Bitcoin and the Theory of Creative Destruction

[d5000]

Reading about this years Nobel laureates I stumbled upon the the theory of Creative Destruction. It is an old theory published first in 1942 by Joseph Schumpeter and explains how innovations replace older technologies, creating value on the way, and thus ensuring the survival of capitalist economies. This year the Swedish Rijksbank Prize for Economic Sciences went to Philippe Aghion and Peter Howitt who have applied the theory on the development of modern societies through technology.

I thought Bitcoin fits quite well into this very basic model, and thus I'm wondering if it was already discussed here.

Bitcoin comes as a "new type of money", i.e. as a financial innovation. Can it "creatively destroy" its predecessors? And what are its predecessors? Fiat money, or other kinds of assets?

Schumpeter's theory says basically that the essentials of creative destruction is a new combination of production factors (like capital and labor). For example, AI is an example where certain kinds of labour (e.g. writing and graphic design) can be replaced by capital (investment in computing power), leading to a "recombination" of these production factors. Graphic design studios for example have to adapt, e.g. concentrating on high quality design or offering AI-assisted low quality design, or they will probably die. Both alternatives are less labour and more capital intensive, so the whole sector will change, but in the end they will deliver more value.

How fits Bitcoin here? Many people for example think that Bitcoin could replace banks, which would be essentially such a process of "creative destruction". I don't think it will replace them entirely (risk scoring and loans are very difficult to replace, for example), but IMO it can lead to some of banking's services, like SWIFT for international transfers, certain payment services, but also (if Bitcoin stabilizes) retail and company bank accounts. Bitcoin is far less labour intensive than banks, so the process would be similar to the way AI replaces or "enhances" some creative industries in the present.

It's interesting though that Bitcoin seems to be also less capital intensive than banks: while there are investments in mining and also in development of services (who sponsor Bitcoin development too, e.g. in the case of Blockstream), banks have even higher capital requirements, think of all the office space they occupy. So Bitcoin really could boost productivity in the financial sector and be perhaps even more revolutionary than AI.

In the case of fiat money, I think it is questionable if Bitcoin can replace it. Fiat's "innovation" was to adapt money supply to real economic growth without the "limits" of an asset like gold. I can perfectly imagine a "Bitcoin standard" society, but in this case I think there would be replacements to fiat -- and if we think of a crypto-only economy, this would be a strong altcoin sector with continuously growing total money supply.

There are several details to discuss here but I don't want to get the post too long, so I leave this for the discussion. I will also try to look into the work of this year's Nobel laureates to know if their adoption of Creative Destruction can be applied to Bitcoin.

[348Judah]

In the case of fiat money, I think it is questionable if Bitcoin can replace it. Fiat's "innovation" was to adapt money supply to real economic growth without the "limits" of an asset like gold. I can perfectly imagine a "Bitcoin standard" society, but in this case I think there would be replacements to fiat -- and if we think of a crypto-only economy, this would be a strong altcoin sector with continuously growing total money supply.

There are some common similarities that we may be able to apply and compare fiat to Bitcoin existence, but we should know that they entire pattern of introducing Bitcoin does not aligned with what we already have with fiat, but if it happens as intended, it's either we have both to exist and each individual will have to decide on which one they wanted and how they are going to make it more applicable on their demands.

Talking about the value of bitcoin, the incessant printing of fiat currency and inflation altogether, we should be able to arrived at a conclusion which permits that the more we continue with the way of using fiat, there's obvious reasons not to have a change from what has always been, but bitcoin serving an alternative will make everything balanced on an equal rights and access towards a decentralized network, whereby the Bitcoin value continue to increase over time instead of continuing mining without limit, everyone will eventually have Bitcoin even after the 21 million has been completely mined, because it will always increases in value instead of continuous mining as they do with fiat.

[Hypnotizer]

Bitcoin comes as a "new type of money", i.e. as a financial innovation. Can it "creatively destroy" its predecessors? And what are its predecessors? Fiat money, or other kinds of assets?

Bitcoin indeed can `creatively destroy’ it’s predecessor which are fiat in terms of currency use and gold, silver or stocks in terms of investments and the predecessor that will probably experience the ultimate destruction is the fiat money because many people back then before the creation of bitcoin consider fiat currencies as their primary store of value(to easily save and spend)…precisely most people especially in the rural areas that don’t have direct access to the stock market, banking system or gold and silver to store their values consider storing their values  in fiat currency because it is probably the easiest option available to them and then the currency end up losing its value due to inflation. Bitcoin on the other hand offers decentralized and borderless network that doesn’t limit anyone from using it and it being appreciative over long period of time makes it perfect for the people in the rural areas to store their values instead of  storing it  in fiat.

When bitcoin will eventually go mainstream those rurals will store their values in bitcoin, when they fully understand the system and how it works. They will only keep their spendable money in fiat

Even currently I might say bitcoin has creatively started destroying fiat money especially in the scenarios as I mentioned above.

[EluguHcman]

Reading about this years Nobel laureates I stumbled upon the the theory of Creative Destruction. It is an old theory published first in 1942 by Joseph Schumpeter and explains how innovations replace older technologies, creating value on the way, and thus ensuring the survival of capitalist economies. This year the Swedish Rijksbank Prize for Economic Sciences went to Philippe Aghion and Peter Howitt who have applied the theory on the development of modern societies through technology.

I thought Bitcoin fits quite well into this very basic model, and thus I'm wondering if it was already discussed here.

Yeah I saw one similar topic earlier today that discusses about Benner's Theory & Bitcoin which Bitcoin has come to existence as evolution to potential volatile asset following the specified theory.

Back to the discussion... Before Bitcoin came to existence in 2009, there has been speculations that there will be a currency that will be in used by everyone and it was dma skeptic how this can be possible when the traditional currencies is there and monetary is at it high regulations where every countries imposes their own policies.
But as today's has come that era with Bitcoin being usable by anyone and can send fund through it digital system across borders with a very low fees.

So it digital accessibility, use cases and potential values got it (Bitcoin) an oversight as one of those evolution and modernized monetary values

[Mrbluntzy]

The adoption of creative destruction theory is gradually working with Bitcoin but not completely, there are some factors that you have already listed such as loans, risk and elimination of Fiat money.

In some country like mine, we already know that there won't be a total elimination of Fiat money and can not be replaced completely with Bitcoin because there are localities in my country that has big general markets where the traders are mostly older men and women and some younger uneducated ones too who are selling some of the locally most wanted food materials in those markets.  
       These sets of traders wants payment to be made to them in cash, not even via mobile bank transfer or the use of credit or debit cards on point of sales terminal but they demand for cash, they feel they are more safe with receiving cash and then going to the bank to make deposits of the cash received from payment but that's if they want to, and they are also ready to visits the bank or ATM to collect cash too if they want to. They have not passed the stage of relying on Fiat money so it will be very difficult and would take so many years to completely convert this people. I know that it's not just in my country that we have this kind of people.

Speaking about the adoption of creative destruction in using AI for text writing or graphics design, this is something that its importance is widely seen in the industry of graphics, data search and test writing, and the adoption of AI in that industry is not really a big deal for the government to approve of it.
          Meaning that it is not the same thing as Bitcoin which has to do with finance and requires so much scrutiny by the government before bringing forth a strong system that supports the motion of Bitcoin to replace banks and Fiat money. Bitcoin will become more centralized if there is Bitcoin bank where people will go and entrust their coins holding.

 But already (lately), so many people are preventing their selves the stress of using banks for some foreign transactions and they are now using Bitcoin for most of their transactions. Some businesses too in some countries are accepting Bitcoin payment and in terms of asset investment, many people have shift to Bitcoin investment. That was why I first said that the adoption of creative destruction theory is gradually working for Bitcoin because we can see how people are making use of the Bitcoin for transaction and also holding it as investment instead of using other things.

Or, do Bitcoin have to completely eliminates Fiat money, eliminate banks and be adoption by everyone as an asset of investment before it will be seen that theory of creative destruction has taken place?

[abhiseshakana]

Reading your opinion, about creative destruction, I immediately thought about economic evolution, innovation, and creative destruction itself. Some time ago, I read a quote from Tom Peters that read, "Destruction is job number 1 (before the competition does it to you)."

I believe Bitcoin is the result of a technological phenomenon, an economic process, and a civilizational event. In a logical sequence, Bitcoin begins with a vision (visionary), triggers innovation (technology), and produces creative destruction that fuels the evolution of the global economic system.

This is the basis of my thinking:

Creative destruction is merely a mechanism, not a driving force. Its initiators describe it as a process that continuously revolutionizes the economic structure from within, destroying the old and creating the new. They also emphasize that what drives the machine is not the mechanism, but the entrepreneur-visionary who creates the disruption. So, without an agent who dares to think outside the old structure, creative destruction is merely potential, not movement.

Every process of creative destruction begins with the radical vision of someone who sees the world differently. Satoshi Nakamoto didn't just write code; he wrote an economic manifesto that rejected central monetary authority after the 2008 crisis, with a primary vision of individual financial independence and distributed trust, not his blockchain technology. Satoshi created an ideological narrative that challenged the status quo. Bitcoin was born from a visionary perspective, not from a typical market experiment, but from an ideological belief in a new system. Once the visionary initiated the disruption, a process of creative destruction took over, as radical innovation challenged the old model, markets and regulations reacted, and old institutions were forced to adapt or collapse. At this point, the visionary shifted to become the architect of a new ecosystem.

Satoshi realized his vision with concrete technological innovations: he combined cryptography (hash + signature), distributed ledger (peer-to-peer network), and game theory and mining incentives (Proof of Work). This proved a new way of combining technologies into a trust machine. With this, Bitcoin was not just an idea, but an innovative product that functioned without trust institutions. Bitcoin also marked the birth of a new paradigm: digital scarcity, something previously impossible in the digital world. At this point, Bitcoin was the result of visionary innovation, the technological manifestation of an ideological vision.

Once Bitcoin was live and widely used, it began to gradually destroy the old structures. It challenged the monopoly of money by central banks, shook up the banking model, and changed how society understood value, ownership, and trust. It encouraged countries and global institutions to create their own "centralized" versions. This was a phase that was both destructive and creative: destructive because it shook up the old monetary order. Creative because it forced the system to build new forms (DeFi, stablecoins, asset tokenization, digital IDs). Here, Bitcoin became a catalyst for creative destruction, changing not only financial technology but the global economic power structure.

After the initial disruption, came a phase of selection and adaptation. Many innovations were born from Bitcoin's inspiration (Ethereum, DeFi, Layer-2, CBDCs). Regulations and financial institutions began to adapt, some rejecting it, others integrating it. The global financial ecosystem began to move toward coevolution between centralized systems (CBDCs, banks) and decentralized systems (crypto-native finance). This is where the evolutionary phase of the digital economy begins. It is no longer a matter of "Bitcoin versus the system," but a matter of how the old system evolves with the new DNA introduced by Bitcoin.

So, Bitcoin is the result of a visionary innovation that triggered a process of creative destruction and is now a catalyst for the evolution of the global digital economy. Satoshi Nakamoto = visionary (agent of change). Bitcoin = innovation (tool of change). Creative destruction = the dynamics generated by that innovation. The evolution of the digital economy = its long-term consequences. Bitcoin is not simply the result of evolution, but rather a mutation created by a visionary innovation that ignited the process of creative destruction and forced the global economy to evolve into a new form.

[d5000]

Bitcoin indeed can `creatively destroy’ it’s predecessor which are fiat in terms of currency use and gold, silver or stocks in terms of investments

I do agree with gold and silver a bit. I think they will not completely be destroyed, because they have "real" demand from different industries (jewelry, but also technology). I guess however that a lot of their "speculative" value (monetary premium) can be taken away from Bitcoin.

However I don't know if this really fits in the theory of creative destruction. Well, we have a business sector dealing with gold and silver as store of value assets (e.g. businesses that certify the authenticity of gold), and this one could be replaced by the "completely automated" Bitcoin sector. But I think this sector is very small, so it doesn't really affect the whole economy that much like a "replacement of banks services" would do.

I don't agree at all about stocks. Stocks are nothing more than owning part of a company, and so they will always exist as long as corporations exist. There is perhaps some monetary premium Bitcoin can take away but not much imo. And making stocks a bit cheaper will not provide more productivity or value to an economy.

and the predecessor that will probably experience the ultimate destruction is the fiat money [...] losing its value due to inflation. Bitcoin on the other hand offers decentralized and borderless network that doesn’t limit anyone from using it and it being appreciative over long period of time makes it perfect for the people in the rural areas to store their values instead of  storing it  in fiat.

Fiat can also contract, not only expand, if banks give away less loans. This has happened in history even if the long term trend of fiat money supply was mostly growing.

Thus if fiat loses importance or demand, it isn't necessarily the case that it loses value, as the Central Banks could simply restrict access via high interest rates. However, if this process is too fast, then indeed the system could collapse.

But as I wrote in the OP, then some kind of "expandible money" would replace fiat, because it is easier for the economy to grow if there is an asset that is stable in value but expands with economic growth (due to a lot of psychological effects, for example the "feeling good" if you earn more (either as a business or a worker), if you're interested I can delver deeper). And we have already altcoins that do that in some way.

So what could happen in theory is altcoins replacing fiat, Bitcoin replacing a part of Gold/Silver "store of value" qualities, and both replacing a part of the bank services.

Regarding possibilities for people in rural areas I answer both you and @Mrbluntzy with a similar doubt:

These sets of traders wants payment to be made to them in cash, not even via mobile bank transfer or the use of credit or debit cards on point of sales terminal but they demand for cash

I agree that cash could be potentially demanded for much longer than we might think. This is not only due to older generations, but also because cash's privacy is unmatched, it is probably even better than the privacy of coins like Monero or Grin. In many developed European countries thus cash has still a huge demand, and when I visited Europe the last time, there were indeed some businesses which only accepted cash! In South America this has become very rare, people unfortunately don't care that much about privacy here.

But what we could imagine is a kind of Bitcoin-based cash. If the State officially issued counterfeit-proof Bitcoin "banknotes", just like Casascius coins but with much higher security, then both privacy and the "resistance to technological change by older generations or rural people" would be possible to be delivered by the Bitcoin currency.

Meaning that it is not the same thing as Bitcoin which has to do with finance and requires so much scrutiny by the government before bringing forth a strong system that supports the motion of Bitcoin to replace banks and Fiat money. Bitcoin will become more centralized if there is Bitcoin bank where people will go and entrust their coins holding.

I think you refer here to that people wouldn't want to store their coins in their own wallets, but need a custodian (e.g. to be safe when they lose their coins)?

Yes this is of course a challenge, but I think Bitcoin contracts offer still some very underexplored methods which are almost as safe as storing the coins at a bank, like vaults (addresses where you only can spend your coins to a group of "approved" addresses, so it is very difficult to steal them). This is currently quite complicated but could become easier if convenants were approved. So the need for a "Bitcoin bank" or a "trusted custodian" is perhaps not that big as many think.

Or, do Bitcoin have to completely eliminates Fiat money, eliminate banks and be adoption by everyone as an asset of investment before it will be seen that theory of creative destruction has taken place?

I don't think so. My understanding is that even if Bitcoin only is able to "destroy" a few financial services improving productivity, like remittances, it would already a "creative destruction" process and the theory would be applicable to BTC. Of course, the more it can destroy, the better (if no quality like privacy is left behind ...).

[Die_empty]

I do agree with gold and silver a bit. I think they will not completely be destroyed, because they have "real" demand from different industries (jewelry, but also technology). I guess however that a lot of their "speculative" value (monetary premium) can be taken away from Bitcoin.

The value of silver increased greatly because of the high demand for industrial use. It is a for the production of solar panels, batteries and also in the medical field. Bitcoin might not replace these precious stones because their demand might keep increasing. 

I agree that cash could be potentially demanded for much longer than we might think. This is not only due to older generations, but also because cash's privacy is unmatched, it is probably even better than the privacy of coins like Monero or Grin. In many developed European countries thus cash has still a huge demand, and when I visited Europe the last time, there were indeed some businesses which only accepted cash! In South America this has become very rare, people unfortunately don't care that much about privacy here.

The transition from fiat to cryptocurrencies will be gradual and longer because of the nature of fiat. Access to the internet in gradually increasing in developing nations, but about 2.6 billion people worldwide do not have internet access as of last year. I also assume that the rate of people who don't have access to phones is also high. Fiat will keep dominating in some areas because of its simplicity.     

[d5000]

-  snip -

Nice write-up, I agree so far, above all about the idea that there need to be visionary agents to change the system.

However I think your vision sounds more like 2040 than like 2025. We currently unfortunately do not know how far the "creative destruction" process initiated by Bitcoin can reach. We do have hints that it is changing the economy, but for now this remains speculative. For example, the remittance business would be in theory one of the most challenged by Bitcoin, because remittances are so overpriced. Well, it seems that it isn't that easy. Western Union for example has even risen their fees in the last years again after they had perhaps seen their model threatened and lowered fees in the early to mid 2010s. And I think most know that the El Salvador attempt to decrease remittance costs wasn't as successful as expected.

The only sector where Bitcoin is excelling is in the "store of value" department, but due to its high volatility it remains much more speculative than gold or silver and still isn't ready to enter a creative destruction process even in this field.

Maybe we need a new generation of visions to extend the use case spectrum of Bitcoin?

It is however also possible that the stars align alone, for example if the investment model changes from "riding the waves" to DCA and institutional investment. If the next bear market doesn't go as low as expected (<50-60% since the ATH), we could be at a tipping point actually, where Bitcoin isn't anymore seen as an ultra-risky asset only to ride the waves, but actually is developing at least into a "mildly volatile" store of value ready to challenge gold and silver. (See also this thread).

The value of silver increased greatly because of the high demand for industrial use. It is a for the production of solar panels, batteries and also in the medical field. Bitcoin might not replace these precious stones because their demand might keep increasing.

Yes, this is possible, above all in the case of silver where a bit more than half of the demand seems to come from industry (according to a quick web/AI search). So the "monetary premium" for silver, i.e. the part of the price which is driven only by investment and speculation, is lower than for gold, where industrial usage is less than 10%.

However, if there is a strong movement of funds from gold towards Bitcoin, it's possible that also silver could suffer a lot, because both could enter a longer term trend change, which could result in panic. Both silver and gold could crash to about 50% of their previous ATHs, as even in silver the monetary premium is significant (if 40-45% is investment/speculative demand).

Regarding internet access being an obstacle for Bitcoin adoption, read my previous answer to @Mrbluntzy: a similar degree of simplicity could be achieved with a "paper" or "cash" version of Bitcoin (basically paperwallets with watermarks and other security elements, just like current banknotes, and better than Casascius coins).

[Solosanz]

I don't think it will replace them entirely (risk scoring and loans are very difficult to replace, for example), but IMO it can lead to some of banking's services, like SWIFT for international transfers, certain payment services, but also (if Bitcoin stabilizes) retail and company bank accounts.

People have more choice than just Bitcoin, other cryptocurrencies offer lower fees and faster transactions. Even Bitcoin run in lightning network, but the way I see many people prefer to use stablecoins run in SOL, BSC, or any other less known network.

The strongest power that Bitcoin have is decentralization, unfortunately that power can't be seen easily unlike AI which can create a long text or graphic just in few seconds.

We have to wait until big centralized assets like banks, IPO companies, etc to fall and have a problem in withdrawal, then people will migrate to Bitcoin and it will destruct any centralized assets because people don't see it's safe anymore.

[davis196]

Bitcoin/crypto can bring a revolution to the financial markets, not the traditional banking sector(loans, mortgage, etc.). I've heard rumors about implementing blockchain technology and tokenization in the stock markets, but I don't know if there are any actual plans for such implementation. If you are connecting crypto to creative destruction, you have to ask the question "What does crypto actually destroy?" Is it fiat money? Is it traditional banking? International money transfers? I don't think that any of these are damaged or destroyed by the crypto world. Fiat money and traditional banking are still as popular as they were several years ago. Maybe the crypto industry doesn't create any "creative destruction".

[crwth]

From my understanding, Bitcoin is a significant innovation in financial applications, similar to how other technologies operate. Mostly, it could replace what we currently have, but the innovation here is hard to replace and might be expensive to replace.

It's similar to how CBDCs are emerging now, as this is one of the digital alternatives that complements BTC. This assumes that anyone can follow and apply it, but numerous barriers exist. We all know that this is disruptive technology. We all want to have decentralization here.

This somewhat reminds me of "The Bitcoin Standard by Saifedean Ammous"

[Spaceman1000$]

The Schumpeter's creative destruction theory is actually inevitable when you look at the contemporary society and how AI and some other modern technologies are springing up, especially in the Banking sector. at the moment it is capital intensive for you to run a Banking successfully, operational cost alone deep it's hands into the coffers of the annual profit of the bank, that's why they are always in need for people to come and obtain loan so they could make profit. so factors like this can actually make the bank to shift grounds to accommodating bitcoin to supposedly reduce cost as they will have less workers and few Bank branches, and also with some of the factors you've enlisted like the swift international transfers and the rest can actually be done with the use of AI.

 However this process will take a lot of time because there are some economies of the world that are heavily dependent on fiat especially when it comes to day-to-day transaction with business owners, I feel what bitcoin needs to get to that stage is for the creation of local laws that protects its usage just the way we have for fiat, that way Bank can easily switch into adoption, and it will easily snowball into the local economy as locals will be educated on how to make transactions using bitcoin as they will be transiting from fiat usage to bitcoin.

[Alpha Marine]

Bitcoin comes as a "new type of money", i.e. as a financial innovation. Can it "creatively destroy" its predecessors? And what are its predecessors? Fiat money, or other kinds of assets?

A new kind of asset won't replace the old ones as long as the old ones are still profitable. So I don't think there will be any replacement of assets because of Bitcoin. There may be a shift years later, but as long as those assets stay profitable, they will always be there.

As for fiat, I believe Bitcoin can replace it, but it has one obstacle, and that is a very big obstacle. Fiat is backed by the government and state. It is a currency on which the whole economy of the country is based. The government, who are usually the most powerful people in the country, won't want their source of power to be replaced, and it is because of this I believe bitcoin will never replace fiat. With fiat, the government has control; they have power. They can print as they like, and nobody even knows where a big chunk of the printed money goes. If the fiat currencies of countries were things not owned and controlled by governments, if they were things owned and controlled by private companies, Bitcoin would have had a better chance to take over.

That leads to why Bitcoin won't even be accepted as a currency by the government. The government may allow people to use the currency as they want, as long as it's a very small number of people. They won't come out and officially make it a legal tender like El Salvador did. This is because making it legal tender will push more people to use bitcoin, thereby abandoning the fiat currency of the country, and when this happens, the currency might lose value due to reduced demand. Since the government won't stop printing, and when you add that to a reduced demand, the fiat currency will take a nose dive, and the government will try to avoid that by all means.