Bitcoin as Institution: An approach for investors
Tags: Institutions, Bitcoin, Organization, Commerce, Bitcoin Mining

Or on how to shorten the learning curve, increase awareness about the development fabric, expand the thesis-driven customer base, minimize misunderstandings and avoid bad decisions.

Richard Dadd (Source)

In the parts of the Mediterranean that were controlled by Muslims during the high middle ages, there was a fairly liberal culture for the time where people had different legal systems available for all kinds of things, including trade. There were Jewish, Christian and of course, Islamic courts and partnership systems. Without any type of coercive mechanism, most people, no matter the ethnic origin or religion, opted for the Islamic legality. Maimonides, one of the greatest Jewish philosophers and the first significant Aristotelian philosopher of the common era, complained that many Jews in Islamic Spain did business in the manner of the gentiles (non-Jews). But what was the reason for this predilection for Islamic law? Due to great institutional efficiency.

To begin with, in sociology an institution is a framework of behavior that regulates, promotes and penalizes practices within its influence. The influenced agents can be individuals, organizations or even other institutions. So, what makes an institution efficient for economic development? A transaction cost minimization. This is the inverse relation between the measurement and enforcement of agreements, and the operative costs.

Jewish partnership laws required the financier (the person paying to a merchant that is going to travel from point A to B), to share profits 50/50. While in the Islamic law, it was given to the financier the flexibility to set their own profit ratio depending on their reputation, product, risks involved etc. So, people in their own liberty, decided what kind of institutional framework wanted to be part of, despite their own cultural heritage.

Coming back to present times, where it was only possible through a legal and military complex to conserve the right of private property and voluntary exchange, now you can just use the Bitcoin Network, which has a ridiculously minimization of the transaction costs.

So, Bitcoin not only solved the problem of double spending in the infrastructural dimension, but also the scalability of the operational capabilities in horizontal institutions. Put another way, Bitcoin is the hardest money ever existed, because it is one of the hardest institutional forms in existence.

Wait… an institution? Is not that precisely what Bitcoin is opposed to?

As I describe in “New Institutional Theoric Model for Bitcoin” (Medium) and “The Dimensions of Bitcoin ‘’ (Bitcoin Magazine), in my reference field, neo-institutionalism, which is probably the best approach to organizational change, order and reproduction, and its relation with economic dynamics, you can find two main subcategories of institutions that work in codependency: formal and informal. Bitcoin shares and excludes aspects of these, and it seems that the dynamics of codependency between separate layers of behavior, is rather welded in itself. I found necessary to work in a new category that could describe the more than clear institutional nature of our unstoppable money: the amphibious institution.

You can read more about it in the aforementioned texts, but here I would like to highlight the importance to think of Bitcoin as an institution and its potential impact on the market.

1- The Bidimensional Problem

The biggest Bitcoin and “crypto” related exchange companies have a lot of vices and problems in presenting their market thesis (topic that deserves its own piece), the what and why of a market’s reality, and how the performance will be better in relation to present time. This can be understood considering that the success of their business does not lie in rationalizing purchase decisions, but in fostering inertia, while the consolidated thesis-driven users interact in small niches that fuel themselves.

As I criticize in both referenced texts, just focusing on the technological infrastructure and monetary policy when explaining Bitcoin, what I call bidimensional narrative, is not only not enough, but it’s harmful to the development fabric.

It might surprise some, but the geocentric model can predict the motion of celestial bodies in the solar system with considerable accuracy, although it is extremely over-complicated. In a similar way, many people can be attracted by the bi-dimensional narrative, but they will have to spend a long time “getting Bitcoin” and discovering the organizational dimension (the relationship between the miners, node operators, the development fabric and network users), which is what guarantees that the network has that rigidity and consistency.

heliocentric vs geocentric

2- A Three-Dimensional Solution

With the entry of many institutional investors onto the stage and the even greater interest of individuals in long-term investment, the implementation of narratives that create thesis-driven players has become even more necessary. Said narratives should provide the clearest and broadest vision possible, and from which one can start to inquire into details.

“It’s the users of Bitcoin who control it… and I think the big guys don’t understand that.” - Caitlin Long, Pomp Podcast #346: On Federal Banks.

In the case of River Financial, for example, people of advanced age are their main market, and much of the wealth from these groups is shared. So if a member of a marriage or family wants to invest in Bitcoin, they need to be able to defend their position, and this position shouldn’t depend on the performance of the price at that moment, since Bitcoin will seem like a good or bad investment depending on the color of the current candle and not in a long-term projection based on its institutional and monetary reality. The same goes for our big guys.

Thus, the importance of this new sociological category relies on the possibility of giving a solid theoretical body to the organizational aspect of Bitcoin, by having methodologies and analytical tools that were lacking before. This dimension may differentiate itself from the other two, and form a three-dimensional model of the aspects of Bitcoin and its interaction.

But doesn’t this make it more esoteric? The three-dimensionality of Bitcoin can be synthesized into a simple definition, which when broken up makes it easy to get into the individual dimensions and virtually all internal aspects of it: