Digital Assets Are The Future of Value
Bitcoin’s digital nature is not detrimental to its value, it is among its greatest features
The fact that Bitcoin is an exclusively digital asset should not be viewed as detrimental, rather it is one of its greatest advantages.
In the 21st Century, our professional, social, academic, romantic, and commercial lives are deeply embedded with digital products, transacted in digital spaces. Kindle, Spotify, and Netflix have all supplanted their physical predecessors by offering digital alternatives. Despite declining sales of physical books, CDs, and DVDs, the total consumption of literary, musical, and video media has never been higher. Digital is surpassing physical.
The proliferation of digital products is attributable to the fact that they provide superior scalability, accessibility, transferability, portability, and of course price. Although adhering to physical products in physical marketplaces may yield some benefit under some circumstances, the practical limitations of physical goods will always make them less competitive if a digital alternative exists.
The limitations of physical products or physical marketplaces should be seen as friction, impeding the flow of transactions and encumbering marketplace participants. The bookstore selling paperbacks must rent space, manage inventory, organize shipments, and hire staff, in the hopes that customers will physically come to buy books. The kindle store, on the other hand, operates 24/7, with no marginal inventory costs, and is instantly accessible to anyone regardless of location. The friction caused by operating in physical space is structural to the business model and means that paper books will always be more expensive and slower than ebooks.
Given the choice, people will choose products that reduce costs and friction, in order to meet their needs faster, cheaper, and better.
For these reasons, the financial world has been largely digitized. Paychecks are direct deposited, bills are auto paid, credit and debit cards are swiped for purchases… all transacting with dollars that never manifest in physical space. This low-friction financial world is what lets everyone operate more freely and efficiently, without having to consider handling physical paper cash.
We use digital money to pay for digital products in digital marketplaces because it’s faster, cheaper, and better.
Both paper and digital dollars are capable of storing and exchanging value. They are both real, in that they are capable of fulfilling their purpose and accomplishing real-world tasks. In the same way that a digital book and a paper book are both capable of communicating a story, digital monetary assets are equally capable of holding and exchanging value. Whether digital or physical, what matters is the ability of the asset to fulfill its intended purpose by continuing to exhibit its valuable properties.
Whereas previous generations held their stocks, bonds, and investment portfolios in the form of paper certificates, the modern investor will hold investments in digital form. Transacting with digital representations of currencies and investments offers the same low-friction scalability, transferability, portability, and reduced costs that enabled Netflix’s digital movies to outcompete Blockbuster’s physical movies. It is easier to send $10,000 digitally rather than physically.
It is not only advantageous from a cost and friction standpoint that the transition to digital makes sense, but also because it affords users new possibilities. The advent of email enabled not only instant delivery of messages but the possibility to send to multiple recipients, attach files, incorporate hyperlinks, dynamically edit, and store gigabytes of messages in an inbox. It’s not that the postal system is simply uncompetitive from a cost and friction standpoint, it is incapable of competing from an enriched communication standpoint.
When comparing our current digitized dollars and Bitcoin, the differences may seem trivial, but structurally their differences are profound.
Bitcoin is a decentralized digital asset. It is created, held, and transacted in digital space, rather than on centralized bank databases. Although the miners, nodes, exchanges, and hardware wallets exist in physical space, it is inaccurate to say that any bitcoin exists in any particular location at any particular time. Bitcoin exists exclusively in digital space.
In the same way that switching from paper cash to digital cash gains advantages of cost and efficiencies, so does switching from digital cash to Bitcoin gain similar advantages. The cost and friction profile of operating with digital dollars can be viewed in how they are used: depositing, withdrawing, borrowing, lending, investing, and saving. There are transaction fees, minimum balance requirements, wire transfer delays, withdrawal limits, minimum purchase thresholds, and in-person signature requirements for operating with digital dollars.
The largest cost of operating with dollars, whether paper or digital, is that of inflation. Holding dollars for an extended period of time is guaranteed to lose purchasing power due to expansive monetary policy. This is a cost that encumbers anyone who operates within a fiat monetary ecosystem.
Bitcoin offers an alternative digital monetary asset, carries a different cost and friction profile. There are transaction fees, confirmation wait times, hardware costs for self-custody, KYC/AML requirements for exchanges, and of course a lack of popular adoption of Bitcoin by merchants, employers, and people. Although these things encumber the use of Bitcoin as a means of holding and exchanging value, throughout Bitcoin’s history, these frictions have been largely on a declining trend. It is now easier than ever to send, receive, hold, lend, borrow and trade Bitcoin securely.
Along with this different cost and friction profile, Bitcoin enables a more robust feature set for storing and exchanging value:
- Send billions of dollars of value globally with final settlement within minutes
- Through Bitcoin’s lightning network, stream penny-value transactions in seconds at little to no cost
- Audit and verify the global supply and the balance of all addresses
- Gain exclusive control over digital assets, without relying on a third party to hold and transact
- Transfer value without censorship or human-imposed restrictions
Most importantly, Bitcoin’s programmatic and immutable disinflationary monetary policy means that purchasing power is not eroded by inflation. One Bitcoin will always be worth no less than 1/21 millionth of the total supply.
These features of the Bitcoin monetary network are unmatchable by legacy financial assets and networks. Transferring value via Bitcoin, whether in large or small amounts, will be increasingly cost-effective and frictionless. Given the choice, people will gravitate towards this alternative value network in the same way that they have gravitated from paper cash to digital money.
In a world increasingly dominated by digital assets and digital marketplaces, Bitcoin’s innovation of a verifiably scarce digital asset is truly profound. The digital nature of Bitcoin is not detrimental to its candidacy as an alternative monetary asset, rather it is foundational to its unprecedented feature set and unmatchable cost and friction profile.
Originally published at https://thebitcoinletter.substack.com on November 25, 2021.
