Understanding Bitcoin Utility and Price

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We hear the word often enough. “Utility”. Early Bitcoin adopters, and particularly those inclined towards on-chain scalability (big-blockers) will throw this term around whenever making an argument for bigger blocks.

The term was actually coined by a Swiss mathematician and physicist, way back in the 1700’s, named Daniel Bernoulli. Bernoulli understood economics, better than most people do today it seems.

“Utility” is after all an economic term. It refers to the value and satisfaction received from consumption of a commodity, good or service. Ergo, usefulness.

There’s an important lesson in this:

If something is ‘useful’, it directly affects demand. Demand directly affects price.

Sure enough, early adopters of Bitcoin understood this concept very well. People like Hal Finney, Gavin Andresen, Mike Hearn, Roger Ver – they understand this. Utility in the business world is everything. Let me repeat that again – EVERYTHING. It is a key driver of business. No business can succeed in the world, if the essential service provided is not ‘useful’. People won’t buy ‘useless’ items.

Samsung as a company has done incredibly well by designing feature-rich smart phones. Smart phones that come with capabilities which can resemble your desktop computer. Such a product is useful, and therefore has excellent utility. We can see the direct result of this relationship in the numbers, with Samsung detailing record profits year on year.

While many of these early names in Bitcoin understood the economic value of utility, some did not. Gregory Maxwell, Chief Technical Officer of Blockstream, struggled with the concept. He in fact did not even believe Bitcoin as a system could work.

He has stated before: “When bitcoin first came out, I was on the cryptography mailing list. When it happened, I sort of laughed. Because I had already proven that decentralized consensus was impossible.”

While his scepticism in the quote does not directly correlate to misunderstanding the value in utility. His actions certainly do.

To increase utility, one must look to increase the application of the good or service, and thereby, increase the customer base. Certainly, Blockstream have been far more infatuated with increasing the node count, over the user count.

The node vs user argument is real. By Core’s own logic, one directly affects the other. By keeping the transaction capacity small, we can have many, many Bitcoin ‘nodes’, because the hardware requirements to run something primitive, are also primitive. But very little users. If three transactions per second is the global capacity, it means not many people will use it.

The many nodes therefore restrict capacity, which evidently, creates a volatile fee market.

No business can soundly operate with wild and unpredictable fee patterns.

Fees at the recently observed $7 per transaction rate have literally wiped out more than half the world. By default. This isn’t good news for customers, but it’s even worse for businesses. They fail to reach their potential customer base, and will simply opt to use another product. Congestion is absolutely, a ‘negative network effect’.

Why does Bitcoin’s value keep going up then?

The network effect of money is far more powerful than say, social media. This isn’t facebook vs myspace. It’s not about “where Jenn should put her photos”. This involves real money, real risk, real consequences. Bitcoin has years of evidence proving its functionality, its safety, its staying power. Of course, the crypto-market is all in all booming. If Bitcoin was going up alone in these conditions, you could be forgiven for scratching your head. But over time, Bitcoin is losing its network effect to competing coins. This is an ominous sign that Blockstream have either completely failed to understand, or willingly complicit.

Bitcoin Cash was born as a grassroots movement by the people. People, like you and I, who saw an impossible situation with no way to resolution, and forked away. It is a movement to free Bitcoin from the shackles of its debilitative, hamstrung state. The raised blocksize cap immediately enables more users, and brings fees right down. Further utility will come about as the eco-system builds. POS systems, ATMs, apps, smart contract functionality – these are coming and we have a wide range of teams working on these products. As mentioned, the network effect of money is slow to transition – and the change won’t happen overnight. It would be naive to think so.

What we can be assured of is that the change will happen. Bitcoin’s diminishing market cap is evidence alone that unless something changes there will at some point be a ‘flippening’. Which other coin will take the mantle, remains to be seen. Bitcoin Cash advocates believe in the fundamental values established in Bitcoin’s inception as a global currency, and continue to work towards that vision. Right this moment, we have lots of work to do. We can all contribute, work together and prove that the revolution will not be centralised.

Eli Afram
@justicemate