This is a comment posted in response to this article.
“It’s disappointing that a seasoned economic commentator such as Jeremy can only find purchase on this phenomenon with recourse to the clichés of “ponzi schemes”, “greater fool theory” and “rackets”.
Bitcoin is not a new concept. Until 2009, researchers in cryptography, have worked on – and largely been eluded by – the idea of a counterparty-free, electronically liquid bearer token for at least 35 years (if we take for example the early work of people like David Chaum as an arbitrary reference point). Later this was built on by early Bitcoin prototypes such as “Hashcash” by Adam Back.
As such, the absence of “intrinsic value” is by design because bitcoin is a pure monetary token with no upper limit on its exchange value which is largely determined by the extent to which it is adopted as an electronically liquid store of wealth. In that sense Jeremy’s “greater fool” theory does hold some water since any monetary token requires to garner confidence that it can be traded away with equal ease and value by which it was acquired. Where it departs from that theory is in that it doesn’t require ‘greater fools’ to be economically viable, only a background of inflationary currencies and debt bubbles.
This is no different from historical monetary tokens such as the gold coin. Although gold is considered to have “intrinsic value”, a more appropriate and accurate term would be “monetary value” since its adoption as a store of wealth is really what gave it a monetary premium over its utility value. Just the same as if you purchase one of those plastic ride-tokens at a funfair you may pay 100 times the price you would for it in a hardware shop since the funfair micro-economy has adopted it as money and the otherwise worthless plastic token therefore carries a monetary premium which justifies its cost. Likeways, you can now deposit bitcoin in your account with a debit card provider and gain spending power access to the entire Visa network of merchants.
Sociologically, a monetary system is no different from a transport infrastructure, an education system, a manufacturing industry or a media sector. It performs an industrial function and if it performs well in its role then that system will have value. Until the advent of bitcoin there did not exist any technology which could perform the role of a counterparty-free bearer token where settlement and trade are co-incident. (i.e. the same role that the gold coin fulfilled in the days of physical markets). You needed a bank in the middle.
After 2009 with the advent of bitcoin, that was no longer the case. Further, the market has shown itself capable of arbitrating successfully between “bitcoin the technology” and “bitcoin the asset” since, while the technology can be replicated and new blockchains created, they are distinctly valued compared with the authentic chain. (Just like Christie’s will give you a different price for an otherwise ‘perfect’ Mona Lisa painted by a modern street artist to the one they’d give you for the authentic original by one Leonardo Da Vinci).
Contrary to Jeremy’s experience at his lunch party, bitcoin followers are more than familiar with the concepts of “the greater fool theory”, the Dutch tulip phenomenon and the Madoff ponzi scam since those have formed a more or less continuous drone in their ears since the days of $35 bitcoin.
Would that commentators such as Jeremy had the same depth of understanding about the digital asset phenomenon as bitcoin followers do about ponzi schemes.”