Bitcoin, NFT, crypto are collectables and have a-kind-of value

Just like any other collectable, bitcoin’s main feature is that people want to collect it. The other things bitcoin can do are secondary; like an old comic. Collectors don’t buy the comic only to read it; they ascribe some value in having it — in collecting it.

We see many digital collectables marketplaces these days. You can collect bitcoin, thousands of other coins, digital property, digital art. There are collectables markets in old coins, Magic the Gathering Cards, magazines and cars. Logically, we should see similar markets appear within the digital space. Anything with a limited supply and more than one person interested in collecting it creates a market.

There are many things you could choose to use your bitcoins or crypto-collector-digital-coins for, but those are side-effects of the main purpose — collection.

Because bitcoin and other similar supply-limited digital products are collectables they will have limited utility. If enough people ascribe value to a bitcoin, some companies may choose to accept bitcoin as a form of payment but that is the modern day equivalent of accepting a rare baseball card as payment for something instead of cash. There is a way to do it, but it won’t be as easy as a normal currency.

There is a great, detailed overview of digital collectables by James Surowiecki and the related bubbles. He has some similar and different opinions on this topic. Worth a read.

Why do we have currencies?

We have decided that we want people to operate within markets (out of all the other options tried during human civilization, markets have won so far). Markets work by having people buy and sell things from/to each other. The larger percentage of people who can participate in the market, the more things will get bought and sold. The people participating in the market have a direct incentive to try and make it easier to buy and sell things as they will directly benefit from increased exchange. And, excluding short-term edge cases, the self-interest of those people participating in the market encourages more exchange. Over time markets will become, on average, more fair. In the short term or at any given slice of time, the market (or parts within it) could be completely unfair as one participant monopolizes something, controls how products are exchanged, or any other number of opportunities to maximize self interest through market manipulation or just crime.

This need-to-exchange selfish dynamic of markets means that currencies (abstractions of the ‘likely’ market value of a given product) are biased towards ease of exchange (ubiquity) and stability. A currency which isn’t easy to use or unstable or rare/hard to find makes it unsuitable as a means for abstraction of value. I can’t sell my carrots if today they can sell for 1$ and tomorrow 100$.

Any digital product which has an objective other than to be the ‘best’ currency, will fail. Blockchain and the related crypto ecosystem of coins are reasonable means for digital product authenticity. It is probably just about as difficult to sell someone a fake bitcoin as it is to sell someone a fake collectors car. It might actually be easier to sell a fake Bitcoin to an uneducated buyer due to the hype around the topic.

There aren’t any real applications

I don’t find any reasonable application for blockchain encryptions outside of the digital goods collectors space. Blockchain doesn’t have any compelling advantage over other kinds of digital encryption and certification systems. Many countries are running pilots to test blockchain based digital currencies. I predict that in the years ahead, these pilots will lead to different encryption standards for digital currencies that may have learnings from blockchain but will be purpose built.

Until recently, there was still some fundraising advantage to doing things in the blockchain as you could often raise money easier with a luster of blockchain. However, like all hype cycles, this one has died and in its place, people are back to being concerned about whether this application of blockchain suites their needs and does so at a reasonable price/difficulty/value intersection.

This doesn’t matter. Collectors items don’t need real world applications. The justifications of crypto HODL (misspelled ‘Hold’) that there will be a massive boom time coming where the true value of crypto/bitcoin or something else that is blockchain based are the same as short sellers shorting a company and then publishing attack reports. Once you have bought into the hype that crypto has value, you have a direct personal interest in getting more people to buy it so that it has additional value.

Gaurav Sharma has a great overview of how bitcoin is a scam due to the market interconnectedness and the ability for a small number of people to influence the overall performance of the market. Worth a read.

This is how markets in collectables work including the emerging market of NFTs

Collectors of rare cards or coins want more people to be interested in those collections. Artists want their art to be in demand (within the segments that collect art). With demand, sellers have a market for their goods.

Scott Galloway has an excellent overview of the NFT market and explanation of the dynamic that scarcity and trust play in this whole picture of digital collectables.

And this means that bitcoin could live on for many years to come. Digital collectables (in-game items, actual digital art pieces, bitcoin, blockchain based kittens…) are just as likely to retain value as old coins and discontinued video games.

Ben Zotto has a great article that covers the recent craze over digital Non Fudigible Assets (NFTs) and how there is value in such things as collectables (like single prints from an artist), yet the way its being done is terrible. The markets for digital collectables would be much better if people stopped trying to make them antigovernment currency alternatives; and instead made great collectables marketplaces.

As long as more than one person in the world desires to collect bitcoin for any reason, there will be a market in bitcoin and the larger that market becomes the more likely people will find ways to include more people into that market and transact more easily.

Matt Levine has a great overview of NFTs and a plain English description of how the market is and isn’t working. Last section in the link.

As we have seen with investment products for wine, art and other collectables, we will see more investment products for popular blockchain based digital collectables and all kinds of other digital products unrelated to blockchain but offering some form of validity/authenticity.

Gold is quickly becoming a collectable

Bitcoin is often referred to as digital gold. Gold was once a prized representation of value; usable as a currency; medium of exchange. Gold also has a lot of utility, people use gold culturally, it’s used in manufacturing and it does still retain a position in global markets for that perceived value. Due to the cost of gold (driven by a lot of people wanting some of it), the real world applications of gold are quickly declining as companies look for alternatives. And gold doesn’t underpin global markets any more as countries have much more complicated and ‘lighter’ ways of representing value within their economies.

Within global markets, Gold is already just another commodity product that pretends to be something else. Some things made from gold retain collectors status like specialty gold bars, jewelry, etc. But they retain this value not because the gold itself has functionality or utility in equal to that value but because people ascribe that value to it because they want to collect it in the hope that it will continue to be valuable (and more valuable) in the future.

This doesn’t tell us what it will be worth

Accepting that digital products like bitcoin are just collectors items doesn’t actually help us predict the future value or price of bitcoin. It does help us understand how these and similar markets operate.

Bitcoins will continue to be worth more so long as more people want to collect them than there are coins available. After the last bitcoin is mined, it is conceivable that the price could continue to rise as bitcoins can be lost/destroyed just like any other collectable product.

Leonardo Drago has a great article in the Business Times looking at Bitcoin and related digital products as a long-shot, high-risk investment gamble. Worth a read.

It is also equally conceivable (and I would argue more likely) that at some point the market for interested collectors of bitcoin peeks and starts to decline. For those who bought into bitcoin to play in the market, they will leave and the price will further collapse. This could take 10 years or 100.

There is likely to be a collectors market for bitcoin for many years to come. It was one of the first digital collectors items and it has made such a mark on this slice of history. I wouldn’t be surprised if in the future, the wealthy have displays for their bitcoin/crypto collections.

Markets are human creations where we buy and sell things of value to ourselves. The utility of something matters less than whether someone else wants to buy it.

Duct Tape