Bitcoin is frequently referred to as a "bubble," a Ponzi scheme, a craze, a greater fool's theory scam, or even the "tulip mania" of the 21st century. This shouldn't come as much of a surprise. In the wake of the Global Financial Crisis of 2008 and the bursting of the dot-com bubble over a decade earlier, it is prudent to maintain a healthy level of skepticism regarding innovative financial products. It is usual practice to place bitcoin in the same category as other shady investments that have gotten out of hand. It is reasonable to ask, "How is bitcoin comparable to or different from other speculative booms that have occurred in the past?" In every instance, there is a constellation of tales surrounding the new asset class that is responsible for attracting the euphoric attention of investors.
There is a school of thought in academics that attempts to make sense of these narratives, but for the most part, they are unsuccessful due to the fact that they do not take the technological roots of Bitcoin's incentive structure seriously. They also disregard, for the most part, the most active participants and texts that are at the heart of the culture around Bitcoin. In this article, I examine two different assessments of this kind, highlight some of the flaws that are present in each of their respective arguments, and work toward developing a set of recommendations for conducting nuanced examinations of Bitcoin narratives.
Bitcoin serves as a case study that Robert Shiller employs in his book "Narrative Economics," which he wrote to highlight how pervasive sticky economic tales are in current culture. "The Bitcoin narrative," as he puts it, "involves stories about inspired cosmopolitan young people, in contrast with the uninspired bureaucracy; a story of wealth, inequality, sophisticated information technology, and involving strange incomprehensible language." [Citation needed] The "technobabble" or hype that is characteristic of Bitcoin discourse is the primary target of his criticism, just like it was for Jon Baldwin, whose piece "In Digital We Trust" I examined in the first part of this essay series.
The problem is that neither of these authors gives a lot of thought to the way in which the technical aspects of the code influence these narratives. It's possible that these elements include the proof-of-work consensus method, the difficulty adjustment algorithm, and the supply distribution schedule. These aspects are what form Bitcoin's incentive structure and help define its market rhythms. When Shiller does explore the importance of the cryptocurrency's technical features in his research, he does so primarily to illustrate how little "Bitcoin aficionados" appear to truly know about the technology:
"I will not make any attempt to describe the technology behind Bitcoin in this article; nonetheless, it is important to remember that it is the result of decades of study. Only a small fraction of Bitcoin traders actually grasp this underlying technology. When I come across people who are passionate about Bitcoin, I frequently question them about its fundamental ideas and theories. For example, I might inquire about the Merkle tree or the Elliptic Curve Digital Signature Algorithm, or I might request that they explain Bitcoin as the equilibrium of a congestion-queuing game with limited throughput. The typical reaction to this question is a blank expression. At the very least, this means that the theory is not the focus of the story, with the exception of the fact that the reader is made aware of the fact that some exceptionally bright mathematicians or computer scientists conceived of the notion.
This line of reasoning suffers from a number of flaws all along. Anecdotal data from people he's met who describe themselves as "Bitcoin aficionados" is the primary basis for this evaluation. It is never made obvious throughout the book who these "enthusiasts" are, where he met them, or what kind of expertise or personal stake they have in Bitcoin. Likewise, it is never made plain where he encountered them.
Second of all, he asks his anecdotal subjects to explain complex cryptographic features that are fundamental to Bitcoin's protocol, but rarely play prominent roles in Bitcoin discourse. This is true even in some of the most dedicated circles of Bitcoiners. Thirdly, he cites a number of anecdotes to support his claims. Given that he appears to have borrowed these phrases from an article focusing on the "Economic Analysis of the Bitcoin Payment System," the choice of technical aspects that he went with is very peculiar. The primary focus of this essay is on the manner in which the Bitcoin protocol modifies its incentives in order to encourage participation. When evaluating the narratives around the plausibility of Bitcoin's perpetuity and predicted capacity to continue to exist in a state of price discovery, it is essential to have a solid understanding of these characteristics. In other words, he avoids discussing the important technical aspects that have an impact on Bitcoin's narratives and instead chooses aspects that are likely to confuse the people he is researching.
My experience of being immersed in Bitcoin's digital environment on an almost daily basis has taught me that the proof-of-work consensus mechanism and the difficulty adjustment algorithm are the major technical characteristics that are responsible for driving its narratives. Understanding Bitcoin mining and the payment schedule for newly produced coins requires a solid foundation in the aforementioned protocol characteristics. A fundamental understanding of this process is helpful in elucidating the fundamental incentive structure that drives individuals to mine for and amass Bitcoins. To put it another way, miners receive a reward in Bitcoin that is directly proportional to the amount of processing power that they contribute to the network. The mining of cryptocurrency will get increasingly challenging as more computing power is supplied to the network. The incentive will remain in place for miners as long as they believe their payouts will increase. Every four years, there is a one-half reduction in the value of the prizes. As a result, there are regular modifications made both to the level of difficulty and the payouts in order to maintain interest in the mining process. This acts as the fundamental material mechanism for ensuring the continuing functioning of Bitcoin and for transforming energy into digital assets. Moreover, it is also the name of the cryptocurrency. The narrative that bitcoin has the potential to appreciate in value indefinitely centers on the verifiable scarcity of the asset as well as the sustainable incentive structure for involvement. Both of these aspects are essential to the story.
If Shiller had entered "proof-of-work" or "halving" instead of "digital signature algorithm" in the search bar of his ProQuest News and Newspaper query, I believe he would have seen a far larger number of relevant articles than the few that were returned. Although it is significant to state that Shiller researches mainstream news and newspapers, which are unlikely places to uncover information where you may find stuff that was initially acquired from Bitcoiners, it is also noteworthy to say that Shiller does so. Instead than reading conventional newspapers, true "bitcoin aficionados" are probably more likely to be found on social media platforms like Twitter and in magazines like Bitcoin Magazine. In addition to this, his footnotes only relate to two news pieces that were published on Bitcoin.com, four articles that were published in mainstream news outlets, one article that was published in an academic journal, and the Bitcoin white paper. In a nutshell, Shiller appears to neglect the online forums where Bitcoiners are most likely to congregate, despite the fact that his book emphasizes the significance of the role that social media plays in narrative virality. His approach is not well-grounded, or at the very least, it makes the common error of misidentifying conventional news sources as the core body of texts from which Bitcoin narratives originate and spread.
Shiller's assertion that "there are brilliant computer scientists who are fascinated by cryptocurrencies but who won't say whether the captivating ideas that generate public excitement are ultimately right or wrong" is an additional example of the generalizations that he makes that are only tangentially supported by evidence. Who exactly are these bright scientists of whom he talks, and what does it signify that they have chosen to ostensibly refrain from commenting on the veracity of the story being pumped up around Bitcoin? Again, readers are forced to speculate as to who the mysterious people involved in Shiller's study are as well as what literature he is referring to as basis for his statements.
Later on in the book, Shiller makes the argument that the narrative attraction lies in the younger generation's greater capacity to grasp Bitcoin while older generations struggle with it:
"It might be that the fact that comprehending Bitcoin takes some work and expertise is part of what makes it so appealing. In the same way that traditional money is shrouded in secrecy, the digital currency known as Bitcoin is as well. Only a small percentage of individuals are aware of how the value of paper money is created and maintained... The notion that clever young people understand Bitcoin, while elderly fogies never will, is one that many find appealing.
Shiller is only speculating that there is some of this generational attraction to Bitcoin tales, but it is possible that there is some of it. If Shiller had explored the discourse of actual Bitcoiners, which he never demonstrates that he does, he might have found thousands of pages of books and articles as well as countless hours of videos and podcasts that provide in-depth analyses of Bitcoin's philosophy, economics, and social theory. However, he never demonstrates that he does this. Bitcoin does exude an aura of secrecy; there is no denying it. However, there is also a substantial corpus of information that Bitcoiners have been tirelessly adding to for the past ten years. These contributions have helped build the tales that Shiller primarily dismisses as being incorrect. And if the stories are considered to be nothing more than unsubstantiated rumors, then the only reasonable conclusion is that Bitcoin has no actual value.
Baldwin and Shiller appear to be on the same page with their assessment that Bitcoin is a speculative bubble that has no fundamental material worth. It does not have "fundamentals," which is an investment term that refers to production reports, revenue streams, and earnings per stakeholder share. At least, this is how it is often understood. While Shiller does not specifically make this accusation, Baldwin claims that Bitcoin is a Ponzi scheme that "must continually be talked up" in order for its value to increase. On the other hand, he does address the ways in which the varying and sometimes shifting narratives surrounding Bitcoin continue to maintain the currency's perceived worth by spreading contagiously from one person to the next.
His narrative framework looks for sophisticated reasons as to why individuals would feel that it has worth in any form at all. The idea that Bitcoin is "the future," economic empowerment, and its potential function as a "membership token in the world economy" are some of the key factors in these stories. Other key factors include celebrity endorsements, mysteries about the value of conventional money, the mystery of Satoshi's identity (or identities), fear of missing out (FOMO), and mysteries about the value of conventional money. He contends that the narrative constellations mentioned above give Bitcoin its intrinsic worth, saying that "people are interested in Bitcoin precisely because there are so many other people interested in it." They are interested in hearing fresh Bitcoin-related tales because they believe that other people will also be interested in hearing about these experiences. In a nutshell, he asserts that the value of Bitcoin can be traced back to the efficacy and contagiousness of its narratives at any given time. The stories that are told about how successful Bitcoin is end up becoming self-fulfilling prophesies.
This conclusion is predicated on the premise that Bitcoin does not has any genuine social value. A significant question that appears to have been overlooked in both Shiller and Baldwin's studies is the following: from a user's point of view, who may benefit from using bitcoin? Both writers are so fixated on the narratives that they feel are untethered from reality that none of them looks beyond the use cases such as Silk Road for how people are actually using Bitcoin and what user needs are driving the growth of Bitcoin. Bitcoiners, the people who create and think about the network, have been largely excluded from these evaluations. Academic studies of Bitcoin would benefit enormously from taking a concrete look into Bitcoin culture and examining where the narrative syncs up with reality and which narrative parts are only hype. This would help determine where the narrative is accurate and where it is simply hype.
For instance, Seung Cho Lee provides an empirical assessment of Korean bitcoin investors during the bull run that lasted from 2017-2018 in his paper titled "Magical Capitalism, Gambler Subjects: South Korea's Bitcoin Investment Frenzy." [Citation needed] In contrast to Baldwin and Shiller, Lee is enlighteningly transparent about the identities of his subjects as well as the cultural milieu in which they are actively engaged. During the bull run that bitcoin saw between 2018 and 2017, nearly 21 percent of all bitcoin investors were Korean. Lee participated in two of the most prominent social media sites relating to Bitcoin, one of which required users to maintain an anonymous identity while the other did not. He refers to these people as "lay bitcoin investors," and he says that they appear to tread a fine line between investing and gambling with their bitcoins.
The only complication to this otherwise straightforward analysis is found in the first footnote of the author's work, where he states, "I shall use bitcoin as a type of synecdoche for all of the cryptocurrencies covered throughout this essay." I would suggest that, as a general rule, it is better from an analytical standpoint to create a clear separation between bitcoin and altcoins in this context. The various consensus processes and capabilities offered by these blockchains generate contrasting and often even mutually exclusive perspectives about the future of cryptocurrencies and money. For instance, Bitcoin maximalists only support Bitcoin and think that other cryptocurrencies are either impossible to use or, even worse, are just frauds. They believe that Bitcoin is the only viable cryptocurrency. Extreme tribalism may be seen throughout the entirety of the bitcoin industry. It is also important to point out that this buying frenzy for bitcoin coincided with the boom of initial coin offerings (ICOs), during which billions of dollars flowed into hundreds of new altcoins. This is something that should be noted. However, it is plausible to think that the lay investors portrayed here may not have made many crucial differences between the coins they bought in while making their investments.
He positions this upheaval as taking place against the backdrop of a post-developmental and neoliberal cultural environment. A significant economic transition had taken place in South Korea, one that was characterized by increasing wealth disparity, low wages, insecure employment, and riskier investing that was supported by lax regulation of consumer credit. Lee paints a picture of a milieu in which disillusioned young people harbor great aspirations of finding financial success in thriving capital markets. The appearance of internet exchanges, smartphone investing applications, and worldwide crypto marketplaces opened the door for ordinary people to make "magical" market investments. According to Lee's argument, "the magic of financial capitalism is profoundly based in a process that acts through self-referential value and self-fulfilling performativity." [Citation needed] Within these markets, players execute a repertory of rituals that legitimize their economic behaviors and collectivize their hopes and anxieties, all while putting into question the logic of market fluctuations. These behaviors and hopes and fears are collectively reflected in the market. This results in mimetic cycles of value narratives that are seemingly unattached to material reality, which is an argument that was also made by Baldwin and Shiller. Nevertheless, in a period when disciplined effort does not appear to provide as much promise for material achievement as it did in previous generations, these marketplaces offer enticing opportunities for financial triumph.
The economic setting that Lee explains is what sticks out most about the cultural context that we are looking at. He contends that the beginning of the post-developmental era was marked by a financial crisis in South Korea, which was then followed by a bailout of the government by the IMF and a decline in the labor market. It is striking to highlight that Bitcoin was introduced as a critique of the very conditions that contributed to South Korea's economic condition. While Lee is focusing on lay investors who do not appear to have any political investment in Bitcoin, it is striking to highlight that Bitcoin was introduced as a critique. Bitcoin was promoted as a critique of failed banks and weak monetary policy when it first came onto the scene. It is also important to note that the International Monetary Fund (IMF) has emerged as one of the most formidable institutional adversaries facing the Bitcoin community. Even if Bitcoin's investors are unaware of the flawed monetary system that helped shape these post-developmental conditions, his analysis suggests that bailed out banks and deregulated markets have created the conditions for Bitcoin to receive mass retail attention. These conditions have been created because bailed out banks and deregulated markets have created the conditions. As a result, Bitcoin is both a product of and a response to the existing institutions' ineffective management of the world's economy.
Lee explains how the use of social media may help make the mystical incantations of market participants more accessible. Lay Bitcoin investors actively exchanged memetic terms that helped them manage the completely inexplicable market volatility. These investors openly questioned the rationality of the market, and the memetic expressions assisted them. This is the defining characteristic that differentiates a gambler from an investor: for the gambler, "expertise" refers to the ability to cope well with risk and uncertainty. The gambler, in contrast to the laborer, who cultivates an organic and ongoing contact with the world, welcomes unpredictability and looks for the optimal time to rapidly capture possibilities. It is essential to place an emphasis on this idea of competence. I would argue that this includes traditions of intellect and emotional control that are unique to various networks. Because Bitcoin is still a relatively new commodity with innovative measurements for its fundamentals, the social network takes on an extremely crucial role in terms of its importance as a source of advise on how to navigate the market. As Lee demonstrates, this requires a repertory of memetic actions that may reduce fear, uncertainty, and doubt while simultaneously fostering optimism, confidence, and trust in the recipient. When it comes to methods of forecasting, technical analysis is the method that is relied on the most. However, many individuals within the market community publicly throw doubt on the effectiveness of technical indicators since these indications are usually invalidated by sudden and excessive changes on the price charts. These participation traditions make it feasible for investors to build meaningful relationships with the market, which is beneficial to everyone involved.
Lee, much like Baldwin and Shiller, is saddled with the responsibility of trying to make sense of the value of Bitcoin, which is widely acknowledged to have no objective, inherent basis. "What determines the price of a financial commodity is thus people's beliefs about what other people believe, or collective belief on collective belief," he says, reaching the same conclusion as the authors who came before him about the ultimate significance of self-reference in determining bitcoin's value. It is important to note that Lee applies this theory to all of the financial markets. Bitcoin, however, continues to serve as a perfect example despite the fact that it is lacking in obvious foundations and is a whole new financial instrument that is difficult to compare in a meaningful way to anything else. Because of the self-referential nature of Bitcoin, any information that is disseminated about Bitcoin or events that may have an effect on its price are understood according to the standards that have been established by the Bitcoin community for pricing. The news is presented in such a way that it always matches the narratives that are sought regarding valuations. His argument is that "every piece of information and every statement about Bitcoin is supposed to be subject to this self-fulfilling valuation process in which the 'constative' meaning [its nature of being true or false] of a certain statement is deciphered based only on its 'performative' effect." He says this to support his claim that "every statement and every piece of information about Bitcoin is supposed to be subject to this self-fulfilling valuation process." In this sense, the values of Bitcoin might be founded on faith in the capability of its narrative to persistently inspire confidence in more market players.
Lee presents the most convincing argument out of the three writers on how Bitcoin's narrative is influenced by the real market players in the cryptocurrency's market. It is becoming increasingly obvious, by placing actual investors into a cultural framework, what reasons could be engaged in the taking of financial risks, how this involvement might operate as enchantment, and how news about Bitcoin is filtered into ever more positive narratives. While it seems that Shiller is looking at newspapers for examples of these narratives, Lee argues that market participants steal, interpret, and circulate news information amongst themselves. This is, of course, a feedback loop for information in and of itself. The community sifts through the news and strengthens the argument that bitcoin is headed in a bullish direction. This results in a higher level of interest in the asset. The fact that this market is so popular is reflected in the media's coverage of the ups and downs that occur within it. On the other hand, Lee only provides a limited number of examples regarding the ways in which various messages can be interpreted performatively. The emphasis placed by Baldwin and Shiller on the political and techno-utopian discourse provides hints regarding the possible interpretive conventions that are at work here. In the following piece of this series, I will examine how different aspects of each of these authors can contribute to the development of a vernacular theory framework for the purpose of researching the culture of Bitcoin's most devoted supporters.
