By Adam Taché and Murad Mahmudov.

To nocoiners, gold-bugs, and Keynesians, the cryptocurrency space is best seen as a parasite infecting millennials with technobabble, forcing them to spout economic gibberish, and sucking them into believing the pipedream that a crypto-anarchist society could exist. To believers in the technology, cryptocurrencies represent an escape from the imprisonment of the traditional financial system in which they are forced to participate by being born; a system which has been plagued by inflationary monetary policy, monopoly by nation-states on money creation, malinvestment, and debt. To believers, cryptocurrencies are a starting point to rebuild honesty and a true measure of value in society among borderless, apolitical and decentralized systems.

The most prominent and powerful of the cryptocurrency communities — the Bitcoin community — has fractured into multiple factions based on desires for various directions to take the protocol and tribalism over different projects altogether. This article will explain some of the current motives driving these ideologies and try to express the reasoning behind this schism.

Although this article will be split into four main sections, there is certainly some overlapping thought between individuals who espouse these theories. The two schools of thought which we outline initially — bitcoin, first and foremost, as a store of value, and bitcoin cash as digital cash — are typically considered more mainstream, whereas the last two — Bitcoin as catalyst for something John Nash called “Ideal Money,” leading to bitcoin-backed fiat currencies, and finally, looking at Bitcoin from the perspective of information theory — are less commonly known.

Four Theories About Bitcoin

Bitcoin was the first decentralized cryptocurrency ever created. It was released in 2009 as the culmination of nearly two decades of discourse on the key concepts within the cypherpunk community. It was cited by the anonymous founder(s) Satoshi Nakamoto to be inspired by Bitgold by Nick Szabo and B-Money by Wei Dai, two earlier attempts by well-known members at creating functional electronic currency.

Most individuals within the Bitcoin community envision an endgame where an implementation of Bitcoin will be a massively adopted cryptocurrency that is both a store of value and a medium of exchange. They see bitcoin eventually being the predominant global currency. However, the ideology then diverges sharply on on how this can be accomplished, and which priorities should take precedence along the way.

Bitcoin As Money

Bitcoin presents us with an opportunity to reinvent gold, or even rethink money for the digital future. A number of economists have suggested that it may be more appropriate to evaluate items based on their degree of moneyness. According to this thinking, it isn’t that something either is or is not money; on the contrary, many items can play a monetary role and some items can play this role more effectively than others. In a number of ways, bitcoins have a high degree of moneyness. They are more portable, durable, divisible, and scarce than both gold and government fiat currency.

As of today, bitcoins can best be described as digital commodities with monetary properties. According to the Bitcoin Maximalist interpretation of monetary history, it is likely that a new, scarce form of money would evolve roughly along the following lines:

Collectible + Store of Value + Medium of Exchange + Unit of Account.

Proponents of bitcoins as digital cash believe that utility should initially take precedence over store of value, and prioritize attaining the medium of exchange role before store of value by making payments as cheap as possible.

Those who believe bitcoin will become the future global monetary standard ascribe current volatility to the fact that bitcoin is undergoing the process of monetization, and that a global cognitive shift is slowly occurring. In their view, despite great volatility, the long-term parabolic ascent of the price is a testament to more and more people believing in a future world where Bitcoin is widely used.

Crypto-Austrians who consider themselves Rothbardians, such as authorSaifedean Ammous, believe that bitcoin’s disinflationary nature and cap on supply makes it the most sound money ever invented. They believe that bitcoin, with its fixed monetary supply, is the only fair form of money, as well as one which allows for the most efficient capital allocation by individuals and most efficient price signalling by the market as a whole.

Many individuals in this group are against the idea of fractional-reserve banking and consider it to be fraudulent. They believe that a fractional-reserve banking system is unlikely to emerge atop bitcoin, as bitcoins lack the physical centralization of gold, which forced settlements and clearance to necessarily pass through centralized choke-points, allowing governments to have complete control over the money supply, transmission, and the monetary regime at large. The governments had so much control that they were able to get rid of the gold-standard (which was organically chosen by the market over centuries) and introduce their own fiat standards, not backed by any commodity.

These individuals believe that fractional-reserve systems are simply unsustainable in the long run without lenders of last resort, which do not inherently exist in Bitcoin, and that people would be unwilling to accept bitcoin-substitutes in the market.

Those in the “Free Banking” wing of the Austrian school, such as George Selgin and Lawrence White, believe that bitcoin’s strictly fixed-supply and lack of lenders of last resort do not technically prevent a competitive system of fractional-reserve banks and entities arising atop bitcoin, or in an economy where bitcoin is the defacto monetary standard.

It is clear that there is a chance that bitcoin can, at the very least, emerge as a mildly volatile digital commodity, a store of value akin to digital gold. However, doubts remain whether it will transcend the raw store of value role and achieve low enough volatility to become a global medium of exchange and a unit of account.

Some believe that, due to its strictly inelastic supply, bitcoin is unlikely to be stable in its purchasing power anytime soon, if ever, and that people prefer for their day-to-day currency to be stable in purchasing power. These people have expressed excitement about the emergence of cryptocurrencies with more flexible and self-regulating monetary policies built in. For example, stablecoins aim to peg their market value against another form of value, such as the USD or a basket of goods, using an algorithmic central bank.

Others believe that, despite bitcoin’s strictly inelastic supply, bitcoin is a perfect solution to John Nash’s Ideal Money proposal that he worked on for over fifty years. Nash, a Nobel Laureate in Economics, proposed that central banks could inflation-target their currencies against an apolitical index to achieve international relational stability of all state currencies. In response to increasing demand for bitcoin, some believe banks will value target their currencies against bitcoin as a basis for the standardization of the value of money.

Deflationary Death Spiral

Mainstream, Keynesian, and Monetarist economists have expressed concerns with Bitcoin’s fixed-supply. They fear the possibility of harsh deflationary pressures if bitcoin becomes the predominant currency through the process known as hyperbitcoinization.

Their fear is that the inability to expand the money supply would result in bitcoin’s purchasing power growing by 2–3% per annum, roughly in line with the growth rates of global economic output. Some have expressed concerns that deflationary economics might reduce aggregate demand in the present and the near-term, result in excessive savings and hoarding of money, and produce less consumption, investment and entrepreneurial risk-taking by individuals.

Austrian economists believe that the fears associated with a deflationary form of money are overblown and that the ‘deflationary spiral’ is a myth. Austrian’s counter the Keynesian and Monetarists concerns that the delay in spending doesn’t last in perpetuity by reminding them that this spending is merely delayed into the future. People will now have a lower time-preference and that instead of buying “useless” things with their “hot potato” decaying money, they will turn their attention to long-term productivity.

They also believe that business profit margins will not be hurt because not only would product prices, but also business costs, deflate at the same rate, leaving the profit margins unchanged. Austrians believe that deflation is absolutely normal, and absent central control on the money supply, both capitalism and technology are naturally deflationary phenomenons. This can be seen in the less-regulated electronics industry, where increased storage/memory/compute capacities are becoming cheaper every year.

According to Austrians, it is the central bank inflationary fiat printing that exacerbates recessions and business cycles, as the perpetually-decaying money embeds the citizenry constant anxiety and stress, resulting in not well though-out investments and expenditures, collectively referred to as ‘malinvestment’. These malinvestments are typically inefficient allocations of capital, which are unlikely to result in personal gains, societal gains, productivity, or capital stock.

First Theory: BTC as a tamper-proof store of value.

Tenets: Sound Money. Set-in-stone monetary policy. Full-node affordability. Sovereign-grade censorship-resistance. Maximized decentralization and security.

Individuals that fall within the Bitcoin-as-sound-money camp generally believe BTC is the only legitimate cryptoasset, with everything else ranging from being entirely useless at best to blatant scams at worst. Commonly called Bitcoin Maximalists, they desire “sound money” by the Austrian Economic School definition, that cannot be inflated away or be at risk of confiscation, as the case was in 1933 when Executive Order 6102, issued by Franklin D. Roosevelt, made hoarding gold illegal in the United States.

These individuals believe that, for the foreseeable future, the goal of the Bitcoin project isn’t to facilitate the buying of coffee, but to become “high-powered” money, an even better form of gold. They claim it to be a digital asset superior to physical gold due to a truly limited supply and more deflationary emission. They also claim that, if used properly, it is unseizable, unhackable, arbitrarily unprintable, and is an attempt to engineer a superior form of money. Bitcoin is often discussed as a settlement network where the raw block space is not meant to facilitate small-value individual transactions. It is believed, rather, that its usage is for settling transactions of a larger value, where fees are less of an issue. This would likely include once-in-a-while settlement transactions of secondary payment solutions, for example, settling millions of Lightning Network payments in one finalizing transaction on the blockchain.

Although there are many brilliant concepts that were first brought together in Bitcoin, many Bitcoin Maximalists believe the mining difficulty adjustment may be the most ingenious, as it allows for true digital scarcity that is tied to the external, physical world. Saifedean Ammous is one of the most vocal and prominent BTC Maximalists, and in his new book, The Bitcoin Standard, he states that it is Bitcoin’s high stock-to-flow ratio coupled with its untamperable monetary policy that will eventually make it both the most attractive and the most robust store of value.

As of now, most bitcoin holders insist on not spending, a common statement being, “it would be foolish to spend when the price can still increase by a factor of 100x or more.” Instead, many are hoarding the asset, which has become known colloquially as “hodling.” For them, hodling is the main use case of Bitcoin during the time before the Tipping Point. The positive feedback loop of hodling and the price increasing encourages an ever-growing army of hodlers. This army in turn collectively increase both the value of the asset and the desirability to hoard it, as supply available on the market becomes increasingly scarcer.

This logic is nicely illustrated by Pierre Rochard in the diagram below to show that hoarding may create a positive feedback loop to increase the BTC price, resulting in increased mining profitability, hashing power, user adoption, and more.

Bitcoin Market Components

Bitcoin Maximalists hold the opinion that the key element of Bitcoin is the money it represents, rather than technology behind it. They cite Bitcoin’s “perfect monetary policy” (illustrated in the graph below) combined with the Lindy Effect due to first-mover advantage to explain why BTC will become and remain the dominant currency. The caveat being: Bitcoin must maintain its status as a peer-to-peer, decentralized system which produces a new block randomly, roughly every ten minutes. These Bitcoin Maximalists believe that as long as this is done, eventually hyperbitcoinization will occur, resulting in BTC being the dominant currency in existence.

In terms of monetary policy, Bitcoin Maximalists tend to believe that the hyper-deflationary total money supply of Bitcoin gives it the best monetary policy of any existing asset, and fractional reserve banking is rotten to the core. They prioritize saving and capital accumulation as opposed to superficial consumption. They believe, in line with Austrian school economists, that government meddling, especially with the money supply, causes malinvestment, makes interest rates artificially low, and enriches a select few at the expense of many.

Bitcoin Maximalists believe that bitcoin as sound money is to be accomplished through maximizing both the collective and individual security within the system. Currently, the Bitcoin blockchain is by far the most difficult to tamper with of any cryptocurrency in existence, based on hashrate alone. As of April 2018, it is estimated that transactions in Bitcoin are currently secured by confirmations from a network of computing power that produces over 29 exa-hashes per second. This rate is estimated based upon the mining difficulty, which has approximately tripled in the last six months and has grown every year since the release of Bitcoin in 2009.