Throughout Bitcoin’s lifetime, different people have participated in the network based on different desires.

Originally published in The Conversation, under Creative Commons licence CC-BY-ND. Updated here by the author.

Mainstream commentators are often dismissive of the people who buy bitcoin, writing them off as naive victims of a fraudulent bubble. But if we look more carefully, we can trace the history of bitcoin, and its growing acceptability, through the arrival of different kinds of buyers. Each group has been drawn by a different narrative of bitcoin’s value, and it is these groups and narratives that have gradually contributed to its long-term growth.

Bitcoin arose from a tiny group of cryptographers, known as “cypherpunks,” who were trying to solve the “double spend” problem facing digital money: “cash” held as a digital file could easily be copied and then used multiple times. The problem is easily solved by financial institutions, who use a secure central ledger to record how much everyone has in their accounts, but the cryptographers wanted a solution that was more akin to physical cash: private, untraceable, and independent of third parties like the banks.

Satoshi Nakamoto’s solution was the Bitcoin blockchain, a cryptographically-secured public ledger that records transactions anonymously and is kept as multiple copies on many different users’ computers. The first narrative of bitcoin’s value was built into Nakamoto’s original “white paper.” He claimed that bitcoin would be superior to existing forms of electronic money such as credit cards, providing benefits like eliminating chargebacks to merchants and reducing transaction fees.

But from an early stage, Nakamoto also marketed bitcoin to a libertarian audience. He did so by stressing the absence of any central authority and particularly bitcoin’s independence from both states and existing financial institutions.

Nakamoto criticised central banks for debasing money by issuing increasing amounts of it and designed bitcoin to have a hard limit on the amount that could be issued. And he stressed the anonymity of bitcoin transactions: safe, more or less, from the prying eyes of the state. Libertarians became enthusiastic advocates and buyers of bitcoin, more as an act of autonomy than for financial reasons. They have remained highly influential in the Bitcoin community.

These, however, were small constituencies, and bitcoin really started to take off in July 2010 when a short article on Slashdot.org (“news for nerds”) spread the word to many young and technically-savvy buyers. This community was influenced by the “Californian ideology” – belief in the capacity of technology and entrepreneurs to transform the world.

Many bought small quantities at a low price and were somewhat bemused to find themselves sitting on significant investments when the price multiplied. They became used to huge fluctuations in the price and frequently advocated “HODLing” bitcoin (a misspelling of “hold,” first used in a now iconic message posted by an inebriated user determined to resist constant “sell” messages from day traders). The HODLers insisted, half seriously, that bitcoin was going “to the moon!” and talked of buying “lambos” (lamborghinis) with their gains. This countercultural levity generated a sense of community and a commitment to holding bitcoin that helps stop its value from sinking to zero when sentiment turns against it.

The more recent groups that have contributed to bitcoin’s history are more conventional. The fourth group consists of individual speculators who have been attracted by the volatility and peaks in bitcoin prices.

On the one hand, we have day traders, who hope to exploit the volatility of bitcoin’s price by buying and selling quickly to take advantage of short-term price movements. Like speculators in any other asset, they have no real interest in the larger picture or of questions of inherent value, but only in the price today. Their only narratives are “buy” and “sell,” often employed in an attempt to influence the market.

On the other hand, we have those who are drawn in by news of price bubbles. Ironically, bubble narratives in the press, often designed to deter investors, can have the opposite effect. These investors join what Keynes called a “beauty contest” – they don’t care about long-term or intrinsic value but only about what other people might be prepared to pay for bitcoin in the short- to medium-term future.

Bitcoin started to become more attractive to more sophisticated investors when narratives of its value as a useful element in a larger investment portfolio started to emerge. These investors buy bitcoin to hedge against wider risks in the financial system. According to modern portfolio theory, investors can reduce the riskiness of their portfolios overall by holding some bitcoin because its peaks and troughs don’t line up with those of other assets (i.e., bitcoin became known as an “uncorrelated” asset), providing some insurance against stock market crashes. This is arguably the narrative that started to break down the barriers to bitcoin’s acceptability among mainstream investors: they often take the view that risk, rather than something to be avoided, is something to be embraced as a source of high returns in a properly-balanced portfolio.

Most recently the continuing upward progression of bitcoin’s price plateaus and market value have started to make it attractive to corporate investors. Initially this has been driven by enthusiasts in senior positions in a few large corporations who have made very large purchases of bitcoin to hold as part of the corporation’s own portfolio of assets. These purchases have enhanced the narrative of bitcoin as a mainstream investment, but they also contribute to a different narrative about the value of the corporation’s own shares. When a company’s bitcoin holding becomes a significant part of its assets, its own shares can be positioned as bitcoin-like investments, which should rise in price when bitcoin does, and vice-versa. They therefore become more attractive to investors who want some exposure to bitcoin but are wary of buying it themselves – or are legally prevented from buying it, like some mutual funds.

As bitcoin becomes attractive to more and more constituencies of buyers, the major financial institutions are becoming increasingly eager to get in on the act. We can expect them to package up new financial products, including derivatives, that give investors indirect exposure to the bitcoin market. In a narrative that has been bubbling under for some time, they are preparing to position bitcoin-related products as a routine element of institutional portfolios. If they succeed, the packagers will also have to buy bitcoin themselves to hedge against their commitments to buyers of their financial products. The irony, of course, is that these recent developments tie bitcoin ever tighter into the financial institutions that Nakamoto designed it to escape from.

Bitcoin’s value, then, has been built on an evolving series of narratives which have drawn in successive waves of buyers. While mainstream commentators are often dismissive of bitcoin as lacking inherent value, all asset market values depend on narrative processes like these, so bitcoin is much more like conventional assets than they are prepared to admit. Of course, bitcoin prices may well collapse again, but so may those of any other financial asset. Investing in bitcoin is arguably neither more nor less risky, for example, than investing in the latest technology company to be launched on the stock market without ever having made a profit.

This is a guest post by Dave Elder-Vass. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.

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