Bitcoin embodies Schumpeterian creative destruction. Bitcoin also behaves like a physical natural resource, with unique differences that make it a driving force for effecting fundamental change, much like gold, oil or electricity has done.
Bitcoin goes through periodic cycles of varying lengths that inspire a creative rejuvenation of its ecosystem with new ideas and innovations at various timescales and magnitudes. Here we will apply the idea of a Schumpeterian business cycle to Bitcoin and construct a Schumpeterian Bitcoin cycle based on three componential waves: a multi-decade Bitcoin Kondratieff cycle; a Bitcoin Juglar cycle that is shorter than a decade; and a Bitcoin Kitchin cycle that corresponds with the halvings.
Associated with these sub-cycles are three ratios that capture their logic: stock-to-flow (S2F), installed capacity-to-capital investment (IC2CI) and inventories-to-sale (I2S).
1. Creative Destruction
Joseph Schumpeter would have loved Bitcoin. He would have seen in Bitcoin a living representation of his theory of capitalism, so often quoted but rarely understood. Creative destruction is the process by which capitalism continually rejuvenates itself. It is what drives markets forward and allows them to be constantly refreshed with new ideas that destroy extant structures and erect better ones in their stead.
There are countless elements in Bitcoin that structurally instill the process of Schumpeterian creative destruction in its ecosystem, making it an excellent model for the cycles of capitalistic rejuvenation that formed the basis for Schumpeter’s theory of economic growth. For instance, consider the process of the halving of block rewards. Every 210,000 blocks, Bitcoin forces a creative destruction of itself, urging its participants to either reimagine their competitive edge, seek hidden efficiencies and eradicate waste or risk being left by the wayside. Bitcoin’s worth is rooted in the intrinsic value of capitalism, liberated one…