Is bitcoin moving beyond its use as a store of value?

This is an opinion editorial by Paolo Tasca, professor, economist and founder of the Center for Blockchain Technologies at University College London and the Distributed Ledger Technology Science Foundation.

Bitcoin has held its place as the dominant digital, robust and unhackable store of value for nearly a decade. Still, every year the debate continues on whether bitcoin should evolve into something else. Could “digital” gold also become the world’s currency? Can bitcoin’s blockchain be used to register assets of value? should it be?

This conversation has reached a peak with the launch of Bitcoin Ordinals and the BRC-20 token, fueling even more demand for the Bitcoin blockchain. And it’s natural – bitcoin’s unparalleled security and stability have led it to be known as a blockchain of value. Now that it’s possible to store an ever-increasing range of assets, people want to do so. This is welcome news for store-of-value proponents, as demand for bitcoin should drive the price up.

But more transactions also means more competition, and if you want yours to happen, it means higher fees and longer confirmation times. This isn’t ideal for supporters who prefer bitcoin as a currency and the growing competition for block space is already affecting the ability to register assets.

evolutionary theory of the economist

This dilemma is not new to bitcoin. Its deliberate restrictions on block size and transaction capacity have spawned great technologies like the Lightning Network, and provoked debate over the adoption of colored coins, SegWit, and other mainstream changes.

And bitcoin is no exception. When other blockchains hit the market, their ability to handle ERC-20 tokens, NFTs, and other operations limited their popularity. Ethereum also faced similar limitations, but they were resolved to some extent with technological upgrades. However, this has prompted DApps to seek shelter in alternative chains. This created serious interoperability problems, but the economist’s “evolutionary principle” held true: markets move in the direction of maximum opportunity.

From an economist’s perspective, it is important to note that bitcoin’s utility as a store of value has yet to be widely adopted beyond our own sphere. For example, during the early stages of the COVID-19 pandemic, we were curious to see how the crisis (the kind bitcoin was designed for) would stimulate demand for cryptocurrencies. What emerged instead was that, while some people bought in and HODL, others apparently still preferred to save in their fiat currency and happily accepted fiat currency support payments. Unfortunately, these fiat payments have been severely devalued due to inflation, yet widespread global investment and adoption of bitcoin has not been possible.

But what is happening behind closed doors? Bitcoin is entering the coffers of many institutions, banks and countries. They understand its value, and are already using it as a hedge against the next financial or global crisis.

When considering the future, the pandemic is actually an example of why we should be optimistic about where bitcoin has reached. Although it is not (yet) a global reserve, it has been successful. Google took about 17 years from its inception and 11 years from its IPO $500 billion market cap, bitcoin did it in less than 12 years, and didn’t sell your data to advertisers to do so. Not only that, but being a proof-of-work blockchain, it has come a long way. There are many other chains that have been relentlessly and expensively iterated and are facing diminishing returns. Not bitcoin.

However, we know that it is impossible for bitcoin to develop in the way that everyone wants. There is no way (yet) to create a blockchain that can be a store of value, a method of transaction, and a home for NFTs, tokens, and other valuable assets. But if the market wants a one-stop blockchain for all these uses, either bitcoin will become it or some other blockchain will.

bitcoin losing race

Of course, this “one blockchain shall rule them all” mindset has driven many to Ethereum, and its supremacy has yet to materialize. Bitcoin can learn from Ethereum’s mistakes and use this time to redefine its identity and purpose in the market. Certainly, it will remain the first and still the most successful example of a widespread digital currency that also solves the problem of trust. A truly decentralized, self-sovereign monetary system requires trust. Bitcoin provides that trust – and does so with incredible unreliability. In whatever form it develops, this is its core value as a system.

And bitcoin, being the most free market ever, will indeed continue to grow. Its independence drives its adaptability to changing market conditions, and this is what makes it, yet again, the blockchain of choice for many.

Of course, as a free market, we can only influence this through our daily actions. This is not bitcoin’s fault. This is its best feature, and a sure predictor of its ongoing successful growth.

This is a guest post by Paolo Tasca. The opinions expressed are solely his own and do not necessarily reflect the opinions of BTC Inc. or Bitcoin Magazine.