Volition Labs

Returning Bitcoin's Missing Velocity

August 02, 2021

Volition Lab's B1G SP1R1T argues the case for agorism holding the key to returning Bitcoin's velocity and with it Satoshi's core vision for a grey market revolution. It's time to get that vision back on track.

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In obtaining a deeper understanding of Bitcoin, let us understand its velocity.

By way of context: in the beginning, Bitcoin was presented to the cryptographic community as a thought experiment, 'A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.'

A world without dependency on banks was the proposition. Code, the universal language of the cypherpunks, was the mechanism.

On January 3rd 2009 the genesis block was written and Bitcoin was birthed into digital reality, a pseudo-anonymous, decentralized, deflationary monetary mechanism underwritten by unbreakable consensus. Notably lacking were the swarms of investment speculators. Those interested in the idea of a completely sovereign digital currency were the cypherpunks.

Satoshi´'s protocol was slowly and organically adopted by a curious band of the technically-astute; just a handful of cyber idealists assigning CPU power to secure the network and partake in the process of consensus validation.

A day after launch Hal Finney hypothecated on Twitter, "as an amusing thought experiment, imagine that Bitcoin is successful and becomes the dominant payment system in use throughout the world.' Current estimates of total worldwide household wealth that I have found range from $100 trillion to $300 trillion. With 20 million coins, that gives each coin a value of about $10 million”,

Despite these playful projections, a year and a half after launch Bitcoin’s value remained at $0. In order to participate and secure the network, miners went out of pocket on hardware and electricity, with no guarantee of recuperation.

Bitcoin's value proposition was freedom and as such those with Bitcoin circulated it freely without financial consideration. In 2010 dev Gavin Andresen launched a faucet website to gift Bitcoin and fuel adoption. According to an account by GroundbreakingLack78 on Reddit, Andresen gave away some 20,000 Bitcoins.

Early adopters were not driven by speculation. There was a collective investment in the vision of world free from monetary slavery.

As observed by Bitcoin analyst Nic Carter,

"Bitcoin benefited from a very rare set of circumstances. Because it launched in a world where digital cash had no established value, they circulated freely. That can’t be recaptured today since everyone expects coins to have value. The immaculate conception" .

But still Bitcoin lacked velocity.

The velocity of “money”, a common mechanism of economic analysis, is the rate of exchange or transactions. In a healthy economy high consumer confidence results in high levels economic exchange. Velocity is high.

In times of economic downturn market confidence wanes. Consumers are wary to transact and velocity slows.

The rate of bitcoin velocity is obtained via the following formula.

Now let us consider a Bitcoin non-exchange velocity chart (on chain transactions only). (Data scaled to USD at the time of transaction to maintain consistency)

Volition Labs

From the genesis block to late 2011 velocity was low. Coins circulated but they had no monetary value. There was no liquidity. There was no asymmetric trade.

As yet Bitcoin holders had not convinced others to part with goods for hashes.

Then on May 22, 2010 a programmer by the name of Laszlo Hanyecz placed an advert on bitcointalk.org requesting the delivery of two pizzas to his home in Florida in return for 10,000 Bitcoins. The transaction occurred and history was made: Bitcoin became a medium of exchange. “I wanted to do the pizza thing because to me it was free pizza,” Hanyecz recounted. “I got pizza for contributing to an open-source project. If I had treated it as an investment, I might have held on a bit longer."

Hanyecz went on to spend 100,000 bitcoin — currently over $4 billion — on pizzas alone in the summer of 2010. Like many other early adopters, Hanyecz had one desire: to let Bitcoin flow.

Then a historic development occurred. In February 2011 a libertarian idealist took the core philosophy of agorism and fused it with the censorship resistance of Bitcoin and the anonymity of Tor, alchemizing a powerful triad into a near flawless private, permissionless environment for a grey market to flourish.

The onion website Silk Road was launched. The first darknet marketplace to harness the power of bitcoin, Silk Road use of encryption software and a pseudo-anonymous digital currency made it immune to government regulation.

Overnight a use case for Bitcoin was born: an international marketplace where, in adherence to the Non-Aggression Principle (NAP), participants could sell and purchase any item that did not result in injured parties. Items that constituted crimes in the eyes of governments but created no victims. Cannabis, psychedelics, libertarian texts.

According to founder Ross Ulbricht, the Silk Road was designed to give people the freedom to make their own choices. Ulbricht's Linked In profile expressed his desire to “use economic theory as a means to end the use of coercion and aggression amongst humanity” declaring, “I am creating an economic simulation to give people a first-hand experience of what it would be like to live in a world without the systemic use of force.”

Buyers and sellers of real world goods flocked to the site and started trading goods for Bitcoin. Silk Road's escrow service combined with a well-utilized customer review system ensured transactions achieved a 95% positive feedback rating, firming its success. Silk Rose became one of the most successful darknet markets of all time with over a million transactions, $1 billion in sales and an estimated 900,000 active buyers. According to estimates, at its height, Silk Road transactions counted for 20% of all Bitcoin transactions.

Experiment 2.0 was a success; by becoming engaged as the central mechanism to facilitate market trades of real world items, Bitcoin had merged into the realm of the physical.

But the atomic ripple effect of this did not go unnoticed. In October 2013, following an epic sting operation by the FBI, the Silk Road was shut down, 30,000 Bitcoin seized and Ulbricht placed on life imprisonment. Mirror sites sprang up, creating new avenues for trade.

Yet velocity did not recover.

Bitcoin price action began to take off but its velocity became divorced from its dollar value. Despite a slight regain In 2016-2017 during the alt-coin bubble, Bitcoin's velocity never recovered and since 2018 has flatlined, reaching an all-time low in July 2021.

Why the velocity downturn?

2013 saw the birth of a new Bitcoin phenomenon. On December 18 an inebriated user on the BitcoinTalk forum posted a rant riddled with typos declaring that he was not going to sell his Bitcoins despite the price volatility.

The post entitled “I AM HODLING”, went instantly viral in the crypto community and become the rallying cry for a new class of Bitcoin owner: the HODLer.

Darknet usage of Bitcoin had turned it into a viable currency and begun the pull of financial speculators. But the jarring volatility experienced by the fringe asset prompted many users to figure that the best game plan was to sit tight on their asset. In short, HODL.

According to an article on thebitcoininvestors.com in December 2021,"You should never sell Bitcoin. Time and time again selling Bitcoin in exchange for fiat currencies has again proven to be a poor investing decision."

Unchained Capital, one of the first companies to provide loan solutions to Bitcoin hodlers states, 'Our mission is to build a bitcoin-native ecosystem that ensures everyone can secure and maximize the value of their bitcoin holdings over multiple generations.'

Is this the way we guarantee freedom to the generations of the future? Where does the true value of Bitcoin lie?

Consider this HODLing wave chart displaying distribution of UTXO age to understand the rise of the HODL phenomena.

Volition Labs

As the blue wave encroaches, UTXO age increases, velocity declines. HODLing strategies now make up the lion's share of BTC holdings.

The case for Bitcoin maximalism is persuasive; the value of a network is directly proportional to the square number of nodes connected to this network. Each additional node increases the number of potential connections exponentially, making the network more valuable. This theory, first devised by Robert Metcalfe, highlights the fact no project has ever gained as much traction or adoption as Bitcoin.

Volition Labs

Bitcoin’s first-mover advantage has created a bandwagon effect that has drawn in a wealth of investors, developers, large companies, and nation states.

But the act of HODLing stifles velocity.

So let us return to the concept of Agorism. Agorism, named after the “agora”, the Greek word for marketplace, is the libertarian philosophy that seeks to create a society free of coercion and force by using black and gray markets in the underground or “illegal” economy to siphon power away from the state.

According to Samuel E Konkin III, author of the New Libertarian Manifesto, “An agorist is one who acts consistently for freedom and in freedom,” . For Konkin, all non-violent economic activity that takes place outside of the control of the state forms part of a strategy that he terms “counter-economics".

Counter-economics comprises all peaceful economic activity that takes place outside the control of the state. Essential to the growth of agorism is the public’s support of entrepreneurs who actively do business outside of the state’s license and regulations.

Hence libertarianism, as developed to this point, discovered the problem and defined the solution: the State vs the Market. The Market is the sum of all voluntary human action. If one acts non-coercively, one is part of the Market. Thus did Economics become part of Libertarianism.' – Konkin

Bitcoin is not itself the panacea. It is the means to international agorism. But if Bitcoin divorces itself from the world of the physical it looses its ability to effect real world change.

Agorism is peace. Trade is what makes us human. From trade comes innovation, the cornerstone of evolution, the rising of consciousness. The Agora is how we free people peacefully from statism.

Bitcoin was invented to fuel that trade – free trade outside of the control of governments. But without the market application, bitcoin becomes ungrounded. It floats off into economic irrelevance, its purpose held in little more than its relativism to the US dollar. A speculative asset; a way for turning $ into BTC and back into more $.

As Silk Road founder Ross Albricht continues to languish in prison for the victimless crime of turning the words of Konkin, Smith, Rothbard and Von Mises into action, the question is, how can we reground Bitcoin and reignite the grey market in order to fulfill the Satoshi vision and liberate society from the shackles of central banking and monetary nationalism?

Let us wean ourselves off USD relativism and get Bitcoin's purpose back on track.