Behavioral Economics: Bitcoin's Moat Has Created Fundamental Market Beliefs That Will Prove Difficult To Eradicate For A Currency Called Ether
In the following text I try to look at why ETH will have a difficult time overcoming Bitcoin. Moats! Does Bitcoin have a trust moat? (Moats more important for LONGTERM price than innovation?) I recently argued that I liked Musks idea that innovation is more important than moats. I may have to backpaddle on that. Maybe in the short-term innovation is more important to keep your momentum going but what about the long-term? What about stable value? If you keep innovating, you keep spending: Energy, money, time. A perfect / ideal moat just exists, it doesn't cost you anything. Maybe innovation is more important to keep your company share price at unrealistic levels:
Buffett has been successful thanks to his purchases of undervalued companies; Musk has become successful by marketing an overpriced company so that it becomes even more overpriced
Musk represents the promises of disruption, potential for very fast expansion in coming years, and indeed, bubbles and manias where this obsession often leads because it's much easier to pronounce big words and get enthusiastic than to provably produce billions by hard work.
My argument is that disruption always relies on emotion, manias and grandeur. Moats don't require such things. You don't disrupt anyone without attempting the crazy thing, the bold thing and taking crazy risks in the process. It is part of the entrepreneurial game. Innovation comes at a cost - it is a rollercoaster. Case in point: EOS Sources: https://motls.blogspot.com/2018/05/musk-vs-buffett-innovation-or-moats.html Largest consumer base and trust as a moat? What is the fundamental value of Bitcoin? Why is there not a single currency that comes close to Bitcoin? Because you don't just build network effects and mindshare over night. It just doesn't happen. In that regard, Bitcoin has a 9 year advantage. Trust as a moat. Who needs innovation when you have trust?
Bitcoin has by far the largest customer base
Bitcoin is still a reserve currency and will likely stay one
Bitcoin is still used by some merchants to store value
Other currencies such as Ether still suffer from hacks like DAO, Parity and so on. Bitcoin has had no such hacks. Yes, "bitcoin" had exchange hacks but that wasnt Bitcoin and only the public would label that as a Bitcoin hack and trust loss. Ether not a store of value, branding issues, trust perception in crypto circles, reliance on utility for brand perception a red flag A coin called Ether will have to overcome serious trust issues and will in my opinion never be accepted as a store of value (that doesnt mean the price cant go up due to an increase in userbase). The EF has made serious branding mistakes and the hacks have destroyed trust within crypto circles moreso than in Bitcoin. This is a fundamental market perception that will not just disappear regardless of utility. Actual consumers ready to switch, no love for Bitcoin The downside is that actual consumers may have no love for Bitcoin as they experienced slow transactions and high fees. They may switch once aware of alternatives running atop of ETH. That in turn can considerably push the price up in the short-term as demand for ETH goes up and demand for the more boring coin (digital gold) goes down. Anecdotal: Personally I always use BTC to pay because of 0 confirmations and a more widespread acceptance compared to ETH. So far I have never used ETH but this is just anecdotal and we have many here who have used it before. It is in my opinion foolish to belief that an ETH scaling solution will arrive before Lightning finds adoption looking at current adoption numbers (massive growth in the hundreds of percents YoY). That is real data Ethereum supporters cant just talk away. Assumption: A store of value needs to be a great medium of exchange (WRONG!!!) I recently listened to a talk about Bitcoin. The speaker claimed that a store of value needs to be a medium of exchange. His conclusion, if Bitcoin wants to be a store of value it should be a medium of exchange. I disagree. ===> Real estate, art are excellent store of values and not good mediums of exchange. I believe Bitcoin will act as a fundamental economic stabilizer in the future. I see decentralized currencies as an economic breakthrough that will go down in history. You don't just launch a decentralized currency. It took Bitcoin 9 years to build its network effects and I dont think Ether will ever be considered such a thing regardless of what the techies claim (more useful, maybe better medium of exchange and thus a better store of value) and not just because of branding issues but also political issues where Ether is unlikely to achieve legal tender status and its focus on being a smart contract platform, not a currency. Considering that BTC will likely achieve legal tender status it is also likely to become part of portfolio mix of institutional investors whereas Ethereum will be considered an equity / speculative digital asset. The idea that a network grows in value as the userbase grows also in my opinion has fixed ceilings. Metcalfs law is often touted but applied in a strange way to crypto price theory. Once you have non-speculative use cases running on ETH I would personally add a huge discount to ETH due to increased utility and turnover. Personally I am currently pricing this in already which is why I am more interested in competing smart contract platforms that still have to undergo a speculative price finding phase that ETH has already completed (ETH = closer to dapp launch and realistic pricing) but that is just me and I am not Mr market!!! Wait, wut? More utility = lower price? Sounds paradox but I think that is exactly what will happen. It is more important that users keep believing that your coin is a store of value because that collective assumption will lead to a self-fullfilling prophecy. Sources: https://medium.com/@clearblocks/valuing-bitcoin-and-ethereum-with-metcalfes-law-aaa743f469f6 Behavioral Economics Lessons: Beliefs About A Market Create Fundamental Realities Further, reflexive market theory teaches us that you should keep in mind: Rising prices attract more buyers until this process exhausts itself but more importantly it teaches us also that beliefs about a market have real consequences. If the market believes your coin is a store of value this will create a fundamental reality until perception changes. I therefore have to assume based on behavioral economics and related price theories that Bitcoin will continue it's positive feedback loop until the perception of it being a store of value is broken (for whatever reason). Further it is my opinion that this belief cannot be broken by proving that it is a bad medium of exchange, else Ether should have replaced it in during the 2017 runup or thereafter. It failed to do so, that teaches me one thing very clearly: That the market has established a very fixed belief in Bitcoin as a store of value. Sources: https://en.wikipedia.org/wiki/Reflexivity_(social_theory)
Within economics, reflexivity refers to the self-reinforcing effect of market sentiment, whereby rising prices attract buyers whose actions drive prices higher still until the process becomes unsustainable. This is an instance of a positive feedback loop. The same process can operate in reverse leading to a catastrophic collapse in prices.
Though Thiel has long been an enthusiastic supporter of bitcoin, he nonetheless believes that it's likely other digital currencies like ethereum will surpass bitcoin in value. If that does take place, Thiel believes that bitcoin could become a long-term store of value rather than a go-to asset for daily transactions. In this way, the billionaire sees bitcoin a bit like an online version of gold or another precious metal.
A digital store of value in short-term may be less valuable than a network with high utility. But in the long-term will be considerably more expensive unless you assume that economic market cycles do not exist. A store of value should perform well or better in an economic depression. A utility network or company price should perform worse in an economic depression due to less demand and transactional values. Overall, a store of value should at a 10% portfolio rate be CONSIDERABLY more expensive (in the trillions of dollars) than almost any other blockchain (unless market penetration reaches 100% for that platform, ETH monopoly by 2025 anyone?) Edit: Corrections
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