The intrinsic value of Bitcoin
Bitcoin and other cryptocurrencies are "backed by nothing": a claim cryptocurrency haters like the repeat. The opposite is that the US dollars are backed by the ability to collect taxes from US citizens, with some good aircraft carriers and a couple of nukes.
A typical foolish claim (sorry, Jon) looks like
This is not true.
Bitcoin and other cryptocurrencies are backed by several factors. These are mostly intangible
Brand value
Bitcoin's name is recognised by everyone, everywhere, in the literal, online, world. Other similar brands can be counted on one hand, like Google, Microsoft, and Amazon.
Acceptability
Bitcoin can be accepted all over the world. Even if your merchant does not accept it directly, you find middlemen willing to convert.
Even if you cannot convert it to a local currency right away, you can accept and hold Bitcoin in your cryptocurrency wallet and convert it later. At this point, the payment is already accepted.
Accessibility
Bitcoin can be bought every in the world - even in China which has 10 years of history banning it, the harshest most totalitarian surveillance state in the world, has not been able to ban it.
Openness
You do not need to ask anyone's permission to integrate Bitcoin. Not only can anyone do it, but it is very easy in software engineering-wise. It is much easier than, for example, accepting EUR credit card payments for which you need to go through a licensed merchant terminal broker
This has led to both acceptability and accessibility above.
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Network effect
Because Bitcoin is very accessible today, it will be even more accessible tomorrow.
Trust value
Bitcoin has been operating for a decade without hiccups, and it is likely to continue operating for a few more decades. This is, for example, longer than the Euro system has been operating without interventions ("whatever it takes").
Censorship resistant
The government cannot get your Bitcoin without you voluntarily giving it up, e.g. not behind your back. They can still beat Bitcoin out of you, but there is a large gap taking something by violence and confiscating the assets of several people without question.
Liquidity and size
Bitcoin is one of the most liquid markets in the world. Unlike your home or second apartment or even large stock positions, liquidating your Bitcoin is much more frictionless.
Because of its liquidity and size, Bitcoin also makes excellent collateral for trading, assuming you hedge out its volatility first.
Bitcoin has no intrinsic value
Based on the above factors, this is not true. What you would pay for an online payment system that
- Has a well recognised by a brand
- Anyone can integrate around the world with well-defined documentation
- It has market depth to handle transactions from medium to size to arbitrary large without breaking a sweat
- There are local integrators everywhere in the world
- The idiots running your local government or a central bank cannot mess with it -
Bitcoin sucks as a payment method for everyday transactions. This may never be fixed, and there are better public blockchain and cryptocurrency-based solutions to address like stablecoins on Ethereum. However, for transactions of a certain size and as "something that will always work" there is much value. The value might not be correct in terms of Bitcoin market cap, but it is still going to be a value of a large number.
And like with all currency markets, it is a question of faith, we cannot go around this. Fiat currencies rest solely on the faith of the central bank being able to fix things, which we have seen is sometimes hard even for the most advanced economies in the world, not to talk about smaller ones.
Ironically, a lot of Bitcoin faith value comes from the fact that you lack faith in your local elected leaders. Bitcoin is the Big Short movie for the world economy.
What is the correct value of Bitcoin?
The correct value of Bitcoin is what it is worth to have a currency that works based on the above factors. The challenge of valuing this correctly comes from the network effect. The larger Bitcoin and other cryptocurrencies become, the more valuable they will be because the value is derived from their size and accessibility.
Have we reached peak Bitcoin yet? We already see that each "bear market" or "dip" has been smaller and smaller for the Bitcoin market cap, in terms of relative % value, so Bitcoin is stabilising. At some point, the number will stop going up because of the saturation of the market, and then people will find it more useful to convert their Bitcoins to other investment opportunities. Bitcoin price will stabilise. But we are unlikely to be there yet.
Global Planning Manager at ABB
10moKiitos Mikko! Hyvin kiteytetty kirjoitus 👌
Software Architect
10moAgree with this article by Mikko Ohtamaa But the people like John La Grou & Peter Schiff are operating with a false premise. In reality, NOTHING has INTRINSIC value. Prices are solely determined by supply and demand. Something is ONLY worth what someone is willing to pay for it. IF fusion becomes a reality, the prices of EVERYTHING will drastically change. John mentions "energy" as something with "intrinsic value". This is complete hogwash. When there is infinite supply of energy, it's price will drop to zero. If they found a meteor of solid gold in the asteroid belt, the price of gold would drop to a few pennies. The currency USD is backed by fiat, but its "price" is caused by the judgment that it's value will remain stable for the duration of the transaction. In a similar way, the value of BTC will be the perception & judgment that it's "price" will remain stable for the duration of the transaction. The mistaken premise of John & others is looking at BTC like an investment, rather than a potential currency.
Software engineering
10moGold's market value is almost entirely driven by millennia of human sentiment that seems to span all cultures - i.e. it's valuable because we all agree it is. It does have some industiral uses which might be descirbed as 'intrinsic value' but this nowhere near warrants the market value. Like gold, Bitcoin doesn't need intrinsic value to be valuable. If enough people value something, then it is valuable.
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10moBitcoin cannot have intrinsic value because nothing is intrinsically valuable. Value is entirely subjective and based on marginal utilitarian gradient over my head and shades of time preference. I will still give it a read!