I had an interesting conversation recently that started like chewing about prospective crypto and ICOs, where and how it's currently reasonable to invest, the prospects of coins and tokens, and how to distinguish between the really promising ICOs, not so promising ICOs, and scams. Among all those practical matters, I kept thinking about one problem that occurred to me shortly before. Or rather it was an interesting paradox.
The thing is, the Bitcoin was initially conceived as a potential means of exchange. And getting to the bottom of it, its main value is that it can serve as a secure and reliable means of exchange that doesn't rely on the banks and governments, in other words, on trust in some authority that would guarantee its value. Because of that and its limited supply, people consider Bitcoin a viable store of value. Like gold for example.
But here comes the paradox. The more valuable Bitcoin gets (because of its intrinsic ability to serve as a perfect means of exchange which is guaranteed by math) the less likely it is that people would actually use it as a means of exchange. Because it's way too valuable to trade it for something. And its value keeps growing. But isn't Bitcoin's value in its ability to serve as a means of exchange? So the more valuable it becomes, the less valuable it becomes?
In other words, Bitcoin cannot serve as a means of exchange because it's too valuable to serve as a means of exchange, despite that it's valuable exactly because it can serve as a means of exchange.
After I expressed this thought that bugged me, my interlocutor objected that it still can serve as the store of value, and, maybe, it actually was its initial purpose - to serve as the store of value.
Although, I know with some certainty that it's not so, my thoughts followed this new direction. Like really, one of the conditions for something to be able to serve as a store of value is its rarity. Like, gold for example. But while the high value of gold is some concept that I'm pretty used to, it's really hard to wrap my head around an idea of creating something out of thin air that has high value ONLY because it's rare. Because in this new context there is nothing intrinsically interesting about Bitcoin except for its scarcity. For example, the artworks or rare post stamps or other paraphernalia of such kind in addition to their rarity have some artistic qualities that give such things value. At least we are accustomed to thinking so. While, in fact, maybe it's not the case.
So the Bitcoin is just a digital record, a sequence of ones and zeros that doesn't have any intrinsical meaning for anybody who owns it. It doesn't have artistic qualities or some natural utility. If we stop considering it as a currency the only remaining thing, that can qualify it as a store of value, is its scarcity. Nothing else.
And here I've realized something that for me feels like a mind-blowing paradox of the economy and its underlying psychology. Indeed, anything can become the store of a tremendous value solely because it's limited. It can be conjured out of thin air and have nothing else to it, being virtually virtual, which is the case with Bitcoin, but still.
As to the initial idea that laid a foundation for cryptocurrencies, I think their inventors didn't take into account a situation when a process due to its initial parameters turns into a completely different process. Like, it was initially remarked that Bitcoin has a slightly deflationary nature because of its limited supply. Which according to forecasts would have led to a slow, gradual appreciation of Bitcoin over time. In fact, in reality, this slightly deflationary nature turned out to be Hyper-deflationary nature. Predicted gradual appreciation turned out to be an explosive exponential growth. And the most important thing is that Bitcoin lost its ability to serve as a currency and solidified as the literal Digital Gold - an ultimate store of value.
Proving in the process a strange and difficult to comprehend fact, that such store of value can be artificially created, with no intrinsic value or underlying assets or anything. But still. I wish anybody among the economic experts would explain this thing