Bitcoin and the Economics of Voluntary Money: Scarcity, Utility, or Trust?

[Sowat]

It's a good way of conceptualizing money: a voluntary medium of exchange that people use because they want to, not because they have to to pay taxes or fees. Standard money is typically based on some combination of government authority, the central bank, commercial banks, and/or payment networks. Bitcoin goes a different route. It has a fixed set of monetary rules programmed into the system, and there is no requirement to participate-you're free to hold, spend or spurn it as you see fit, if it offers sufficient value. Economically, this leaves one ponder: what reason is there for anyone to be willing to accept a particular form of money, when that form of money isn't enforced?

One explanation is network effects. As more and more people recognize and use Bitcoin, it will become more and more valuable. There is also the potential for scarcity to drive demand, as there will only ever be a fixed supply of Bitcoin. But again, scarcity does not necessarily imply monetary value. Demand, utility, security, liquidity, and trust are also factors. Bitcoin is thus an intriguing economic experiment: can a monetary network still become adopted under this frictionless paradigm, driven by the collective expectations of its users and without the need for central authority?

In my opinion, one of the most interesting economic questions about Bitcoin is the following: what drives voluntary money the most: scarcity, utility, network effects or trust?

[Joy_learns_crypto]

In my opinion, one of the most interesting economic questions about Bitcoin is the following: what drives voluntary money the most: scarcity, utility, network effects or trust?

It isn't one thing that drives financial system like Bitcoin and some factors depend on each other like scarcity without demand won't drive the price at all, utility without adoption will not drive Bitcoin price.
If all factors align the price would be driven upward, and the factors has been aligning together I am not going to lie, that's why Bitcoin has been expanding in price and market cap.

Trust and utility were the background factors, a financial system which individuals can trust away from the government, utilities like easy to transfer without any third party worldwide now for investors scarcity and demand makes it a profitable investment.

[Die_empty]

In my opinion, one of the most interesting economic questions about Bitcoin is the following: what drives voluntary money the most: scarcity, utility, network effects or trust?

Every currency is naturally scarce for it to have value. So I would be skipping scarcity. I don't understand the concept of network effects. Therefore, I am not making any comment on that.

However, trust would be my number one pick. If people trust a currency, they will use and accept it as a medium of exchange.

In addition to all the factors you have mentioned, stability also drives voluntary use of a currency. A currency that consistently maintains its value over a period of time is widely used.

[BlackHatCoiner]

In my opinion, one of the most interesting economic questions about Bitcoin is the following: what drives voluntary money the most: scarcity, utility, network effects or trust?

It's a chicken-and-egg loop. People first came for the scarcity aspect and the number-go-up. Some stuck around long enough to notice it actually works; can't be printed and can't be frozen. That builds trust, trust brings more users, more users brings liquidity, and liquidity is what makes someone accept it without thinking too much.

[viljy]

~
In my opinion, one of the most interesting economic questions about Bitcoin is the following: what drives voluntary money the most: scarcity, utility, network effects or trust?

Network effects.
The concept of trust can generally only be applied to government‑issued money. Bitcoin does not require trust, as the system’s operation is ensured by cryptography.
Scarcity is like a bonus for the system.
Utility is a necessary quality.
Network effects do not arise on their own. A lot of money and effort have been invested in spreading and popularizing Bitcoin. In other words, this means that if you create an analogue of Bitcoin with scarcity and even some utility, network effects will not arise on their own.

[tabas]

In my opinion, one of the most interesting economic questions about Bitcoin is the following: what drives voluntary money the most: scarcity, utility, network effects or trust?

There is no need to separate them all when all of them are important factors of why Bitcoin has been so valuable and its economy keeps on growing. I know that it's up for discussion only but one can't be alone and the two as well. We know that if it's not scarce, there will still investors but it won't be as big as it is. And the same goes with its utility, if it doesn't have it then it makes no sense for the investors to put confidence in it. So, you get the point about the trust and why it has been a medium of exchange and the other factors if there are more, all of it are important.

[ColdLava40]

In my opinion, one of the most interesting economic questions about Bitcoin is the following: what drives voluntary money the most: scarcity, utility, network effects or trust?

I wouldn’t want to separate any of them because they all play important roles in taking Bitcoin to where it is today.

Scarcity comes from Bitcoin’s limited supply, and many factors help strengthen it, including lost coins and dormant wallets. People also trust that the system will continue to evolve over time, and that trust in Bitcoin helps drive its adoption on a wider scale.

As adoption continues to grow, these factors will continue to work together within the Bitcoin economy. Even after all the Bitcoin has been mined, they will still play a role, especially scarcity, which will become even more significant.

As demand continues to grow while the supply remains fixed, the value of Bitcoin could increase. People who did not trust the system before may eventually want to get their hands on even the smallest units of Bitcoin.

[Cryptomultiplier]

In my opinion, one of the most interesting economic questions about Bitcoin is the following: what drives voluntary money the most: scarcity, utility, network effects or trust?

As regards Bitcoin as a financial tool, network effects, scarcity, trust and utility all play their major roles in making it what it is today and one without the other defeats the purpose of its creation.
So it's better to say that the network effects make Bitcoin a global dominant commodity, scarcity makes Bitcoin very valuable to hold as a strong hedge against inflation, trust makes commercial banking systems almost irrelevant because the codes Bitcoin operates with is transparent and open on a public ledger for all to see, while utility makes Bitcoin a better option for across border transactions without third party involvement unlike traditional commercial banks.

It's the network effects that make Bitcoin more dominant in this day and age while scarcity provides value and a more reason why people want to hold it against tomorrow, Incase fiat currency becomes more inflated and depreciated in value.

[goldkingcoiner]

In my opinion, one of the most interesting economic questions about Bitcoin is the following: what drives voluntary money the most: scarcity, utility, network effects or trust?

The fact that Bitcoin does not require trust is already a huge favor in Bitcoin as the next gen money. Fiat requires trust. Scarcity? Fiat gets printed infinitely. Bitcoin does not. The market dynamics are quite clear on what happens when something scarce is in demand. And not only does it have the advantages of scarcity, it also has the advantage of scalability. You can buy 1 usd worth of BTC of an entire BTC worth currently 85K USD.

[joniboini]

And not only does it have the advantages of scarcity, it also has the advantage of scalability. You can buy 1 usd worth of BTC of an entire BTC worth currently 85K USD.

When people mention scalability, they usually refers to how fast a transaction can be confirmed. I'm not sure if a lot of people re here for Bitcoin scalability in that sense. While some blocks have less than 10 minutes between them, the majority (and the network itself) gravitates towards 10 minutes. It's definitely not ideal for making small and quick txs. On the contrary, the security of the network is probably more important to ensure you don't get scammed by people doing double spending and whatnot. CMIIW.

[WillyAp]

Anyone posting on Economy and Bitcoin as the reserve currency should have read a few of MIlton Friedmans Books:

https://miltonfriedman.hoover.org/collections

Or other schools of economy. Just saying,

[goldkingcoiner]

And not only does it have the advantages of scarcity, it also has the advantage of scalability. You can buy 1 usd worth of BTC of an entire BTC worth currently 85K USD.

When people mention scalability, they usually refers to how fast a transaction can be confirmed. I'm not sure if a lot of people re here for Bitcoin scalability in that sense. While some blocks have less than 10 minutes between them, the majority (and the network itself) gravitates towards 10 minutes. It's definitely not ideal for making small and quick txs. On the contrary, the security of the network is probably more important to ensure you don't get scammed by people doing double spending and whatnot. CMIIW.

In Bitcoin, scalability means how well the Bitcoin network can handle more transactions as more people use it. It has an indirect effect on transaction speed, yes, but that is not directly connected to the scalability of Bitcoin.

I was however referring scalability of buying smaller and smaller pieces of a coin in my post's context.

The transaction confirmation speed is a whole different issue with its own problems and solutions. But I would think of transaction confirmation speed as a "symptom" of scalability, at most.

[Odogwu-Blockchain]

Each time Bitcoin moves to new numbers, it drives lots of users into the industry, it's the proof of constant driven that makes investors trust the system. Trust is gotten from repeated show of certainty and reliability that's why there is lots of liquidity that keeps increasing all the time.

From my own opinion, Trust and liquidity had been the major factor that keeps the industry still standing.

[Ucy]

It's a good way of conceptualizing money: a voluntary medium of exchange that people use because they want to, not because they have to to pay taxes or fees. Standard money is typically.....

.....
what drives voluntary money the most: scarcity, utility, network effects or trust?

Ofcourse foundamentals, like the scarcity you mentioned, are the top drivers. Businessmen and Investors first need the assurance that what they will be investing in has the strong and needed fundamentals, then they build and advertise/promote to many more. It's like in real estate, before you build and bring in users, you inquire to be sure that the location is environmentally stable, secure and possibly resource rich . Reasonable amount of consumers also check this things,
So, Bitcoin investors and users want to be sure their money won't be debased easily, confisticated, stolen or rules changed arbitrarily...

[buwaytress]

And not only does it have the advantages of scarcity, it also has the advantage of scalability. You can buy 1 usd worth of BTC of an entire BTC worth currently 85K USD.

When people mention scalability, they usually refers to how fast a transaction can be confirmed. I'm not sure if a lot of people re here for Bitcoin scalability in that sense. While some blocks have less than 10 minutes between them, the majority (and the network itself) gravitates towards 10 minutes. It's definitely not ideal for making small and quick txs. On the contrary, the security of the network is probably more important to ensure you don't get scammed by people doing double spending and whatnot. CMIIW.

Not going to get into semantics here but the scalability "problem" of Bitcoin was, in a practical sense, solved with Lightning (and rather than how fast, it was simply how much volume it was able to handle without congestion.

The security of PoW as you note is so much more important here because of that precious finality.

The "near instant" confirmations from other networks are a false sense of finality (as reflected by the number of confirmations required), as are the ones from trad fiat networks (which are almost never final).

[Dreadboost]

Each time Bitcoin moves to new numbers, it drives lots of users into the industry, it's the proof of constant driven that makes investors trust the system. Trust is gotten from repeated show of certainty and reliability that's why there is lots of liquidity that keeps increasing all the time.

From my own opinion, Trust and liquidity had been the major factor that keeps the industry still standing.

Bitcoin maintains its consistency in increasing in price each Bitcoin cycle. It has to be a core reason why there is trust from many. One thing I also believe in is that adoption paves the way for more adoption. The people who have Bitcoin already are buying more, serving as a motivation for the new ones to see more reasons to buy.

The Bitcoin left in Satoshi's wallet is a lot of liquidity. That alone proves that bitcoin cannot fall to zero.

[Adiljutt156]

Utility and trust are way more important than scarcity. Interest can be created in Bitcoin by its limited supply but scarcity is not a guarantee that it will be useful as money.

Many things are scarce without being widely accepted as a way of exchange. Trust gives people confidence, whereas utility gives them a reason to use Bitcoin,  that the system is continuing to work as expected. Network effect then strengthens both; when more businesses, people and services start accepting Bitcoin, it becomes useful for the next person.  It is true that scarcity attract attention, where as on the other hand, utility creates reasons to use it. Trust encourages people to transact and hold it, whereas the network effect expands its usefulness.