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A Story of Value

November 2, 2021

Value as an idea contains an intrinsic fundamental that allows it to spread more rapidly than other ideas. The idea that something has value is what Yuval Noah Harari in Sapiens calls an inter-subjective story.

When something exists objectively, it exists regardless if we believe in it or not. An example of this is any physical phenomenon, which exists regardless if we believe in it or not. The subjective, on other hand, exists only in the sense that a single person believes in it and when that persons stop believing in that idea, it no longer exists.

The inter-subjective is quite different. In this category, we find ideas that exist because many people share a belief in them. Democracy and languages are in this category. The idea that something has value is as well. Fiat currency and Bitcoin are in this category. It doesn't matter if one individual believes in them. They exist and die with a collective belief.

What makes value a special subset of inter-subjective ideas is that only a subset of a population needs to believe that something has value for that idea to spread throughout an entire society.

Imagine that some subset of the global population are convinced that something, say Bitcoin, works and believe that it is a future store of value. Then, someone who is not in that subset will also be willing to accept Bitcoin as a store of value, not because of a belief in the underlying technology but because that person knows that there exists other people who would be willing to buy Bitcoin, since those people believe that it has value. As long as you believe that there is someone else who sees value in it, you will probably also see value in it.

Many people don't understand the underlying technology of Bitcoin today. The thing is that they never have to understand how the underlying technology works to believe that everyone believes in it. They will just believe that there exists someone willing to buy it. As long as a subset stubbornly believes in Bitcoin, others will continue to believe in it too.

It's easy to think that Bitcoin has been around for a long time and that nothing is happening. It barely works for payments and one could argue that it's not a good store of value today because of its volatility. However, things are happening, and more and more people are buying it, while institutions are adapting to it. Since the shift to Bitcoin is a change in fundamental infrastructure, it's inevetible for it to take time. However, compared to other technologies of this sort, it's doing just fine, as this chart shows.

Bitcoin Adoption

People say that Bitcoin is no substitute compared to other stores of value since the volatility is too high. Here's a chart comparing it to gold (from Seeking Alpha).

Bitcoin Volatility

There have also been several academic papers pointing the same thing out. I think it's an argument that misses the point. I don't think most people who believe in Bitcoin today do so because it's stable today. They believe in it because of what it has the potential to become. It's not mainstream yet, and before that happens, there's going to be some volatility. The volatility though has decreased in general over the past years. The Bitcoin price is now volatile, but much of that is due to the significant increase in price, which is a natural consequence of people moving into the market.