Bitcoin’s “Intrinsic Value”
Here are the things that give Bitcoin value:
- Engineered scarcity
- Its use as a store of value (or work)
- Network Value
- Permissionless payments in humanitarian efforts
- Energy Investment (or security)
Bitcoin is the first asset in our universe, of which we are aware, that has absolute scarcity. Supply is not driven by demand. If the price of any commodity increased 10x overnight, we’d invent new technologies to unearth more of it. Bitcoin’s protocol reliably enforces supply growth that’s perfectly independent of demand; this is due to the difficulty adjustment algorithm. Fewer and fewer coins are minted over time, until eventually no more will be minted. There’s only going to be 21 million units of Bitcoin (perhaps a lot less when accounting for lost coins).
Store of Value
Money is a technology that allows you to store your work in exchange for someone else’s work later. Anything that can help coordinate and store work has value, full stop. For a far more comprehensive look at this line of thinking, check out Parker Lewis’s, Gradually, then Suddenly series.
Given Bitcoin’s fixed supply, governments can’t print more of it; no one can. For millennia, gold has been viewed as a better store of value than government money because of its unique physical properties and relative scarcity. But gold is inefficient to transport and therefore impractical for most transactions. It’s also still subject to changes in new supply based on demand.
Money is perhaps the most successful story told by humans and without it, capitalism can’t operate. Money is a reflexive narrative, and system, and that gives it network effects. Ultimately, the world only needs one currency, but it has to be its best option.
Similar to the telephone and social media platforms, a monetary network becomes exponentially more valuable as more people join it because the number of possible connections it allows is proportional to the square of the number of its total network participants.
Since Bitcoin is permissionless and borderless, anyone on earth can store their hard-earned-work in it. This gives Bitcoin the most broad scope of trade of any money on earth. Less than 1% of the global population uses it today, those folks are scattered across continents, electronically transmitting value instantly, and nearly for free. (It’s <1% now but growing faster than the internet was in 1997) Also, you and your clients are not too late if that worries you. You’re ahead of 99% of people adopting the best money.
My role as a Financial Advisor has made me well aware of how long it can take for electronic bank transfers to settle. We can send cat pictures to space and back in an instant or talk to anyone on the planet whenever we want, but banks using 1970’s technology take several business days to settle cash transfers and don’t even show up to work on Sundays. What can Bitcoin’s network do that banks cannot?
Apps exist right now that can send, and receive, in most currencies, 24/7/365, with instant settlement, and virtually for free. (check out Strike)
Bitcoin’s network capabilities means it will probably replace the Fed Wire, CHIPS, & SWIFT systems as the rails for most global transactions. These apps use the Bitcoin lightning network to accomplish rapid transfers and currency exchanges in about 7 milliseconds, so exposure to fluctuations in the price of Bitcoin is negligible.
Permissionless Payments in Humanitarian Efforts
Those who claim that Bitcoin doesn’t have value tend to be economically privileged. Don’t get me wrong, I’m economically privileged but I’m also aware that there’s only a few (somewhat) transparent central banks and currencies that invoke confidence. The majority of people on earth can hardly trust their government, let alone those in charge of their money spigots. Their work is being constantly devalued in an opaque manner.
I’m also aware of how Bitcoin is aiding the Human Rights Foundation in supporting oppressed groups around the world. If this interests you, seek out any and all content from Alex Gladstein from the Human Rights Foundation. Here’s a good place to start: The Humanitarian and Environmental Case for Bitcoin.
Related and interesting: Why the Yuppie Elite Dismiss Bitcoin
Bitcoin is stored energy. Bitcoin mining is simply converting electricity into stored value. In the next installment, I’ll cover Bitcoin’s energy consumption and the pros and cons of Proof-of-Work (POW). This week, I’ll make the point that Bitcoin mining is an expensive endeavor that gives Bitcoin value and secures the network.
Proof of work is a critical component of the Bitcoin network. Without an energy-intensive process, it would be easy for bad actors to attack the network and “double spend” Bitcoin. In that sense, the energy spent is similar to its network security budget.
A 51% attack, in which a mining group commands a majority of the network’s total computing power, allows it to manipulate blocks and take advantage of the system. However, because Bitcoin’s proof of work is so resource-intensive, it’s nearly impossible for any miner or group to command that much total power. This is how it acts as “security” for the network.
Here’s a satirical 2 minute video of Andreas Antonopoulos explaining the same thing.
If you like wonky, related to all of this: Bitcoin Is Time.