Bitcoin is Digital Energy (Part 1)
The global marketplace for energy is transformed through Bitcoin
WORK STORES ENERGY
A potato farmer works hard. He burns calories to plant, tend, and harvest potatoes.
Come harvest season his investment of time and energy yields a bushel of potatoes. He has managed to convert his labour energy into harvested potatoes.
The potatoes can be understood as storing the farmer’s time and energy, to be utilized at a later date.
The words “value” or “purchasing power” could be used in lieu of energy, but essentially what the farmer has invested is his time and energy, in the hopes of redeeming that investment in the future.
This energy is not electrical in nature, rather it is more akin to potential energy. Similar to how a rock carried to a hilltop holds the potential to roll down the hill, or a stretched elastic band holds the potential to snap back, the potatoes hold the potential to be exchanged, thereby effecting future desirable changes in the world.
Energy comes in many forms, but ultimately it is the ability to effect change in the world.
When it comes to storing and transferring energy, potatoes are relatively ineffective. They rot, they’re heavy, and they’re not universally desirable or tradable. The farmer who doesn’t quickly sell or eat his potatoes is all but guaranteed to lose his invested energy completely.
When the farmer sells his potatoes at the market, and uses the proceeds to pay for goods and services, he is effectively deploying his stored energy through trade. His labour energy is effecting change far beyond his potato field.
Within a free market, the intersection of supply and demand determines price. A high price resulting from high demand with low supply, means the farmer is able to extract more energy from his investment, while inversely, a low price means a diminished return of energy. The more revenue the potatoes are able to fetch at market results in more energy at the farmer’s disposal to deploy as he sees fit.
Successfully navigating the dynamics of supply and demand before his potatoes lose their energy through decay is how the farmer harnesses his labour to effect change in the world.
MONEY AS ENERGY
MONEY AS ENERGY
By trading potatoes for money, the farmer is transferring his stored energy from a bushel of potatoes into cash. It is an energy transfer.
Just as the potatoes stored his labour energy as the potential to be exchanged, so too does money now store his energy. The dollars in his pocket come as a direct result of a chain of energy storage or transfer events that began with the deployment of his labour energy.
Money is the generally accepted medium of exchange, essentially the asset that provides superior energy transfer abilities, thereby allowing the farmer to more capably redeploy his energy across time and space.
Although money is superior to potatoes in transferring and storing energy, it still has limitations. Fiat money, such as dollars, euros and yen, can be difficult or impractical to transfer in both small amounts (<$0.01) and large amounts (>$10,000). Bank holidays, business hours, fees, and minimum transfer requirements also act as impediments to anyone seeking to transfer energy through money at the time, place and quantity of their choosing.
Transferring half of a penny across the country or $100,000 on a holiday Sunday is difficult, or impossible.
Fiat money also loses energy over time due to inflation. Its energy decreases by anywhere from 2% per year to hundreds of per cent per year depending on the country and inflation rate. Year after year, the energy of a dollar (aka value, purchasing power) diminishes, meaning less change is able to be effected with the same dollar.
Just as a potato loses stored energy through rot, fiat money loses stored energy through inflation.
Trading potatoes for money is a way to mitigate energy loss and expand energy transfer opportunities, however, any energy held in the form of money will inevitably be lost over time. The farmer is therefore incentivized to quickly trade potatoes for money, then to trade money for other goods.
Just as money and potatoes carry different energy properties, so too do other assets have their own inherent abilities to store and transfer energy. Any assets that appreciate in price at a faster rate than inflation will preserve or increase the farmer’s stored energy, while assets that depreciate (or appreciate less than inflation) will diminish the farmer’s energy position.
Scarce assets tend to appreciate, as their low and inflexible supply does not increase in accordance with demand pressures. Real estate, for example, will likely preserve energy over time since it is difficult or impossible to add new real estate supply to the market to meet demand.
Abundant assets, or assets whose supply can be more easily increased to meet demand pressures, do not hold energy over time.
What began as labour energy in a potato field, was the beginning of a chain of energy exchanges from potatoes to money to real estate, providing the farmer with an expanding array of possibilities for storing and deploying his energy.
BITCOIN AS DIGITAL ENERGY
Bitcoin is an alternative way to store and transfer energy.
Rather than trading potatoes for dollars, the farmer trades for Bitcoin. Just as converting potatoes into dollars grants superior energy storage and transfer abilities, so too does converting potatoes into Bitcoin award certain advantages.
Notably, Bitcoin surpasses dollars in its durability, portability, verifiability, divisibility, fungibility and scarcity.
Energy stored in Bitcoin will not dilute due to inflation as it would in dollars, nor does it decompose from rot, as it would in potatoes. As there can only ever be 21 million bitcoins, owning one bitcoin establishes ownership of 1/21 millionth of the total possible Bitcoin supply, forever.
The degree to which Bitcoin’s supply schedule is immutable is the degree to which it can be regarded as a scarce asset. The supply cap of 21 million bitcoins means its supply is completely inflexible, regardless of demand pressures. As scarcity is a driving factor in energy preservation, Bitcoin’s absolute scarcity preserves energy absolutely.
Bitcoin is an innovation in energy preservation.
A lifetime of labour’s worth of energy can be stored in a 24-word passphrase that unlocks one’s bitcoins. That energy can also be subdivided into satoshi-level increments (100 millionths of a bitcoin) and be instantly transmitted globally, at the speed of light, either on or off-chain with negligible fees. As the Bitcoin network operates 24/7/365 across all major currency pairs with over a trillion dollars worth of liquidity, the ability to effect change anywhere, anytime abounds.
With Bitcoin, the farmer can now transfer his energy in fractions of a penny or multi-billion dollar increments at 3am on Christmas morning, to anyone anywhere.
Bitcoin is an innovation in energy transmission.
Just as the interplay between supply and demand dictates prices for other assets, so too does it determine the price of Bitcoin. However, since Bitcoin’s supply schedule is predictable and inelastic, fluctuations in its market price are attributable to changes in demand. As Bitcoin adoption continues to grow, the opportunities to buy, sell, hold, lend, earn and spend Bitcoin expand, enticing more users to adopt Bitcoin in a network effect.
So long as there is demand for both robust energy preservation (store of value) and robust energy transmission (medium of exchange), and Bitcoin is able to provide those services better than alternatives, Bitcoin’s price in dollar terms is likely to appreciate over time.
The farmer who transfers his energy into Bitcoin has essentially digitized his energy. With digital energy, the opportunity to convert and transmit his energy across time and space is as boundless as the Internet.
What began as a farmer digging in a field has become digitized energy with unprecedented opportunities.
Energy is the ability to effect change in the world.
The activities of storing, transferring and allocating energy are the circumstance in which all people find themselves. People must allocate their energy resources in such a way that ensures the preservation or expansion of their invested energy, lest they risk losing their ability to effect their desired changes in the world.
Whether for a farmer, a dentist, a teacher or anyone, Bitcoin offers new paths to store, transfer and manage their energy.
Bitcoin is digital energy.
In Part 2 we will explore the relevance of Bitcoin within broader energy marketplaces.