Breaking Satoshi

BTC's artificial price ceiling

January 17, 2020·Deryk Makgill

I rocked the boat a bit when I tweeted that BTC likely has price ceiling because demand is kept artifically low by its block size.

Paul wrote in reply:

That’s exactly what will push it that high. Artificially restricted supply with a demand spike will shoot prices to the Moon.

Ron had this to say:

That’s like saying the price of oil can’t skyrocket because oil doesn’t process enough transactions.

Paul and Ron are both wrong, and they’re wrong for basically the same reason. They’re committing the fallacy of failing to discriminate crucial differences.

While it’s obviously true that scarcity and demand can cause prices to increase for gold, oil and other commodities, this does not necessarily always hold true for the BTC chain of Bitcoin. BTC is (now) fundamentally different than gold and oil.

The reason is actually quite simple and since it was implicit in my original Tweet about this, I’m surprised so many missed it.

Your protocol is broken. Bitcoinfees.Info

Unlike gold and oil, which remain functionally unchanged when demand and price rise, BTC actually degrades when more people want it.

In 2017, when there was a mad panic rush to purchase Bitcoin that took the price to $20,000 per coin, we saw mempool backlogs that lasted days and fees upwards of $50 and more. BTC broke down. It became less divisible. It became less portable. It became less useable. It became less and less like the Bitcoin that was marketed to the public and which helped create that demand in the first place.

Do you see the difference?

Oil doesn’t behave like this. When Ron writes about the transaction capacity (???) of oil, he misses the point. The “transaction” capacity of oil, if we’re to take that to mean the amount of energy that can be extracted from a given quantity, doesn’t change with the ebbs and flows of demand. It functions exactly the same in my car no matter how many other people are using oil at the same time.

And despite all of the attempts to label Bitcoin as “digital gold,” gold does not become more expensive to transact with or heavier to carry when demand rises. It is functionally unchanged at scale and has been that way for thousands of years.

I suspect the confusion here is partly that BTC used to function more similarly to gold in this regard, but it doesn’t anymore. Core developers, either through economic incompetence or deliberate subversion, crippled the original protocol with artifical block-size limits that they argued were crucial for the security of the network. Crucial or not, the limits mean that BTC gets less and less useful as more people use it.

It should be obvious that a protocol that does not act like oil and gold, which gets functionally worse when more people try to participate in it, will necessarily have a limit on its potential demand and price for two reasons.

  1. Once demand reaches a certain level, the reasons for that demand cease to exist. If oil stopped working at a certain demand level, it would likely never cross that particular demand threshold. Why pay a premium for oil when it won’t work anymore as oil? Demand would need to retrace until it became useful again before you would buy it.

  2. The number of people who can practically act on the demand at any given time is slowed down or even halted as more people try to act on that demand. There is almost a sort of Catch-22 for investors. You need more people buying BTC to keep the price pumping scheme going, but more people buying it also means the reasons for buying it break down.

Thus we should expect some kind of price ceiling on BTC unless it is able to scale cheaply and reliably sometime in the theoretical future.

Ironically, we need to conclude that the argument that Paul and Ron make only applies to big-block Bitcoin, which, like gold, functions the same when one person wants it as when millions do. BCH and BSV right now could onboard millions with little hiccup, and in fact the economics of large transaction throughput actually means transaction fees will drop lower when more people use it and the protocols will work better.

When you combine a scarce protocol with near infinite scale, you get the kind of price potential so many people like to talk about.

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