a function of physics and time.
That’s the argument. There’s only one problem with it, and it’s a big one:
Bitcoin is a wheel — but it’s not the wheel.
It shares some attributes of the substances and systems people have used for money, but it’s not the platonic ideal of money. It’s not fire. It’s not electricity. It’s not a physical element. It might be like the printing press, but the jury’s still out. Here’s why.
You cannot argue for or against a lightning bolt any more than you can argue against circles or talk down a forest fire. The physical phenomena against which you are arguing do not acknowledge your arguments nor are they moved by them. If you make the case that circles do not roll or that fires do not burn, you may change some fool’s mind but you have not altered the physics of shape nor the chemistry of combustion. The elements are as they have always been and will be so long after you stop expending hot air to accuse or defend them. You can understand more about the workings of electricity, you may even find a way to generate it or harness it, but none of your goals, none of your aspirations, none of your idiosyncrasies or foibles or desires or vices will change what happens when you stick your finger into the light socket or dance on a hilltop during a thunderstorm waving a long piece of rebar.
Every physical phenomenon adheres to this rule. Truly natural phenomena — air, water, gravity, inertia — do not operate on the plane of human theory. We may indeed have changing theories as to how or why they operate as they do (Newton may give way to Einstein) and our theories may spur us to action, but an asteroid hurtling through space does not consult our theories. Natural laws are greater than human opinion in that nature influences human opinions but human opinions do not change natural laws. Gravity, unlike Bitcoin, does not require consensus.
Bitcoin, on the other hand, is — like other technologies — the embodiment of human opinion. Its development depends on human creativity, its ongoing existence depends on human interest, and its value depends on its usefulness for human purposes.
Unlike fire, water, or electricity, Bitcoin depends on human interest and effort for its continued existence in at least three ways:
1. Human Interest in the Bitcoin Source Code
The Bitcoin network runs on code written mainly in C++ by the person or persons known as Satoshi Nakamoto. Originally (in 2009) the Bitcoin source code consisted of about 3,000 lines, although it has since (through dozens of versions and thousands of individual changes by almost a thousand different developers) grown to hundreds of times its original size measured in lines of code. The Bitcoin code is open source, meaning none of its developers are directly compensated. Assuming the need for ongoing improvements and maintenance, the health of the Bitcoin network depends on a sufficient number of interested and motivated developers working on Bitcoin Core.
Bitcoin also depends, indirectly, on paid and unpaid developers working on tangential aspects of the Bitcoin ecosystem — exchanges, second layer protocols like the Lightning Network, wallets, etc. Bitcoin’s native user experience is convoluted and difficult for non-technical users and the Bitcoin network is limited to around 500,000 daily transactions, so the continued progress of this ecosystem is essential for Bitcoin to enjoy widespread adoption.
2. Human Interest in Mining
The Bitcoin network is peer-to-peer, with no centralized authority or responsibility. Bitcoin transactions are validated by nodes (computers running the Bitcoin code) on the network and validated transactions are aggregated into “blocks” by “miners”. The block is then stacked on top of previous blocks and syndicated throughout the network through a gossip protocol so that every node has a copy of the entire blockchain. The miners’ job is costly because in order to successfully “mine”or aggregate a new block of transactions, the miner must solve a complex math problem using energy-intensive computing resources. The requirement to use energy to modify the blockchain ensures that no one miner can make modifications that affect the validity of previous blocks. Currently, miners are paid by a combination of transaction fees and what is called a “block subsidy” or newly issued Bitcoin paid to the miner for creating the new block. The total cost of processing each Bitcoin transaction is about $50 at current prices, but the average transaction fee is only a couple of dollars. This is because the block subsidy is currently over 90% of the miners’ compensation.
However, this subsidy is halved approximately every 4 years by the Bitcoin protocol. This means that by 2140 no new Bitcoin will be issued, but the halving is exponential so it also means that long before that, the value of Bitcoin must at least double every four years or transaction fees must grow to equal today’s incentive level for Bitcoin miners. As soon as 2036, the block subsidy will be only 1/16th of its current level.
That is assuming the number of miners and their combined energy expenditure stays constant. It need not. The network can function on any amount of miner computation — but the security of the network depends on their collective computational output. If this expenditure goes down to the point where a single mining node or a collection of collaborating nodes could command over half of the computing power (also known as hash rate), then those miners could compromise the network. To maintain current levels of security, Bitcoin’s price must appreciate by over 25% per year and/or transaction fees must go up.
Perhaps this will all work out. It has worked out so far through several halvings. However, the point remains that the ongoing operation and security of the Bitcoin network depends on (as Nassim Taleb puts it) “interested and motivated” miners who’s compensation model depends on Bitcoin’s price appreciating and the unknown willingness of future Bitcoiners to pay higher transaction fees.
3. Human Interest in Bitcoin as a Medium of Exchange.
The total value of all Bitcoin (its market cap) is a little over $400 Billion as of today. Seeing as the M2 money supply of the Mexican Peso is only about $600 Billion, this would seem to indicate that Bitcoin is a thriving medium of exchange serving the equivalent of a medium-sized country. The truth of the matter is not that simple.
Attempting an accurate measure of the total number and volume of Bitcoin-denominated transactions gets technical quickly and I don’t have the space to get into it here, but here are some generalities:
- Very few merchants accept Bitcoin natively. If your buddy claims to pay for everything in Bitcoin, what he almost certainly means is that he’s using a crypto-linked Visa card or an app to convert his Bitcoin into USD so that he can pay the merchant in a currency the merchant accepts.
- The Bitcoin network only processes 250,000 daily transactions on the blockchain and that’s close to half of its upper limit. This is about the same number of transactions that take place daily in a small town.
- The Lightning Network, the most advanced second-layer protocol for the Bitcoin blockchain, only has about 16 thousand nodes with 76,000 payment channels funded with only $120 million worth of Bitcoin (about 0.025% of all Bitcoin).
- Most Bitcoin transactions are just purchasing dollars not a final good or service.
It is true that a larger number of Bitcoin transactions take place through exchanges like Coinbase or (until last November) FTX, custodial wallets like Wallet of Satoshi, and payment networks like Visa, but these transactions are not peer-to-peer and involve trusting a centralized third party with the cryptographic keys to your Bitcoin to make transactions at your behest. Many Bitcoiners, especially Bitcoin maximalists, would say “not your keys, not your coin” and in many, many instances, that assessment has proven to be literally correct. You can, of course, use Bitcoin as a medium of exchange without Visa, Coinbase, and other centralized intermediaries if you’re dedicated; it just takes additional work, additional planning, and additional knowledge.
Why does this matter? Because whatever else Bitcoin can do, it must serve as a medium of exchange if it is to fulfill the maximalists’ predictions. It must serve this function in a market of billions of people and millions of merchants and (whatever its potential) it is not doing that yet. The 100 million people who own Bitcoin most likely conduct a similar number of daily transactions as the residents of Bangor, Maine and most of those transactions look a lot more like stock trading than buying coffee. Why is this? That’s up for debate, but we shouldn’t fool ourselves into believing Bitcoin has achieved market validation just because it can be used as a medium of exchange by those sufficiently interested, motivated, and incentivized or by those willing to give up Bitcoin’s decentralization and personal sovereignty in exchange for convenience.
Even where Bitcoin has been adopted as legal tender like in El Salvador, the Central African Republic, and…(well, the list is short), the population has not adopted it en masse. If the masses adopt Bitcoin as a medium of exchange at scale, then the miners incentives will grow and a sufficient number of developers will likely want to contribute to Bitcoin Core and its ecosystem. If the masses do not adopt, if Bitcoin remains a medium of exchange used daily only by wealthy anarcho-capitalists, cypherpunks, and YouTube influencers, then eventually people’s interest in Bitcoin will fade along with its valuation, driving down incentives for Bitcoin miners and decreasing the number of its open source contributors.
Many maximalists will argue vehemently that user adoption is a fait accompli — that Bitcoin is already used as a medium of exchange around the world and has thus already passed the market test. I don’t think this is the case, but the nature and extent of the test might be legitimately questioned. But the need to argue proves the point. If Bitcoin’s mere existence ensures its ultimate ascendency, then there is no need to argue. If, by all but the wildest estimates, the Bitcoin community still has to convince 99 out of 100 people that Bitcoin should be their next money, then Memeing Bitcoin better stay busy.
The Sound of Inevitability
It is possible that the Bitcoin network, bolstered and motivated by the Bitcoin community, can overcome all of these technical and market obstacles. It’s possible that human interest in Bitcoin will grow in all three of the above categories.
It is possible, but it is not inevitable.
It is not inevitable because Bitcoin is just another wheel, albeit a very innovative one. It is not a natural element in the perfect monetary shape which no other money can match. It is a human construct designed for a human purpose encrusted with many of the flaws and tradeoffs one should expect from any other technology. It is, furthermore, a technology which requires the ongoing effort, interest, and trust of millions of people for its very existence and its day-to-day operation.
Bitcoin, to an extent that is even greater than most other market goods, is a function of human choice. Right now, people have chosen to use and sustain the Bitcoin network by assigning to Bitcoin a market value. If enough of them value other goods more highly, then Bitcoin will stagnate, fade into obscurity, or perhaps even cease to exist. When the Bitcoin maximalists make bold assertions such as “Bitcoin is unstoppable” and “Bitcoin is immortal”, what they are really saying is that they think a sufficient number of humans in the future will maintain interest in Bitcoin forever, but the future is unknowable and forever is a very long time.
The future of money is especially murky because money itself is not a basic human need like food, clothing, or shelter, but a construct (a conceptual technology) by which people trade other things. In other words, with money we’ve created both the problem and the solution so each is malleable and the combination is even more malleable.
Some other human problems are not as malleable. The problem/solution equation for clothing and shelter technologies sometimes looks like this:
Arctic Circle (i.e. the problem) + Party Dress (i.e. the solution) = literally die
The human bodily response to -50F is a relative constant. The solution varies — from building an igloo to wearing a parka to a heated party dress to living in Guatemala instead — but at least the problem stays where we put it.
The problem/solution equation for money looks more like this:
Bored Ape NFT + Only ETH Can Buy a Bored Ape = Cuz I’ve had everything
The problem is made up (No one needs a Bored Ape NFT). The solution is similarly made up to solve just such a problem (Ethereum — ETH — is the second largest cryptocurrency by market cap).
You might argue that people also buy igloos, parkas, and condos in Guatemala with money, but ask yourself whether the invention of Bitcoin was really needed just to facilitate the purchase of human bodily necessities. For that, we probably could have gotten by on seashells.
The equation for money contains two infinitely-variable values:
- What (and how) we want to exchange
- What currency we use to exchange
Both sides of the equation have changed frequently through history. The European tribal cultures of 52 B.C. would have had no use for paper currency issued by a nation-state. People of George Washington’s era didn’t order products from China because the cost of shipping would have been 90% of the total. The infrastructure required for payment cards wasn’t built until the 1950s. The first online purchases were made less than thirty years ago. Bitcoin itself would have been entirely useless had it been developed before the internet monkeyed with the variables of what we buy and how we buy it.
Money is not what something is, but what it is used for. Gold is an element, USD is government-printed paper, and Bitcoin is code, but none of them are intrinsically money. Each may be used for money to the extent that it solves the set of very human problems which emerges in its cultural era.
Even Saifedean Ammous — a Bitcoiner and fierce critic of fiat currencies — admits in “The Fiat Standard”:
“Understanding the problem this fiat system solves makes a move from the gold standard to the fiat standard appear less outlandish and insane than it had appeared to me while writing The Bitcoin Standard, as a hard money believer who could see nothing good or reasonable about the move to an easier money.”
In other words, Ammous concedes that different people in different eras chose different forms of money for semi-defensible reasons. The people, the era, the types of purchases, and the money have all changed through history and they will do so again. The same logic which makes a cultural shift to Bitcoin possible makes it possible to shift off Bitcoin at some point in the future.
When might that future show up? And in the meantime, might Bitcoin replace USD and hit $1M? I don’t think it’s likely, but I don’t think it’s utterly impossible either. But consider that a lot would have to happen — including the disintegration of US governmental power — for that to take place and that will take time if it happens at all. Years? Decades? Realistically, you’re probably betting nothing much happens in the next twenty years that seriously hampers Bitcoin’s growth and that none of the tens of thousands of developers working on alternatives to Bitcoin come up with anything compelling.
I suspect that none of what I’m arguing is a mystery to the Bitcoin maximalists. They know intuitively even if they do not acknowledge it explicitly that Bitcoin’s success or failure depends on people’s perception of its value and its usefulness for solving human problems. They also know that the future needs to get here quickly before something bad happens to spoil the party. This, I believe, is why the maximalists are the loudest, most persistent, and most absolutist members of the Bitcoin community. The maximalists have a vested interest in convincing people of Bitcoin’s future world domination, and perhaps that’s all there is to it. But more than that, I believe they recognize that unless they present a unified front, unless they suppress any lingering doubts, unless they villainize the competition, trivialize all criticism, and hold fast to the true faith, they have little chance of achieving the levels of adoption they predict. Unless, through grift or persuasion, they can change people’s minds they won’t be able to change people’s money.
But What about the Printing Press?
The first book Johannes Gutenberg printed was 180 copies of the Bible, which one might have hoped would secure him providential assistance in successfully monetizing his invention.
But not long thereafter, Gutenberg lost the rights to his presses along with half the Bibles in a lawsuit won by his partner and investor, Johannes Fust. This is just one more example of how in the history of technology, sometimes the Fust is actually the second and the second might not win either.
Bitcoin might be like the printing press. It might prove to be a seminal technology that opens up additional possibilities for the human species. It might also prove to be like the printing press in that its early versions were imperfect and its early inventors and investors were not rewarded to the same degree as those of its later copycats. It might be like the printing press in that governments will seek to control it or create their own versions of it or like the printing business in that it now (to the extent it’s still profitable) doesn’t depend on presses.
Bitcoin might be like Facebook or it might be like MySpace, it might be like Altavista or Google, it might be like Book Stacks Unlimited or it might be like Amazon, it might be like The Commodore 64 or like Windows or like the Macintosh, like the Blackberry or like the iPhone. Bitcoin might be like tablets in the 2010s or like Minicomputers in the 1990s. It might be poised for Tesla-like growth, stagnation like IBM, decline into irrelevancy like AOL, or bust like Blockbuster.
Bitcoin is not the first money or even the first cryptocurrency. It is like version 342.07 of money and version 3.2 of crytocurrency. Conceptually, it builds upon the previous versions and previous technologies, from seashells and gold to eCash, and Hashcash. To say there will never be a better currency than Bitcoin is to be blind to its own lineage — to say that the chain of human ingenuity and irrationalities which has brought us here has now terminated.
Bitcoin is like the printing press in that its future (like the future of any technology) will be decided in the collision of our future selves with our future circumstances. Depending how we or our children respond and what the new cultural era is like, the future may use Bitcoin, USD, gold, or some other currency as yet unnamed and unthought.
But that’s not what the maximalists mean when they compare Bitcoin to the printing press or to the wheel. The maximalist argument is based on a theory of technology development that posits perfect engineers creating perfect solutions to perfectly-understood problems which remain perfectly static with the passing of time. People then adopt these solutions with perfect rationality. How else could one possibly claim (as many maximalists do) that “Bitcoin is Eternal”. This theory has no basis in history or experience. We know of no other technologies that operate like that. Every other technology changes constantly, ebbs and flows as people use, abuse, misuse, and disuse it. Bitcoin has operated the same way, which is why its price is $23k now and its codebase is 30x that of Bitcoin 1.0.
Nature keeps us grounded, literally and figuratively. Fire, water, electricity, gravity: we may not fully understand them but they nevertheless enable our efforts and assign those efforts strict limits — whether or not we can know them perfectly. These forces are important because they keep us from living too long inside our own heads. They force us to periodically reconcile our ideas with reality, sometimes painfully. They keep wild, nonsensical claims by starry-eyed engineers from propagating indefinitely. Given enough rotations, the earth rolls like a wheel over hyperbolic pronouncements that Bitcoin — or any other new gadget or invention — is element zero.
