Original Author: Luc Dossis, Compiler: Cobo Wallet
For many people new to Bitcoin, this is a completely foreign concept. And when a new thing cannot be correctly recognized, misunderstandings can easily arise.
A basic misconception is this: Bitcoins primary use is for payments. And this prevents people from understanding what Bitcoin is really about.
If you ask a few passers-by on the street (whether they will pay with Bitcoin), they will definitely suggest you to pay in another way.
If Bitcoin is simply regarded as a means of payment, it is easy to have similar misunderstandings, because Bitcoin is obviously not as convenient as PayPal, Apple Pay or credit cards when making daily payments.
The limit of 7 transactions per second, high fees, and the irreversibility of transactions all sound like it is difficult for Bitcoin to do anything for payments.
Add in the fact that Bitcoin is only ten years old and its price fluctuates wildly, and its not hard to see why people have so many misconceptions about Bitcoin, and its easy to list a whole host of reasons why Bitcoin wont succeed.
You may ask why Bitcoin does not try to improve transaction efficiency? If not, why dont we choose another digital currency?
Here’s the problem: the idea of “bitcoin as a means of payment” is fundamentally wrong.
For now, Bitcoin does not need to improve transaction efficiency, because its competitors are not PayPal and Apple Pay, but the US dollar.
Bitcoin is not a new means of payment, it is an entirely new form of money.
If you have never thought about the nature of money, then the last sentence may be a bit confusing to you.
What is currency?
What is currency?
In the long river of human history, money, as one of our oldest inventions, has existed in countless forms. Beads, shells, animal skins, stones, livestock, weapons, salt, metal, and paper have all been widely used as money in human society.
The reason why these things can become currency is that they are reliable scarce items in the living environment at that time.
Twigs and leaves are common at all times, and they do not qualify as money. In contrast, a hand-wrought metal knife, a beautiful string of beads, or a piece of precious animal fur are all difficult to craft, and their rarity gives them value.
Slowly, some of these items began to surpass their own attributes and become an intermediate medium for commodity exchange.
For example, if I want to buy a deer you just hunted, but I only have an ax to exchange, the difference in value between the two things will make the transaction difficult. At this time, if there is a third valuable item that is easy to carry and easy to divide, we can use it to measure the value of the deer and make payment.
For this to happen, three conditions must be met:
They need to have a certain value so that people will be willing to use and hold for a long time (store of value)
They can be used as a medium of barter without being consumed in the process (medium of exchange)
After becoming a medium of exchange, they will gradually become the default standard of value measurement, such as a deer is worth 20 gold ingots (value scale)
Items with the above three characteristics become what we know as money.
What does this have to do with Bitcoin?
As I mentioned before: Like beads, shells, and metals, Bitcoin is a new kind of money.
Why is Bitcoin still being discussed ten years after its birth? The reason is that Bitcoin is by far the best form of money.
It may take a book to explain clearly (The Bitcoin Standard by Saifedean Ammous is a good book), so I will make a long story short here.
Essentially, as long as some people think something has value, it can be used as currency, and this value is directly related to the difficulty of its generation.
Why is gold the most precious of all metals? The reason mainly depends on two aspects: the amount of gold that has been mined (stock) and the amount of gold that can be mined each year (flow).
Its that simple.
Why?
Why?
This is analyzed using the Stock-to-Flow ratio (hereinafter referred to as S2F) model.
S2F of different metals (©️PlanB)
The amount of gold we can extract from the ground each year is about 2% of the amount that has been mined, which means that the S2F is about 50.
Such a high S2F ratio means that even if the supply of gold suddenly increases, your gold investment income will not plummet.
Even if gold production is doubled (probability is very low) and the flow/stock ratio increases from 2% to 4%, it will not bring about a significant change in the price of gold.
To borrow a sentence from The Bitcoin Standard:
It is this persistently low supply that has allowed gold to maintain its status as money throughout human history.
A high S2F ratio implies scarcity, which is the condition for a currency to function as a store of value. Historically, no other item has maintained such a high S2F ratio as gold.
Until we had Bitcoin.
The limited supply of bitcoins and diminishing supply are making it the most scarce item ever created in human history. Currently, the Bitcoin network can generate 12.5 bitcoins every 10 minutes, which are distributed to the miners who packaged the block in the form of rewards.
Bitcoin inflation rate over time
As of August 2019, Bitcoins S2F ratio was 22.7. By May 2020, the reward per block will drop to 6.25, and the S2F ratio will rise to 55.
The halving of Bitcoin occurs every 4 years until the total output of Bitcoin reaches 21 million in 2140, when the Bitcoin network will no longer generate new coins. In this way, the scarcity of Bitcoin can eventually exceed that of gold.
Bitcoins future S2F
From the chart above, we can see that Bitcoin’s S2F ratio is gradually approaching gold (Bitcoin 55, Gold 50-60)
After the next halving (2025), Bitcoin’s S2F ratio will exceed 100, followed by a doubling every four years. This also means that in the next few years, Bitcoin will be more scarce than anything created by human society.
This is of great significance.
store of value
store of value
Bitcoin should be a good store of value in theory, but in practice?
Well, I think the answer is yes, considering Bitcoin has been the best performing asset class over the past decade.
Some people may say that the price of Bitcoin has skyrocketed and fluctuated too much, and it is not suitable for storing value. Because of this, some people say that Bitcoin is a bubble, but these are two different things.
First, a good store of value does not mean it will always be stable in the short term. Bubbles in real estate and the stock market happen all the time, but no one is saying they are not good stores of value, and neither is Bitcoin.
After every Bitcoin price surge, the low point of the next plunge is always higher than the low point of the previous cycle, that is to say, as time goes by, although the price of Bitcoin fluctuates greatly, its value is gradually increasing. Increase.
The second problem is that speculative bubbles can burst and never recover. People like to compare Bitcoin to the tulip of the 1630s, but the tulip bubble did not reappear after it burst. Neither did the South Sea Bubble around 1720 nor any other speculative bubble in history.
Compared with just needing, the bubble formed based on new technology can always rebound. Think of the dot-com bubble of the early 2000s, the railroad frenzy of the 19th century, or any stock market crash. These are all caused by the irrationality of human nature, and they are all predictable.
At present, the market size of Bitcoin is still relatively small, and the price is easily affected by investor sentiment and fluctuates violently.
secondary title
Other Properties of Currency
Well, it should be safe to say that Bitcoin is a good long-term store of value, but does this prove that it can become a currency?
Not yet.
As mentioned before, to be a currency, it needs to be a medium of exchange and a measure of value.
Bitcoin is not yet widely adopted by merchants, nor is it used to price goods or services, so we cannot yet say that Bitcoin has fulfilled all the functions of money.
This is something that opponents of Bitcoin often grapple with. The transaction confirmation is slow, the price fluctuates greatly, and not many people actually use it to buy things, so they say that Bitcoin will not work, and choose other digital currencies.
But such thinking is itself a step backwards.
Like our ancestors, you should not accept branches as payment, because we all know that the branches themselves are worthless. If I tell you that this branch is on the chain, you may still think it has a little value , but after all, this is just a worthless branch.
You may have understood what I mean: if you think that other digital currencies are more suitable as currencies than Bitcoin, then you have overlooked the really important point: it should be a value storage method in the first place.
Every item that has been used as currency in human history follows the same law:
First of all, if it is worth collecting, because it is rare, precious, or very useful, people are willing to hoard it;
Because it is difficult to produce, people think it is valuable, and then it slowly becomes a means of value storage, and it is still valuable after the test of time;
When it becomes popular, it can be used in exchange between individuals and groups, gradually becoming a medium of exchange and a measure of value.
This process has been passed down since ancient times and has been tested for a long time. It cannot be overturned by a few fashionable modern words.
So, right now, Bitcoin isnt really a form of money, but its moving in that direction.
The more people see it as a store of value, the more people are willing to hold it; the more people hold it, the more stable its price will be.
Two-layer/multi-layer solutions such as the Lightning Network are accelerating Bitcoins expansion until one day Bitcoins base layer can carry the largest level of transactions, and daily transactions will occur in two or even three-layer networks.
Bitcoin today is not ready to handle thousands of transactions per second, nor is it cheap, stable, or secure enough. No single digital currency can.
There are huge trade-offs between security, price stability, and speed. If what you want is a fast network, it may be more centralized and less secure; if the currency supply model is unreliable, it is not suitable for value storage.
There is no digital currency in the world that is both decentralized and secure, with fast transaction speed and low handling fees. After all, thousands of verification nodes and expensive mining costs are required to ensure the security of the network.
But the history of money tells us: the most trustworthy store of value will eventually make the others obsolete.
Yes, Bitcoin isnt a good means of payment just yet, but that doesnt matter.
original:
original:https://medium.com/
