Bitcoin is like Art
A few days ago I asked on LinkedIn, whether gold or bitcoin is less risky for a long-term investment. The results were stunning.
The bitcoin enthusiasts tend to prefer bitcoin. Outsiders tend to answer gold. However, there was no clear majority for either of the choices. Neither group could call it a victory — its a draw.
No common understanding
It seems to be that we do not have a common understanding how bitcoin works financially. However, without it we may constantly misjudge the opportunities and risks of the technology.
Why is that the case?
I believe we have the wrong mental model. We either think bitcoin is like gold or it is like cash. None of these models are necessarily wrong. They just do not fit reality very well.
Gold and any other commodity have a demand besides investment. Gold for instance is consumed in jewelry and industry. Furthermore, the production may increase if the price rises. Both effects are not present in bitcoin, yet.
If it is neither gold nor cash, what is it then?
A novel asset class? — Maybe. But it takes a lot of time to establish a novel concept in peoples minds. We had more than 10 years and have not found a consensus, yet. Instead I would prefer an existing concept which has properties that are already widely known.
Using ART as mental model
Art fits surprisingly well for this purpose.
Think of Satoshi Nakamoto as an artist that produces digital artwork — called satoshi. 100 million of them would make up one bitcoin. Today the group of miners will create a bit more than 90 billion satoshi. No matter what.
Using art as mental model makes it easy to answer a lot of the puzzling questions about bitcoin and other cryptocurrencies:
- The supply does not correlate with demand? — Same with any artist.
- Age leads to less supply? — Artists typically produce less when they are getting older.
- The overall quantity is bounded? — There is a natural limit what an artist can do in its lifetime.
- Clones do not have the same value? — You do not inherit the fame.
- There are thousands of other cryptocurrencies? — There are millions of artists.
- Bitcoin gets most of the money? — There are very few top-artists.
- Bitcoin could be disrupted? — Same with Banksy.
- The transaction fee correlates with number of pending transactions? — Sotheby’s will do the same.
- The price could be zero or 1 million in the future? — Same with any picture you buy.
The comparison with art is also useful to estimate the risk of bitcoin. Or you simply use Peter Drucker’s insight: All profit is derived from risk.
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