Synthesizing Assets...
In Mary Shelley’s classic novel, Dr. Frankenstein reverse engineers an artificial man by combining parts of men and animals. The creation is then animated with electricity, arising to behave in ways completely unanticipated by its creator. More than two hundred years after Shelley’s enduring story, the creation of bitcoin and crypto assets may in some ways mimic how Frankenstein found that combining individual elements from separate sources produced an entity that behaved in unexpected ways.

Cryptostein
Satoshi Nakomoto, the creator of bitcoin and the blockchain protocol, has remained anonymous since sharing their creation. Conceived in the wake of the Great Recession, crypto's vision involved stabilizing economies by vanquishing inflation and enhancing trust in financial systems. The laboratory that gave birth to crypto largely consisted of Satoshi’s 2008 white paper along with 34 emails and more than 500 forum posts among a group of cryptographers over two years. Within these communications, Satoshi describes the bits and pieces of economic perceptions and features of existing assets of value they attempted to synthesize in the form of bitcoin.

Digitized Gold
Gold was one of the prime components of Satoshi’s bitcoin recipe, likening it to a “base metal as scarce as gold”. Satoshi compared the process of creating new bitcoins to “gold miners”. Mining new coins was a way of controlling the rate of creation and maximum amount of new coins. However, in addition to predetermining supply, the process of mining was often cited as a potential driver of value, with bitcoin’s price expected to reflect the cost of mining. Satoshi may have been most focused on mimicking gold’s quality of scarcity. While scarcity is definitely a factor in determining the value of assets, it may not be the primary factor. For example, the precious metals market has multiple cases of a metal being more scarce than another but being worth less. The global currency market also has multiple examples where more scarcity does not result in more value.

Inflation Monster
The quality of gold-like scarcity that Satoshi tried to program into bitcoin was also a key component of its intended ability to neutralize inflation. Satoshi describes their vision for bitcoin as money that perpetually appreciates in value, and therefore never loses value to inflation by rising faster in value than the prices of goods and services. The fixed supply of bitcoin was central to Satoshi’s plan for ending inflation, with posts reading “escape the arbitrary inflation risk of centrally managed currencies”. The core of bitcoin’s intended anti-inflationary properties are built upon Satoshi’s view that the coins would not lose value due to an increase in supply once the maximum number of bitcoins were created. Also integral to bitcoin’s inflation fighting power is the view that inflation is primarily caused by an increase in the supply of money, such as when governments add money to circulation by creating currency. It may be a notable irony then, that researchers have not found a link between money supply and inflation since at least the 1990s. Though multiple studies on the topic were published before bitcoin’s creation, Satoshi does not reference any sources of empirical economic data in their white paper or within the more than 500 emails and forum posts.

Misunderstood…
As Frankenstein’s creation did not act in ways that were expected by its creator, crypto assets may also exhibit unexpected and ironic characteristics. Perhaps one of the most pronounced ironies, the price of bitcoin has a low correlation to gold prices, often moving in different directions from each other. As its creator thought it was more like gold than stocks, it may be even more ironic that bitcoin prices move more in tandem with the stock market than with gold. Though its correlation to stocks has fluctuated, bitcoin has had a high correlation to the stock market since at least 2013. In that same time, bitcoin’s correlation to gold has been lower and with more periods of negative correlation, where the assets move in opposite directions. Also, with Satoshi seemingly unaware of the lack of relation between money supply and inflation, in addition to their likely overly-emphasized focus on scarcity, the factors that influence bitcoin and crypto value may differ from what was intended by its creator.

October 18, 2023