Bitcoin Timeline Six Groups Bought It

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Originally published in The Conversation, under a Creative Commons CC-BY-ND license. Updated here by the author.

Mainstream commentators often look down on people who buy bitcoin, seeing them as naive victims of a fraudulent bubble. But if we take a closer look, we can trace the history of bitcoin, and its growing acceptability, through the arrival of different types of buyers. Each group has been drawn to a different narrative of the value of bitcoin, and it is these groups and narratives that have gradually contributed to its long-term growth.

The Idealists

Bitcoin was born out of a small group of cryptographers, known as “cypherpunks”, who were trying to solve the “double-spend” problem facing digital money: “cash” held as a digital file. could easily be copied and then used multiple times. The problem is easily solved by financial institutions, which use a secure central ledger to record how much everyone has in their accounts, but the cryptographers wanted a solution that was more akin to physical money: private, untraceable, and independent of. third parties such as banks.

Satoshi Nakamoto’s solution was the Bitcoin blockchain, a cryptographically secure public ledger that records transactions anonymously and is kept in multiple copies on the computers of many different users. The first narrative of the value of bitcoin was incorporated into Nakamoto’s original “white paper”. He claimed that bitcoin would be superior to existing forms of electronic money such as credit cards, providing benefits such as the elimination of chargebacks to merchants and reduced transaction fees.

The libertarians

But from the start, Nakamoto also marketed bitcoin to a libertarian audience. He did so by highlighting the absence of any central authority and in particular the independence of bitcoin from states and existing financial institutions.

Nakamoto criticized central banks for degrading currency by issuing increasing amounts of it, and designed bitcoin to have a hard limit on how much can be issued. And he emphasized the anonymity of bitcoin transactions: shielded, more or less, from the prying eyes of the state. Libertarians have become staunch defenders and buyers of bitcoin, more for self-reliance than for financial reasons. They have remained very influential in the Bitcoin community.

The HODLers

These were small constituencies, however, and bitcoin really started to take off in July 2010 when a short article on Slashdot.org (“news for nerds”) spread the word to many savvy young buyers. This community was influenced by “California ideology” – the belief in the ability of technology and entrepreneurs to transform the world.

Many bought small quantities at a low price and were somewhat perplexed to find themselves sitting on large investments when the prices shot up. They got used to huge price swings and frequently advocated bitcoin ‘HODLing’ (a misspelling of ‘hold’, first used in a now iconic post posted by a drunk user. determined to resist constant “sell” messages from day traders). The HODLers insisted, half seriously, that bitcoin was going “to the moon!” And talked about buying “lambos” (lamborghini) with their earnings. This counter-cultural lightness has generated a sense of community and a commitment to owning bitcoin that helps prevent its value from dropping to zero when sentiment backfires.

The players

The more recent groups that have contributed to the history of bitcoin are more conventional. The fourth group consists of individual speculators who have been drawn to bitcoin’s volatility and price spikes.

On the one hand, we have day traders, who hope to exploit bitcoin’s price volatility by buying and selling quickly to take advantage of short-term price movements. Like speculators in any other asset, they have no real interest in the whole or in matters of inherent value, but only in the current price. Their only narratives are “buy” and “sell”, often used in an attempt to influence the market.

On the other hand, we have those who are drawn to the news of price bubbles. Ironically, bubble stories in the press, often designed to deter investors, can have the opposite effect. These investors are joining what Keynes called a ‘beauty contest’ – they don’t care about long-term or intrinsic value, only what other people might be willing to pay for bitcoin in the short. or medium term.

Portfolio balancers

Bitcoin began to become more attractive to more sophisticated investors when stories of its value as a useful element in a larger investment portfolio began to emerge. These investors buy bitcoins to hedge against broader risks in the financial system. According to modern wallet theory, investors can reduce the overall risk of their wallets by holding bitcoin because its peaks and troughs do not match those of other assets (i.e. bitcoin has become an “uncorrelated” asset), providing some insurance against stock market crashes. This is arguably the narrative that began to break down barriers to bitcoin’s acceptability among mainstream investors: they often see risk, rather than something to be avoided, to be something to embrace as a source of high returns. in a properly balanced environment. wallet.

Business enthusiasts

More recently, the continued upward progression of bitcoin’s price plateaus and market value has started to make it attractive to private investors. Initially, this was driven by enthusiasts in leadership positions at a few large companies who made very large purchases of bitcoin to be held as part of the company’s portfolio of assets. These purchases have enhanced the narrative of bitcoin as a traditional investment, but they also contribute to a different narrative of the value of the company’s own shares. When a company’s bitcoin holding becomes a significant part of its assets, its own stocks can be positioned as bitcoin-like investments, the price of which is expected to rise when bitcoin does, and vice versa. They therefore become more attractive to investors who want some exposure to bitcoin but are reluctant to buy it themselves – or are legally prevented from buying it, like some mutual funds.

Where next?

As bitcoin becomes attractive to more and more buying groups, larger financial institutions are increasingly keen to step in. We can expect them to offer new financial products, including derivatives, that provide investors with indirect exposure to the bitcoin market. In a narrative that has been bubbling for some time, they are preparing to position bitcoin-related products as a routine part of institutional wallets. If successful, the conditioners will also have to buy bitcoin themselves to hedge against their liabilities to buyers of their financial products. The irony, of course, is that these recent developments increasingly tie bitcoin to the financial institutions that Nakamoto designed it to escape from.

Bitcoin’s value has therefore been built on an evolving series of narratives that have attracted successive waves of buyers. While mainstream commentators often dismiss bitcoin as lacking in intrinsic value, all market values ​​of assets depend on narrative processes like these, so bitcoin looks a lot more like conventional assets than they are willing to admit. . Of course, the prices of bitcoin may well collapse again, but so do those of any other financial asset. Investing in bitcoin is arguably no more or less risky, for example, than investing in the latest tech company to go public without ever making a profit.

This is a guest article by Dave Elder-Vass. The opinions expressed are entirely theirs and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.

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