Exploring the Value of Bitcoin

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A common argument against Bitcoin’s long-term viability is that it doesn’t have any real value.

This response is reasonable when you consider that Bitcoin is a technology that is so innovative, it feels unfamiliar to most people when they first encounter it.

It’s not like fiat currency, which is issued by a central bank associated with a powerful government.

It is unlike a stock, which gives the holder partial ownership of a company. It’s not like an altcoin, which is primarily used to speculate on the viability of new tech projects.

It’s not like a bond, which provides the holder with a claim on an amount of debt that will be repaid when the bond matures.

It does not generate cash flows, like rent on real estate or interest on a loan. It is not a precious metal used in industry and jewelry, like gold.

And yet, a single Bitcoin is valued in the tens of thousands of US dollars. People buy, sell and use it all over the planet. Why?

Types of value

According to monetary theory, some forms of money have intrinsic value – meaning that they are useful for something besides transactions.

For example, salt, which has been used as money in the past, has intrinsic value because it can be used to season food.

Similarly, gold has intrinsic value because it has non-monetary uses in industry and jewelry.

Money that cannot be used for anything besides a medium of exchange or a store of value is deemed to have no intrinsic value.

Fiat currencies, such as US dollars, have no intrinsic value. They are useless for anything besides serving as money.

Alternatively, there is a financial concept known as fundamental value. The fundamental value of an asset is the value of the future cash flows that the asset generates, discounted to the present.

Real estate has fundamental value because it generates returns. Gold does not generate future cash flows and therefore has no fundamental value.

Where does Bitcoin fit in

From a monetary perspective, Bitcoin has no intrinsic value, and from a financial perspective, it has no fundamental value.

Bitcoin offers nothing besides utility as money. Warren Buffett attacked it for this reason, calling Bitcoin, “rat poison squared.”

However, many of the smartest investors from the world of legacy finance fail to grasp that Bitcoin is extremely valuable as money precisely because it is so good at being money – and because that is its only job.

If Bitcoin has no intrinsic or fundamental value, why does it nonetheless have value? Why do individuals demand Bitcoin enough to drive its market capitalization into trillions of dollars?

The answer is simple – Bitcoin has value because people think it does. This might sound unsatisfying, but keep reading, and it will all make sense.

We are all speculators, all the time

Money facilitates people’s ability to acquire valuable goods and services. It’s better than bartering because it’s relatively less expensive and complex.

Living in a world where we have to trade our apples for chickens feels anachronistic and needlessly costly, given how many different goods and services we consume today.

Money provides a solution, providing a commonly accepted medium we can exchange among ourselves for the things we need.

Given that many forms of money are accepted as media of exchange, why do people choose one over the other?

For example, why would you hold US dollars in your wallet rather than Argentine pesos?

When you elect to hold US dollars, you are speculating that at least two things are true.

One, that the people who have the goods and services you desire will be more likely to accept US dollars than Argentine pesos.

And two, that the dollars in your wallet will be a better store of value over some time period, reducing the risk that the purchasing power of those dollars will deplete in the future.

People hold Bitcoin for the same reason. Just like with dollars, pesos or any other currency, Bitcoin holders are placing a bet on Bitcoin’s ability to be exchanged for valuable goods and services in the future.

This brings us to the critical question – why do people prefer Bitcoin to other currencies?

Or, put differently, why do they choose to store their wealth in Bitcoin, speculating it will be a good store of value?

Bitcoin has qualities that people prefer for their money

• The meteoric rise in the price of one Bitcoin, rocketing from $1 to tens of thousands of dollars in a few short years, demonstrates that people place high value on it. As it turns out, the reason is that Bitcoin exhibits certain qualities that make it very good at being money.
• Bitcoin is a secure, decentralized payment network, uncontrollable by politicians and governments. Anyone with internet access can use it and exchange it with others – with no third party or intermediary.
• Bitcoin has a fixed supply, preventing an issuing body, such as a company or central bank, from issuing more units and diluting the equity stake in the network enjoyed by Bitcoin holders.
• Being digital, Bitcoin can be divided into infinitesimal parts. Everyone’s used to the base currency unit, like dollars, being divisible into hundredths, like cents. In Bitcoin, every coin is divisible into 100,000,000 sub-units called, ‘sats.’ If needed, the protocol could one day be updated to divide it further.
• It’s impossible to counterfeit Bitcoin because it’s so easy to make software that can validate whether a Bitcoin is real.

These are only some of the strong monetary qualities of Bitcoin, and why people value it.

There are already many use cases for Bitcoin

Although Bitcoin offers nothing outside of its use as money, its monetary qualities make it highly desirable as both a medium of exchange and as a store of value.

While it’s important to remember that Bitcoin is primarily used as a store of value in the United States, there are many countries where it is prized as a medium of exchange as well.

To those in the developing world, where property rights may be weak and currency debasement is regularly used as a political tool by those in power, Bitcoin offers a way out.

Millions of people in developing countries throughout the world rely on Bitcoin to protect their wealth and transact with others.

Outside of the developing world, it is also easy to see why people buy Bitcoin. In the United States, from June 2021 until the time of this writing, the official rate of inflation was 8.6%.

It is widely accepted that the calculation by which this percentage is generated is corrupted by political interests.

While fiat currencies in developed nations are relatively stable, the truth is that something that can’t go on forever – won’t.

Bitcoin is an invention that improves upon money

While Bitcoin does not have intrinsic value as defined by monetary economic theory or fundamental value as defined by financial analysts, its qualities as money offer a level of utility unlike any other.

It assures participants the value they store on the network can never be debased or stolen from them by governments and other entities in control of financial infrastructure.

With about one-percent of the world’s population estimated to own Bitcoin at the time of this writing, Bitcoin is here to stay.

Regardless of whether the price goes up or down, every day it is adopted by more individuals and businesses.

As the immutable Bitcoin blockchain continues to grow over time, Bitcoin will be there for anyone who wants to store the fruits of their labor on the most secure monetary network in the world.

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David Waugh is a business development and communications specialist at Coinbits. He previously served as the managing editor at the American Institute for Economic Research.

 

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