Bitcoin as Absolute Zero
In this article, we will briefly look at economics through the lens of thermodynamics, and make the case that Bitcoin is currently exhibiting properties similar to that of an object at absolute zero.
In thermodynamics, the main reason for the existence of thermodynamic phenomena is the thermal difference between two communicating systems.
Any imbalances between two thermals systems that are both isolated to their environment but communicate to each other via a “thermal gate” will tend to diminish until they become thermally equal. From this process work will be produced.
This process is analogous to the one observed in economics and free markets, except instead of heat flow, we observe monetary flow. The monetary flow analogously seeks to create an equilibrium.
From an investment standpoint, an investor seeks to maximize their return, by maximizing the delta between the future valuation of their asset with its the current valuation.
We can define this delta as the Economic Temperature T(x) of an asset X:
T(x) = P ₓ / F (x)
Pₓ - the current price of asset X
F(x) - forecast price of asset X at a future point in time, from an investor’s PoV
For simplicity, we can ignore risk as a factor.
Based on our definition above, an asset with a forecast price greater than Pₓ can be classified as being underpriced, and would exhibit an economic temperature of <1, and one with a forecast that’s lower than the current price, can be considered as being overpriced, and will have an economic temperature greater than 1.
Once an asset’s temperature is 1, we can consider that asset to be fully monetized.
We can make the statement that, in an isolated economy with only two assets X₁ and X₂, money will flow from the asset with a higher economic temperature T, to the one with a lower economic temperature, until an equilibrium is reached and T(X₁) and T(X₂) are roughly equal.
Bitcoin represents a truly unique economic good because its supply is fixed regardless of demand. Due to a fixed, known supply, as well as a known total market capitalization, we are able to somewhat predict its price upon asset maturity.
Given that we know Bitcoin’s expected total market is several hundred trillion, its current monetization of 1T gives it a very low economic temperature (close to 0). Hence, one can state that Bitcoin is currently acting as a very strong monetary/heat sink in cyberspace.