Again, something that Bitcoiners are making big deal about. During the bull times ofc, in bear times they are silent :)) But let’s see what is this about, so that you know what is it about when you stumble upon someone talking about it.
Essentially, monetary premium explains why things are priced the way they are.
If you’ve ever wondered why gold is valued more highly than other precious metals, such as silver and copper, which also have good industrial use cases, this explains why. If you’ve ever wondered why certain properties in city centers or overlooking beaches and oceans can go for millions of dollars, even though they’re essentially made of the same bricks and cement as houses everywhere else, this also explains why. It also helps to explain why art pieces, such as those by Leonardo da Vinci or Van Gogh or Picasso, go for so much more money than the rest.
The answer to all of these is that they have attracted or gained a monetary premium on top of their existing value or use case.
Now I will tell you what bitcoiners will tell you, and after that I will tell you what is really going on.
By bitcoiners, what primarily drives the monetary premium is scarcity. Assets that are reliably scarce can attract a monetary premium. The more scarce an asset is, the higher that monetary premium. That’s why gold is valued so much more than silver and copper. It’s not just because it’s a rarer asset, but it also has a better stock-to-flow ratio.
You can see that with each halving every few years that drives the stock-to-flow value of bitcoin even higher, that can drive much higher prices because bitcoin is able to demonstrate even more scarcity that really drives up a monetary premium. Over the next century, that’s why it leads certain people like Plan B to think that once bitcoin gets an extremely high stock-to-flow ratio, that just nothing else can even come close to it. It could attract a total market cap of potentially 100 trillion U.S dollars (lol)!
Scarcity element also explains why a house in, say, central New York or on Malibu beach can attract much more value than a house in the middle of Kansas. It’s because there’s only so much housing that can be built in certain areas like central New York, and that fact alone creates tremendous scarcity, which drives a significant monetary premium. You can only build so many apartments in the middle of a city center or on a beautiful beach overlooking the ocean.
Any cryptocurrency that can demonstrate a reliable, provable form of scarcity and unforgivable costliness, such as bitcoin in this case, can attract a significant amount of value as a form of monetary premium.
If you think about this, cryptocurrencies, if they manage to gain this monetary premium from people really believing that they have a form of reliable scarcity, they can swallow up all of the value that right now is stored in other assets that benefit from some kind of monetary premium. So, any money right now that’s parked in things like real estate, like gold or fine art, cryptocurrencies have the ability to gobble up a lot of this or steal a lot of this value from them because it’s an even better form of money.
If bitcoin is that much more portable and durable and fungible or homogeneous and much more liquid, very easy to get in and out of, then it makes much more sense for a rational actor (!!!) to keep a lot more value in something like cryptocurrencies compared to something like a form of real estate where, yes, even if you are in the center of London and have that scarcity going for it.
It’s a very illiquid asset, making it very difficult to dispose of at any given time. You have to sell the entirety of the whole house, including all the fees related to it. Even if you hold a house over the long term, the things like maintanance and tax, all add up.
If you just want somewhere to park your wealth to keep it steady, then it makes much more sense to keep it in something like Bitcoin, which is incredibly cheap to store. Basically, there are no fees attached to storing it, and it can be moved anywhere around the world very quickly, very cheaply, and very conveniently.
It still maintains and drives up an insane scarcity going for it, which adds to its monetary premium. And as you know, incentives are everything. If Bitcoin and crypto generally can drive up a great big monetary premium, then other people will be incentivized to park their wealth in crypto as well. This is because it has the potential to be so much more convenient than many other forms of Store Of Value right now that do benefit from the monetary premium, but have a lot of these additional inconveniences and costs related to them.
The rational actor will choose to take some of that value part in that other place that benefits from the monetary premium and park it into Bitcoin. That’s another reason why Bitcoin and other cryptocurrencies could achieve dramatic valuations going into the future as well. Not only do they benefit from being a payment network with a certain amount of value to it, but they also have the potential for a significant monetary premium sitting on top of that.
Now let’s see what is really going on.
This what I wrote last „but they also have the potential for a significant monetary premium sitting on top of that“ is the key. It’s not enough something to be rare.
You probably stumbled upon the TV show Pawn Stars. This is the show of family-run small pawn shop in Las Vegas you have probably already seen on History channel.
People are bringing all kinds of things, an old coin, an old gun, an old book, and some are worth really a lot.
I remember one episode of Pawn Stars where one guy wanted to capitalize on rarity came with an item saying this is very unique and rare item, there is not other like this. The paws shop owner immediately saw where he is going with that and interrupted him with following words: So is the rock right outside my shop!
Why apartment on Malibu beach or next to Central Park in New York has monetary premium? It’s because lots of people want to be there, and there is lot of competition for those real estate. There will always be that scarcity that drives the monetary premium of those properties, even though they’re ultimately just houses made of cement and bricks. Ofc it is because of scarcity, but so are scarse other places like Sahara desert and no one cares.
The key is that desirability needs to come before scarcity. And that desirability has network effects! This desirability appears in cryptocurrencies because of speculators/traders/investors/ (and they are very bad on picking what has good and what has bad potetial), or from usability. Usability means it is absolutely needed to perform some task that is needed, so called utility.
Scarcity is important when there is developed network effect. That’s why apartment next to central park is more valuable than apartment with same properties somewhere around Sahara desert. Scarcity of the asset is important when asset is needed to be used in quantity for something. This means that asset gas non elastic demand.
Monetary premium of cryptocurrencies does not comes from scarcity alone, at least not how most of people would interpret it. That’s why dumb money has unit bias – they are looking at how many coins they can get for $1. I joked in 2017 that I will make cryptocurrency with total supply of 1, and you would be able to buy only pieces of it.
It is also easy to make cryptocurrency. It is easy to duplicate it. If value would be all about scarcity, we could copy paste bitcoin blockchain with current history called hard fork, and just change name to Butcoin, and voilla! We have new Bitcoin! Want to make it more scarce? Just remove one 0 from everone’s balances and from total supply, and voilla, new Bitcoin is 10x more scarce and more valuable than original Bitcoin!
There needs to be some intrinsic value, something which has demand. So monetary premium comes on top of any value that Bitcoin offers as a simple payment network.
Regarding stock to flow, which I already wrote about here, also does not help with monetary premium. There are cryptocurrencies with fixed supply, or even more interstignly, falling supply such is case with Ripple where transaction fees are burned forever. Just to be clear, I am NOT supporter to Ripple, but you can see what can happen when you isolate one element and focus on it, and what ridiculous conclustions can you end up with.
Don’t trust BS from people who will try to explain to you how crypto, and by this I mean especially Bitcoin can suck value from luxury items like paintings, watches, clothing brands, exotic cars etc. because it would be rational thing to do. Value of these things are never based on rationality. And it will never happen anyways because these things also have network effects of people who are into these things and want to own them.
Conclusion is that if cryptocurrency succeed because it is used and adopted, and ofc then there will be monetary premium on them, but only as addon, on top of everything else underlying that premium. Everything else is a cake, monetary premium is icing on the cake and cherry on the top.