Bitcoin: Creating extreme scarcity artificially under consensus to change the supply and demand relationship

In fact, the price of BTC may have never changed; what has always changed is QE.

Author: Jims Young

Value and Price

Marx is a genius, and "Das Kapital" is a sacred book.

The Capital wrote many brilliant ideas, but the problem is that he has a basic theory that is wrong.

This theory is called the labor theory of value: prices come from value, and value comes from the sum of human labor in the same manner. In other words, the price of a commodity is the total labor time cost spent to produce that commodity.

In today's world of extreme productivity explosion, this theory is obviously wrong. If you invest in stocks, you must have a deeper understanding of this, as the prices of many stocks in this cycle have nothing to do with labor or fundamentals; they only depend on the mood of the market makers or Trump's calls.

In fact, there are no absolute value indicators in the world, only prices, and prices are determined by one and only one indicator: supply and demand.

Supply and demand create prices, and supply and demand price assets in a game of competition, for example, the market maker who pumps the price only creates a temporary imbalance in supply and demand.

The Art of Pricing

The pricing standards for assets are not inherently P/E and P/S.

From the above, we know that the price is determined by supply and demand, so how should the company's valuation be priced?

During the first industrial revolution in the 19th century, if you wanted to invest in a factory, what you needed to do was calculate the asset value of the factory: how many buildings, how many machines, how much land... And the sum of the values of these specific assets would be the valuation of the company you want to invest in. This method is called book valuation method. This valuation system spans various industries, whether investing in a tennis court or a hotel, people are used to it.

However, it is evident that this valuation method seems absurd in hindsight, as many internet companies worth billions of dollars have only a few hundred computers on their balance sheets.

Yes, the valuation system has undergone many reforms.

In the early 20th century, Benjamin Graham proposed another idea, suggesting that we could price a company based on its growth potential, incorporating the expected future income of the company. Thus, the concept of P/E ratio was born. People no longer only focused on summing up assets for pricing but began to pay attention to the long-term value of the company, which later became the famous value investing method.

Everything was running smoothly, until the outbreak of the information revolution and the occurrence of global QE.

The world has enjoyed a long period of peace, and in just a few years, a large amount of liquidity has flooded the market. The ample capital surplus after World War II, coupled with the rapid advancements brought about by Moore's Law, has led to an unprecedented bubble in technology stocks. Various internet companies have captured attention in all aspects, and their valuations have soared accordingly. Around the year 2000, the PE and PS ratios of internet companies skyrocketed from several times to dozens of times, and then to over a hundred times.

The PE framework really can't hold up anymore; every company is a century-old enterprise. There's nothing we can do; Wall Street has coined a new term: Price/Dream Ratio. Simply put, the bolder a person is, the higher the stock price.

Whenever there is an expansion of a bubble, there will always be someone who shorts it, most famously Tiger Management, which shorted all tech stocks. In the early days of the Dotcom bubble, the Tiger Fund, led by Julian Robertson, aggressively shorted tech stocks, and with the rapid rise of tech companies, it was on the verge of collapse in 1999. Just a year after Tiger's collapse, in 2000, the internet bubble burst, and the valuations of Silicon Valley companies were bloodied. Tiger bet on the right direction; it’s just that when the outcome came as expected, the positions were gone. Or you might ask, if Tiger had held on, would the outcome have been different? My own answer is no, because after the bubble burst, the internet entered an epic long bull market. Even if Tiger hadn't collapsed in 1999, it would have likely collapsed in the years that followed. When it comes to the emergence of new things, being cautiously optimistic is always better than being conservative; I am not deceiving you.

However, history never repeats itself, it only hits similar rhymes. A new wave is coming, and the explosion of AI combined with the monetary easing during the pandemic has once again changed the old valuation system. "Which serious investor looks at P/E?" has gradually shifted from a jest to the norm, with projects boasting a hundred times P/S being everywhere. Everyone knows that century-old companies are rare, but the bet is on the dominance that will follow the rise of AI, which is the future of new technologies that can reach and change all aspects of human life.

No valuation system is eternal; only change is eternal.

The Era of AI and Capitalism

We live in an era of extreme overabundance of both material and spiritual products. In the atomic world, buying a pack of instant noodles can come with a bowl, it costs 2 yuan to transport goods from Shanghai to Urumqi, and Pinduoduo merchants can sell towels and cups with hundreds of millions in sales without making a profit, relying on stuffing game cards into packages to scan and play games for free to make a profit. In the digital world, a smartphone can do what used to cost tens of millions for live streaming, the content quality of a top KOL may not belong to any national television station, and the influence of a live-streaming sales host equals that of hundreds of department store sales clerks.

What’s even scarier is that after AI, the vast majority of material and spiritual production value may approach 0. In the long term, we have been living in a function of exponential growth.

When production costs approach zero, and the so-called labor value theory completely fails — when the production of a commodity requires no human labor, but only robots + AI with marginal costs approaching 0, what should the pricing depend on?

Correspondingly, when capital is infinitely surplus, productivity is infinitely developed, wealth / cost will tend towards positive infinity, where should the excess money flow? Where to find additional value?

Answering these two questions is equivalent to answering all the questions of the future world — finance, employment, pricing, and class solidification.

Bitcoin gives us a great answer: artificially creating extreme scarcity under consensus to change the supply-demand relationship. When supply is fixed, the expansion of wealth will continuously drive a stable anchor like BTC to rise — in fact, the price of BTC may have never changed; what has changed is QE.

A similar good example is the real estate in Manhattan, which has been a correct choice to buy at any time over the past 300 years. This long-term investment is referred to by Buffett as the value of compound interest; in other words, it means to long this world, and the best way is to long the most scarce things in this world.

Then here, new entrepreneurial opportunities will be born, and a commodity/value item based on scarcity, which enriches a broad spectrum of value, will also correspond to such a platform.

It could be Bitcoin, an algorithm-based anchor; it could be WorldCoin, a population-based anchor; it could also be personal reputation, electricity, or maybe an AI token... I tend to believe it is a category that is accessible to everyone, but difficult to accumulate, thus diluting the value of the old order while maintaining a certain level of stability, ensuring that the poor have access and preventing the rich from becoming too extreme, allowing the cycle to repeat.

The emergence of AI has brought a certain level of equality to the production side, at least in the virtual asset production sector, where everyone has access to equally smart APIs, enabling further competitive capabilities.

If we go further and achieve standardization and decentralization in some scenarios using blockchain, it would be equivalent to taking a step forward in reversing Huang Zheng's capitalist e-commerce model.

Perhaps this day is not too far away.