Bitcoin Hypermonetization: Bubble Talk (2013) - 2 minute bitcoin

An asset bubble is not the same type of bubble a rising medium of exchange may experience.

medium of exchange - something with which one can pay for goods and services

Whenever there is a rapid rise in the Bitcoin exchange rate (price), skeptics always talk about it being a bubble.

Behind this discourse lies a thinly-veiled debate on whether Bitcoin is a valid system.

When the price goes up, critics say

“it’s only a bubble”

And when it inevitably goes down

“it’s returning to its inherent value (zero)”

Of course, Bitcoin always proves them wrong. Instead, each cycle, Bitcoin prints higher highs and never goes to zero.

Despite that, the same old prediction inevitably always comes back.

Hypermonetization

The term hypermonetization occurred to the author when Bitcoin went from low $30s to high $30s in March 2013.

Hypermonetization is the exact opposite of hyperinflation. The birth of a new medium of exchange following the death of the old debt-ridden money.

demonetization - the process of a widely used medium of exchange ceasing to be one

Historically, demonetization has happened through

hyperinflation - the money is devalued bimetallic standard - changing from using gold to silver metallic standard is abolished/defaulted on (e.g. 1971)

When the EU adopted the euro, it demonetized local currencies (e.g. Italian lira) and monetized the euro.

Bubble

A medium of exchange’s value is related to each holder’s expectations of being able to use the unit in future trades.

“How many people will accept the unit, how readily, and for what?“.

Historically, monetizations sharply gained exchange value on the market due to forced legal conversions.

When a freely chosen unit monetizes through market processes, one can expect volatility. Bitcoin’s volatility is not surprising because it:

is not widely understood is in early stages of development derives value from government instability, which itself increases market uncertainty and market volatility has uncertain expectations of future utility, especially in the face of legal hurdles.

Wording: “is a” Bubble vs. “is in” a Bubble

Bitcoin does have its manias and crashes. However, claiming that Bitcoin is a bubble and totally dismissing the system is painfully incorrect.

The truth is:

Bitcoin’s exchange rate is in a temporary bubble phase at a given point in time. Utility

Bubbles do not raise the utility of the underlying asset - a house remains the same physical asset regardless of the price.

Contrarily, Bitcoin increases its utility as the price rises due to network effects.

higher price → more marketing → more adoption → higher price → etc.

Unlike a simple asset bubble mania, the more people begin using a medium of exchange - the more its utility rises and the more valuable it is in this function for its users.