Bitcoin

Bitcoin as "Digital Capital"

Part VII of The Value of Financial Products and Assets

Part VII of The Value of Financial Products and Assets

Previous Parts

As mentioned towards the end of the previous part of this essay series, the narrative around bitcoin’s instrumental and/or intrinsic value has developed from being a peer-to-peer payments innovation to being “Digital Capital”.

The argument underpinning the need for “Digital Capital”, i.e. an innovative asset that grows and preserves wealth, is articulated in a report titled Your Wealth is Melting and by multiple presentations by Michael Saylor.

The Case for "Digital Capital"

To elaborate on the argument presented in Your Wealth is Melting, in terms of stocks in a company, for example, with the exponential developments in technology and the growing competition between multiple companies, more products and services will become abundant and available. Given the abundance in products and services, the price of said products and services will only decrease, which will contribute to lower valuations of companies providing these products and services. Moreover, the worth of those companies will decline because the products and services they provide become readily available and will be offered by more and more companies, which will make the companies less valuable as an investment. All of this will reduce the potential for maximizing wealth creation by investing in companies and holding shares in said companies. The article also discusses other assets such as real estate and how it isn’t scarce enough for maximal wealth creation. Overall, the argument is centered around economic progress, abundance, and accessibility that will eventually hinder the ability to achieve abnormal, high returns on the typical investments in the market.

As for Michael Saylor’s argument, he points out that the financial and physical assets we traditionally invest in are outdated and imperfect. “$9 trillion in global wealth is spread around physical assets and financial assets that are 20^th century ideas, 20^th century technology” (see link). These asset are not only outdated, but are imperfect; “… the global economy struggles because it relies on imperfect assets and crippled systems to store that capital…its crippling capital preservation”. These assets are imperfect, according to Saylor, because they are susceptible and vulnerable to natural and human made risks such as weather, wars, natural disasters, competition, monetary and political policies etc. Due to these vulnerabilities and the “short lifespan” of traditional assets, they are not robust enough to be effective assets for capital preservation and wealth maximization.

Overall, the arguments underpinning the need for an innovative asset such as bitcoin that grows and preserves wealth, or for “Digital Capital”, is as follows: traditional physical and financial assets, including the ones discussed in this series, are no longer suitable for capital preservation and wealth accumulation since we are living in an era of abundance and accessibility, and since the traditional assets we historically invested in are imperfect assets with “short lifespans” that are vulnerable to natural and human made risks. Those traditional assets aren’t scarce and robust enough to preserve and grow wealth. Due to the imperfections of the market and the inherent risks in the market, we’ll need a new innovative asset that can preserve capital and maximize wealth more effectively than the inadequate traditional physical and financial assets we’ve historically invested in.

We need to “find a way out of the game”. Bitcoin is “the way out of the game”, according to Saylor. Bitcoin is the solution for our “economic dilemma”.

The Innovation

Following the above line of reasoning, the introduction of bitcoin is the introduction of “Digital Capital”. In other words, the innovation of bitcoin revolves around it being a digital asset purely focused for wealth accumulation and capital preservation. “Digital Capital” allows us to codify specific features in said asset to make it an appropriate asset for capital preservation and accumulation. The features codified in bitcoin – its scarcity, decentralized nature, and public transparency – are said to be what makes it the ideal asset for capital preservation and growth. Since bitcoin is “immortal”, “immutable”, and “immaterial” (as Saylor describes it) it is not vulnerable to risks such as weather catastrophes, competition, etc. that traditional assets are typically vulnerable to; so bitcoin has an infinite life span, which makes it the perfect asset and the solution for the imperfection inherent in the market and the assets we typically invest in.

It is important to note that one of the main features of bitcoin which is said to make it the ideal asset for capital preservation is its codified scarcity. Scarcity is the key here. The bitcoin code has the supply of bitcoin fixed at 21 million bitcoins. It is this fixed supply in the code of bitcoin which lends it its value, and this is the central point that is always raised to give bitcoin credibility and value. As described in Your Wealth is Melting, “it is a deep freeze”. "It is a deep freeze" because of its codified scarcity.

(I will not spend much more time discussing the argument as to why bitcoin is considered a valuable asset since these arguments are outlined in Your Wealth is Melting, Michael Saylor's 2024 Keynote Speech, and on many articles and videos on the web.) The main point being raised here is that bitcoin is approached or seen as an innovative asset because of its code that embodies the perfect investable asset for capital preservation and growth. Its use case is purely aimed for capital preservation and wealth accumulation. That's the innovation of bitcoin as an asset. That is what it provides as value.

The World as Capital

The perspective of Michael Saylor and the authors of Your Wealth is Melting, along with proponents of bitcoin as an asset class, approach and interpret traditional financial assets purely as means for capital preservation and wealth accumulation. In fact, Michael Saylor reduces the world to a “big chunk of long-term capital”, so not only are they reducing assets to their financialized, surface level value, but are reducing the world into a financialized object. (In an implicit way, that reasoning reduces Being to capital, but the exploration of this point is beyond the scope of this discussion.)

Of course, financial assets are tools for wealth preservation and accumulation, but as we showed in the previous parts of this essay series, those assets are vehicles for capital preservation and accumulation because of the instrumental and/or intrinsic value they provide and hold. Their existence isn’t purely rooted in their dedication for wealth preservation and accumulation, but they exist as vehicles or tools for capital preservation and wealth accumulation because of their instrumental and/or intrinsic value as outlined throughout this essay series. For example, they serve the function of raising money for certain initiatives (stocks and bonds); the function of providing shelter and land for farming or manufacturing (real estate); the function of jewelry and key components in technology and medicine that we use everyday (gold); and the function of sustaining our essential needs (commodities) – those functions are what we inherently value in said assets, and those functions and features are what led those assets to become valuable financial assets that act as holdings for wealth preservation and accumulation.

That said, the arguments for bitcoin presented above ignore all the instrumental and/or intrinsic value that led traditional assets to be valuable investments, and just take their surface level features, such as their price performance and fluctuation, scarcity, and fungibility, as their sole valuable characteristics. With such a financialized point of view as to the value of these assets, bitcoin’s innovation as the ideal financial asset is due to its consolidation and codification of the surface level attributes of financial assets (i.e scarcity, fungibility, etc.) into its being as a digital item, or “Digital Capital” – it makes these surface level, financialized features its root characteristics and value. Basically, it reduces all assets to their financialized, surface level characteristics, and consolidates and codifies those reduced financialized characteristics as its most valuable features. Bitcoin’s instrumental and/or intrinsic value, according to this perspective, is based on it being an asset purely for capital accumulation and preservation, detached from any other use case or purpose. This is what bitcoin has become, regardless of what its inception and the Bitcoin Whitepaper intended it to be.

To be clear, a tool dedicated for wealth preservation and accumulation is valuable, and coming up with a new way that can preserve wealth is great. Yet, the way it stands, does bitcoin really fulfill that promise and need?

Bitcoin’s Vulnerabilities

Bitcoin’s price maintenance and growth potential is mostly driven by the demand side of the asset, since it is believed that the supply side is fixed. The fixed supply is debatable though, which makes bitcoin less “immutable” as thought in terms of its codified features (see Bitcoin: For the People? Democratic? and A Critique of Bitcoin).

The demand side is driven by acceptance and adoption of the asset. In fact, Satoshi claimed “if enough people think the same way, it becomes a self-fulfilling prophecy”. This quote means that if enough people start accepting and believing in bitcoin, then it will achieve what it intended to be. Satoshi was most probably speaking about bitcoin as a form of payments, but applying this quote to what it is now (“digital capital”), if enough people keep buying it, the price will be supported or will keep increasing. This also implies that if people don't think the same way and don't buy it or keep buying it, then the prophecy fails.

To secure the uncertain demand side, and hence the price and potential of bitcoin as an asset, validation by figures of authority is needed, since pure “free market” dynamics have substantial risk to bitcoin’s price and existence, and have proved to be insufficient, as the public has been mostly skeptical of bitcoin. This point shows that bitcoin isn’t really “immortal”, as Saylor states, since bitcoin can be deprived of all its value once people stop buying it and/or believing in it – it is in fact one of the most vulnerable assets out there.

Due to the importance of the demand side for the “mortality” of bitcoin and to maintain the price of bitcoin, a formidable PR and lobbying push [link] has been extensively underway. The “fundamentals” of bitcoin are therefore tied to narrative and validity by institutions, as opposed to its fundamental features. “Fundamentals” based on narrative, policy, people buying it, and belief alone are uncertain and speculatory; hence the extreme volatility of the asset. The volatility is a measure of the uncertainty of the asset.

An extremely volatile asset that is mostly driven by narrative, social media activity, lobbying, and managing political and economic relations for adoption and acceptance isn’t an effective and secure innovative asset for wealth preservation and accumulation. Moreover, in terms of wealth creation and accumulation, the potential of creating riches from bitcoin is tied to the speculation around it as opposed to its fundamental features. So, yes, there is a possibility of accumulating riches from it, but the correct statement to use here is accumulating riches from bitcoin is due to speculation. To hold and invest in bitcoin requires a strong conviction and belief, or more accurately, a bet in it and/or a high appetite for risk taking and speculation. Speculation is not a reliable foundation for an asset to be touted as a means for wealth creation and preservation. To be clear the speculation here isn't on the potential technology of bitcoin, since its failure as a payment system has been realized, but it is just speculation on if people, institutions, and governments will accept it. With all that said, bitcoin is more so an innovative asset not for capital preservation and accumulation, but for speculation.

A brief note on bitcoin being “immaterial” would be worthwhile here also. Bitcoin’s reliance on electricity, GPUs, water, and land for mining makes it vulnerable to weather, electricity prices, water availability, and digital infrastructure. Bitcoin mining operations have a significant material impact on the physical world, and certain circumstances around mining might probably affect bitcoin overall. Claiming that it is “immaterial” just because the asset is digitally held does not equate the whole bitcoin operation to be "immaterial". Therefore, bitcoin still faces natural risks as traditional assets do, contrary to the statements put forth by Saylor and many "bitcoin as digital capital” supporters.

There are other points to raise about the vulnerability of bitcoin including the potential competition it might face by other digital assets for example. Nevertheless, the point is clear that bitcoin isn’t a robust capital preservation and accumulation asset due to all the vulnerabilities it faces as an asset. Describing bitcoin as "immutable", "immortal", and "immaterial" is clearly a great fallacy.

We can now turn to recap the main points of this part of the series.

Main Points

The point that is being elaborated in this part of the series is that the innovation of bitcoin could be around it being a form of “digital capital”. From the perspective outlined above, bitcoin has instrumental/intrinsic value since its codified rules make it an asset that could act as a means purely for capital preservation and wealth accumulation – its use case and existence is potentially just aimed for capital preservation and wealth accumulation, and nothing else. The innovation lies in that narrow focus it is said to provide.

However, we saw that bitcoin is a hyper-financialized asset that ignores the fundamental features of traditional assets, and reduces and holds the surface level attributes of these traditional financial assets as its pure valuable features.

While an ideal asset dedicated for capital preservation detached from any other use case that people can securely allocate money in to preserve and grow their wealth with minimal risk would be instrumentally valuable, bitcoin does not effectively provide that instrumental value given all the points discussed above and the inherent vulnerabilities it has. In other words, bitcoin isn’t the ideal asset to provide the instrumental value its proponents proclaim it provides as "Digital Capital".

Nevertheless, bitcoin is mostly likened to gold, so we’ll turn to Bitcoin as "Digital Gold" next.