Ludwig Wittgenstein once asked a friend: “Tell me, why do people say it is more natural to believe that the sun rotates around the earth than that the earth rotates?” The friend said, “Well, obviously, because it looks like the sun is going around the earth.” Wittgenstein replied: “Well, how would it seem? if it seemed so the earth turned? “
As Bitcoin’s four year bull run begins, we must prepare for the world’s sudden and ill-informed interest. A great many newcomers will arrive openly – as we have all done once – but also many representatives of the established companies will insist that what we can see with our own eyes does not actually happen according to their theory because it cannot .
This post is part of CoinDesk’s 2020 Year in Review – a collection of posts, essays, and interviews about the year in Crypto and beyond. Allen Farrington writes for Quillette, Areo, and Merion West and extensively on Medium; You can find his collected writings here. He lives in Edinburgh. This is a condensed version of a longer essay here.
Bitcoin cannot be a store of value because it has no intrinsic value. It cannot be a unit of account because it is too volatile. It cannot be a medium of exchange as it is not widely used in pricing goods and services. These are the three properties of money. Hence, Bitcoin cannot be money. However, Bitcoin has no other basis for valuation, so it is worthless. QED.
I call this argument, semantics, reality. What could possibly falsify this? It is basically an assertion about the material world; about what will or won’t happen in real life in this case. Yet it looks more like it relies solely on the meanings of words. In discussing the dollarization in Ecuador – the instructive process that “official” money is spontaneously replaced by simpler superior money – Larry White says of those who, by definition, deny that such a thing can happen, that they “just go on look at the blackboard and not at what is happening outside the window. “This is a strange approach to understanding novel phenomena that I would generally not recommend. Reality doesn’t care how you describe it.
But there is also a softer, slicker, more agnostic form of semantic theory that recognizes that something is happening: Bitcoin is not nothing, but it certainly cannot be money because it is so dissimilar to the standard conception (semantic) of what money should be and how it should behave that the proposal is too unpleasant to accept. It certainly seems like a network: it’s global, digital, solid, open, and programmable. And it has undeniably increased in value since it was worth nothing at all in the past. But is that different from a normal old financial bubble? Can “money” be reconciled with bubble-like behavior? And is the digital nature of Bitcoin such a plus? Doesn’t the internet allow for a speed and potency of virality arguably fine-tuned to inflate a bubble into what is seen as open and programmable digital? Bitcoin can be something – maybe the “blockchain technology” it runs on? – but obviously Bitcoin doesn’t seem like money.
Wittgenstein would be the least impressed. He would probably ask, “What would it be like if it looked like a global, digital, solid, open, programmable money monetizing from absolute zero?”
See also: Allen Farrington – Spiritual Reflections on the Bitcoin Halving
The semantic theory is alarmingly static. This stasis is rooted in its semantic chicane: many languages have different verbs to distinguish between “being” because they have a property in themselves or awkward, such as: B. ser or estar, in Spanish. English not. I am male just as I am hungry. But in what sense is Bitcoin volatile? Is it inherently volatile, or is it volatile relative to a standard at some point under certain circumstances? Are goods and services generally resistant to pricing in Bitcoin? What if you try this? Is it like dividing by zero?
Imagine if all serious business knowledge had been derived from studying large, established companies because there had never been a startup in living memory. Then when a startup came along, people might say, “This is not a business because it is not making a profit” or “This is not a business because it has no defined business plan.” This would clearly not be advisable. That is not to say that their models and definitions are completely wrong instead of perfectly right, but that things are not that binary. Reality is messy, and it is reality that we should be concerned about, not our theories of reality, which it turns out have never really been tested.
I suggest we should reject the arrogance of knowing that no new money can arise because reality follows from our semantics.
As it would seem
So what would it look like? It would depend on the relative merits of the challenger and the incumbent, but also how the perceptions of those merits spread, how the perceptions of those perceptions spread, and so on. Since the opportunity cost is absolute, the challenger’s money cannot simply be used as in a novel social network, but must be sincerely believed. Therefore, the emergence of the challenger may for some time depend on how individuals on the network think about money themselves …
Anyone who believes in semantic theory would immediately dismiss the challenger. If it doesn’t act as a medium of exchange and a unit of account, it doesn’t get the network effects to ever do, which means it neither stores value nor can be money. QED.
However, a more sophisticated observer might be less interested in definitions and be concerned with the circumstances of the competition between the two in real life. She would realize that money has value because of economic uncertainty and that the greater the uncertainty we have about how it works, the less useful it becomes. that the need for security that it mutually fulfills means that its value is derived primarily from perceived utility in exchange in the future, not in the present; that it should support healthy and stable capital formation, and that its mechanism should reliably capture the real scarcity without dilution.
Reality doesn’t care how you describe it.
When she turns to the challenger, she could be deterred by the lack of immediate benefit and the uncertainty that unfavorably creates. Still, it could recognize the value of the essential trustworthiness of its mechanism and its transparent and limited dilution as a useful future security that respects the time and energy it seeks to preserve. Encouraged by the prospects of healthy capital formation and the first signs of such capital formation, she may find that the perception of her utility is spreading and steadily self-sustaining the size and strength of her network.
As for the incumbent, she may fear that his highly dilute mechanism might not be trusted at all; that the capital formation it supports is toxic and unstable; that its overall operation is highly uncertain and that, as this perception seems to spread, its long-term usefulness and the size of its network are increasingly being called into question.
She could argue that, like Esperanto, because of its elaborate design, it could be pleasing to its designers, yet fragile, and burdened in the real world as natural languages and natural monies emerge and evolve to meet a decentralized demand. They fit a rough reality, not a clean semantics. That these designers seem to have no idea of the importance of time, uncertainty, knowledge, and capital for the money could make them even more nervous about the likely quality of their design.
Regardless of her own appreciation of the merits, however, our observer cannot escape the fact that she must also prevent the realization of the merits by others and her appreciation of the knowledge of the merits by others, and so on. The success of challenger money depends precisely on the uncertainty its potential utility creates. This is not just a compromise in the minds of economic actors, but a likely source of dynamic instability.
This is all to say that if it looked like new money was about to emerge, it would likely appear extremely volatile, irrational, and unpredictable. The perspective of the individual says nothing. It may tell us less than nothing because it appears informative as a snapshot of the dynamics of the entire network. It seems like this volatility, irrationality, and unpredictability destroy the challenger’s usefulness as money. But his individual perception is irrelevant to the whole. When an individual acts on it, it affects the whole in fleeting, irrational, unpredictable ways and returns to influence its later perception.
If it looked like new money was about to emerge, it would look like it was following an evolving and chaotic narrative, rather than obeying a fixed and clean equation. It would be slow and sporadic. It wouldn’t be the straight exponential of a hot new social network, as the nature of its “network effects” would frankly be far more complex. It would essentially be the unpredictable and ever-changing proliferation of contrary beliefs about the nature of money itself.
If it looked like a global, digital, solid, open source programmable money was being monetized from absolute zero, it would look very similar.