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This is an opinion editorial by Maximilian Brichta, a doctoral student at the University of Southern California currently working on his dissertation, \u201cVernacular Economics: On The Participatory Culture And Politics of Bitcoin\u201d<\/em><\/p>\n It\u2019s hardly a surprise that bitcoin gets maligned as a \u201cbubble,\u201d a Ponzi scheme, a fad, a greater fool\u2019s theory racket or the tulip phenomenon of the 21st century. Coming off the heels of the 2008 Global Financial Crisis and the bursting of the dot-com bubble nearly a decade prior, it\u2019s healthy to be skeptical of novel financial products. Bitcoin is commonly filed in the same category of bunk investments that have spun out of control. It\u2019s a fair question to ask: How is bitcoin similar or different from prior speculative booms? In each case, there are constellations of narratives around the new asset class that generate ecstatic attention from investors. <\/p>\n\n There is a strand of scholarship that seeks to make sense of these narratives, but largely fails because they do not take the technical foundations of Bitcoin\u2019s incentive structure seriously. They also mostly ignore the most active participants and texts that lie at the core of Bitcoin culture. In this essay I take a look at two such analyses, demonstrate some of the weaknesses in each of their arguments, and work toward a set of guidelines for nuanced investigations of Bitcoin narratives. <\/p>\n\n\n\n In Robert Shiller\u2019s book \u201cNarrative Economics<\/a>,\u201d he uses Bitcoin as a case study to illustrate how sticky economic stories arise within contemporary culture. \u201cThe Bitcoin narrative,\u201d he suggests, \u201cinvolves stories about inspired cosmopolitan young people, contrasting with the uninspired bureaucrats; a story of riches, inequality, advanced information technology, and involving mysterious impenetrable jargon.\u201d Like Jon Baldwin, whose article \u201cIn Digital We Trust<\/a>\u201d I evaluated in part one of this essay<\/a> series, his main avenue of critique is the \u201ctechnobabble\u201d or hype that characterizes Bitcoin discourse. <\/p>\n\n The issue is that neither of these authors give much consideration to how the technical features of the code shape these narratives<\/em>. These features might include the proof-of-work consensus mechanism, the difficulty adjustment algorithm and the supply distribution schedule that produce Bitcoin\u2019s incentive structure and shape its market rhythms. On the few occasions that Shiller does consider the role of its technical aspects in his analysis, he only does so to demonstrate how little \u201cBitcoin enthusiasts\u201d seem to actually know about the technology:<\/p>\n \u201cI will make no attempt here to explain the technology of Bitcoin, except to note that it is the result of decades of research. Few people who trade Bitcoins understand this technology. When I encounter Bitcoin enthusiasts, I often ask them to explain some of its underlying concepts and theories, such as the Merkle tree or Elliptic Curve Digital Signature Algorithm, or to describe Bitcoin as an equilibrium of a congestion-queuing game with limited throughput. Typically the response is a blank stare. So, at very least, the theory is not central to the narrative, except for the basic understanding that some very smart mathematicians or computer scientists came up with the idea.\u201d <\/p>\n\n\n\n There are multiple weaknesses in this line of argument. Foremost, this assessment is based on anecdotal evidence of \u201cBitcoin enthusiasts\u201d he\u2019s encountered. Throughout the book, it never becomes clear who these \u201centhusiasts\u201d are, where he encountered them, or what sort of knowledge or personal investment they have in Bitcoin. <\/p>\n\n Second of all, he prompts his anecdotal subjects to explain complex cryptographic features that are fundamental to Bitcoin\u2019s protocol, yet rarely play prominent roles in Bitcoin discourse, even within some of the most dedicated circles of Bitcoiners. It is a curious choice of technical features given that he appears to borrow these terms from an article focused on the \u201cEconomic Analysis of the Bitcoin Payment System<\/a>.\u201d This article primarily focuses on the way Bitcoin\u2019s protocol adjusts its rewards to incentivize participation. These features are fundamental to understand when considering narratives around the plausibility of Bitcoin\u2019s perpetuity and projected ability to remain in a state of price discovery. In other words, he deflects the key technical features that affect Bitcoin\u2019s narratives and selects features that are likely to stump his research subjects. <\/p>\n In my experience of almost daily immersion in Bitcoin’s digital ecology, the primary technical features that drive its narratives are the proof-of-work consensus mechanism and difficulty adjustment algorithm. These protocol features are central to understanding Bitcoin mining and the reward schedule of newly created coins. A basic grasp of this process helps explain the basic incentive structure that motivates people to mine and accumulate Bitcoins. In simple terms: miners earn Bitcoin in proportion to the computational energy they supply to the network. More computer power contributed to the network means higher difficulty for mining coins. If miners perceive their rewards will appreciate, the incentive persists. Every four years, the size of the rewards is cut in half. Therefore, there are consistent adjustments in the difficulty and rewards to sustain interest in the process of mining. This serves as the underlying material process for assuring Bitcoin\u2019s continued operation and for converting energy into digital assets. The provable scarcity of the asset and the sustainable incentive structure for participation is a centerpiece to the narrative of bitcoin\u2019s possibility of appreciating into perpetuity. <\/p>\n\n\n\n\n Had Shiller searched \u201cproof-of-work\u201d or \u201chalving\u201d rather than \u201cdigital signature algorithm\u201d in his ProQuest News and Newspaper query, I anticipate he may have discovered a relative heap of results compared to the handful that turned up. Although, it is also noteworthy to mention that Shiller queries mainstream news and newspapers \u2014 unlikely outlets to find content where you might find originally sourced content from Bitcoiners. I would suggest that actual \u201cBitcoin enthusiasts\u201d would more likely be found on Twitter and reading publications like Bitcoin Magazine <\/em>rather than mainstream newspapers. On top of that, his footnotes only reference two news articles from Bitcoin.com, four mainstream news articles, one academic article, and the Bitcoin white paper. In short: Shiller seemingly ignores the forums you\u2019d likely find Bitcoiners congregating on the web, despite the fact that his book highlights the importance of social media\u2019s role in narrative virality. His analysis lacks grounding, or at least makes the mistake of confusing mainstream news sources as a primary body of texts in which Bitcoin narratives form and proliferate. <\/p>\n Another instance of Shiller\u2019s loosely grounded generalizations appears in his assertion that \u201cThere are brilliant computer scientists who are fascinated by cryptocurrencies but who won\u2019t say whether the captivating ideas that generate public excitement are ultimately right or wrong.\u201d Who are these brilliant scientists he speaks of and what does it mean for them to apparently avoid commenting on the validity of the hyped narrative around Bitcoin? Again, readers are left guessing who Shiller\u2019s shadowy research subjects are and what texts he\u2019s referring to as grounds for these claims. <\/p>\n\n\n\n\n Later in the book, Shiller suggests that the younger generation\u2019s superior ability to understand Bitcoin while older generations struggle with it also has narrative appeal:<\/p>\n \u201cMaybe part of the appeal is that understanding Bitcoin requires some effort and talent. There is an air of mystery around Bitcoin, just as there is conventional money. Few people understand how paper money gets its value and sustains it either\u2026 The idea that savvy young people understand Bitcoin, but that old fogies never will, appeals to many.\u201d<\/p>\n Perhaps there is some of this generational appeal to Bitcoin narratives, but Shiller merely speculates that it exists. If Shiller were to explore the discourse of actual Bitcoiners, which he never demonstrates that he does, he might have found thousands of pages of books and articles and countless hours of videos and podcasts that take deep dives into Bitcoin\u2019s philosophy, economics and social theory. Indeed, there is an air of mystery around Bitcoin. But there is also a robust body of knowledge that Bitcoiners have contributed to relentlessly for a decade and have shaped the stories that Shiller largely writes off as misguided. And if the stories are deemed pure hype, a logical conclusion is that Bitcoin lacks real value. <\/p>\n\n Baldwin and Shiller seem to agree that Bitcoin represents a speculative bubble with no underlying material value. In investing parlance, it lacks \u201cfundamentals,\u201d at least in the traditional sense of production reports, revenue streams and earning per stakeholder shares. Whereas Baldwin denounces Bitcoin as a Ponzi scheme that \u201cmust constantly be talked up\u201d to appreciate, Shiller does not explicitly make this charge. However, he does consider how disparate, often mutating stories around Bitcoin continue to sustain its perceived value by contagiously leaping from person to person. <\/p>\n\n\n\n His narrative framework seeks nuanced explanations as to why people would believe it has value at all. Some of the key factors in these stories are fear of missing out; celebrity endorsements; mysteries about the value of conventional money; the mystery of Satoshi<\/a>\u2019s identity (or identities); the notion that Bitcoin is \u201cthe future\u201d; economic empowerment; and its potential function as \u201cmembership token in the world economy.\u201d He argues that these narrative constellations make Bitcoin\u2019s value self-referential: \u201cpeople are interested in Bitcoin precisely because so many other people are interested in it. They are interested in new stories about Bitcoin because they believe that other people will be interested in them too\u201d. In short, he contends that Bitcoin\u2019s value traces the potency and virality of its narratives at any given time<\/em>. The narratives of Bitcoin\u2019s success become self-fulfilling prophecies. <\/p>\n\n