Bitcoin is a Schelling Point

By John Banks

On Oct. 30, we noted that Bitcoin is outperforming gold. Less than a week later, as the U.S. election week comes to a close, Bitcoin is up another 14% (above $15,500 as of this writing).

The latest run higher seems driven by a sudden burst of extreme U.S. dollar weakness — a bullish thing for risk assets in general, and Bitcoin especially.

It could also be related to a Department of Justice (DOJ) seizure of 70,000 Bitcoins generated by drug sales in the now defunct Silk Road online marketplace. That is about $1 billion or so worth of Bitcoin supply that is off the market, at a time when demand is exploding.

Last but not least, it can’t hurt that a Bitcoin “Hodler” (an affectionate nickname for long-term holders of Bitcoin), who bought her first BTC all the way back in 2013, will have a seat in the U.S. Senate.

How do we know that Cynthia Lummis, the projected Republican senator-elect from Wyoming, is a Hodler? Because she said so herself at a local event, the third annual Wyoming Blockchain Stampede.

“It was during my time in Congress that I first learned about Bitcoin,” Lummis said. “I was struck by how innovative Bitcoin is with its decentralized public ledger and a fixed supply.”

“Knowing that there’re only going to be 21 million Bitcoin makes it an attractive store of value,” Lummis added. “I have long worried about the Federal Reserve’s program of quantitative easing and the amount of debt on which our nation’s economy’s future rests.”

Again, that is a U.S. Senator talking — pretty remarkable stuff. 

It was also interesting to see this Nov. 3 article headline in Chief Investment Officer magazine, as currently shown on its website homepage: “Why Wild and Crazy Bitcoin May Become a Pension Portfolio Fixture.”

The article subhead, “Retirement funds and other institutions are gradually warming to cryptocurrencies,” is exactly what we anticipated — with detailed explanation as to why — 18 months ago.

To understand why this is happening, it helps to understand that Bitcoin is a Schelling Point.

The Schelling Point, sometimes also known as a Focal Point, is a powerful Game Theory concept, introduced by the American economist Thomas Schelling in the 1960s.

“”People can often concert their intentions or expectations with others,” Schelling wrote, “if each knows that the other is trying to do the same.” 

A Schelling Point can be seen as a solution, or a course of action, that people converge on without talking to each other. The greater the number of people who observe a Schelling Point and interact with it, or take some action because of it, the more powerful the Schelling Point becomes.

The power of a Schelling Point also depends on how exclusive it is. If a Schelling Point offers a solution to a problem that can’t be obtained any other way, or a means of expression that has no real alternative, it can behave like an electro-magnet, exerting a pull on most who discover it.

Bitcoin, in our view, has the potential to become the most powerful Schelling Point in history.

We say this because no asset known, other than gold, has the potential ability to pull in such a diverse and global array of users — American investors, Brazilian shopkeepers, European bank executives, Kenyan farmers, Japanese housewives, you name it — with all of them seeking a solution to the same problem: How can one protect savings from the ravages of inflation and currency depreciation, while avoiding the hassles and headaches of physical ownership? 

Another aspect of a powerful Schelling Point is this: The more attention it gets, the stronger it gets, as attention amplifies the signal and increases the distribution.

Bitcoin is now a textbook example of this, and the cycle is accelerating.

  • The more that Bitcoin’s price goes up, the more attention it gets.
  • The more attention Bitcoin gets, the more that users gravitate toward it, making the Bitcoin network even stronger, and even more robust and widespread.
  • As the Bitcoin user network expands — with the majority of users holding for long-term price appreciation of 10X or even more — an overwhelming demand imbalance drives the price up.
  • The price rise generates more attention, and the cycle repeats.

In our view, that cycle is going to repeat, over and over again, until Bitcoin obtains a multi-trillion-dollar market cap. (As of this writing, BTC/USD has around a $290 billion market cap.)

Given the non-replicable, universally valuable, and globally distributed nature of the Bitcoin use case — acting as a dematerialized, sovereign store of value, aka “digital gold” — it would make perfect sense for Bitcoin to settle into a plateau after achieving a greater market cap than all the FANG names put together, on par with a quarter to a third of the above-ground gold supply.

And because new generations of savers and investors are more comfortable living in a digital reality, and increasingly more likely to favor Bitcoin over gold, we can expect the relative market share of Bitcoin versus gold to rise over time.

Gold is a Schelling Point, too, by the way. It was the yellow metal’s elemental properties, as noted by its place on the periodic table, that caused the whole world to converge upon gold as the most efficient money solution available (portable, divisible, scarce, doesn’t rust, doesn’t corrode, and so on).

Nobody had to communicate to determine that gold was the best stuff for the job — instead, all the other elements were eliminated by a process of reasoning or experiment. (Silver had a competitive run, but it ultimately wasn’t scarce enough.)

Bitcoin, as a digital alternative to gold, is the first asset to offer a store-of-value equation while bypassing the periodic table entirely. This does not mean the Bitcoin network is invisible or imaginary, however.

It is immensely tangible and real in terms of a globally active user community, a globally distributed infrastructure (impervious to any single point of failure), and a global hive mind of genius-level programmers constantly improving the technology architecture.

And every time another person “gets it” — every time a new light bulb clicks on, so to speak — the demand rises that much more, even as supply remains constantly and immutably fixed.

This is why we can say, with a high degree of confidence, that Bitcoin may well be the dominant Schelling Point of the Information Age — which, again, would automatically make it the most powerful Schelling Point of all time.