One of the most difficult questions is "Why is Bitcoin valuable?". In many ways it looks like a "greater fool" mania. People who own Bitcoin are not paid dividends, so it is not like a profitable company. With a company you can figure out how big a loan those earnings could pay off and have some estimate of the value of the company. We don't have anything like this with Bitcoin. Given no way to estimate an intrinsic value for Bitcoin, many experienced investors think Bitcoin does not have value.
To make matters worse there are around 20,000 other crypto coins and many are clearly jokes or scams. Some jokes and scams are worth billions of dollars, so some cautions people group the whole category as jokes, ponzis, or scams.
All of the above is clear and easy to understand. It is harder to explain why Bitcoin has value but since this is a really important and common question, I am going to try. Will list some arguments below.
Faith in money
The dollar used to have value because it was backed by gold. However, since 1971 it is not backed by gold. Now the Federal reserve assets are mostly Treasuries. Treasuries are just future dollars. So the dollar is backed by future dollars. This is really just faith in dollars. If the faith goes away, there is no gold or anything to prop up the value. The dollar does not have any intrinsic value. During the revolution America had "The Continental Dollar" (stressing that a big continent should not be ruled by the little island of England) but after they printed too many, the value went to zero.
If enough people have faith in Bitcoin as money that may be all it really takes. Over the last 13 years Bitcoin has been growing in converts fast. Projecting the trend seems reasonable.
There have been many strange things used as money in the past. At some point in the future using pieces of paper where governments could print as many as they wanted will seem stranger than Bitcoin with a fixed limit of 21,000,000 Bitcoin. Also, you can not counterfeit Bitcoin but paper money has a problem. So in some ways it is easier to have faith in Bitcoin.
There are people who would buy more Bitcoin if the price got below some certain price. There are people who would sell some Bitcoin and buy a beach house if it got above some price. Large numbers of such people gives Bitcoin a bit of stability and over time I would expect the stability to get better.
Secure Accounts
Having an account that no government can easily grab is valuable. In the normal financial system governments can grab money in accounts. It used to be you could get a numbered Swiss bank account that no government could bother, but those days are gone.
With Bitoin you can make as many different accounts as you want on your own. Nobody else gets to know what accounts are yours. This is kind of nice.
The Bitcoin miners updating the blockchain with new transactions is the most secure accounting system ever developed. Nobody can modify or forge this record of transactions. There is value in having a secure set of books. It is an important service. Particularly when regular Fiat money may be running into high inflation trouble.
Untaxed Income and Investment
If someone pays you for a job in Bitcoin, and neither of you report it, there is no bank involved to report it. So the government need not know about this transaction. If you just keep the Bitcoin you might have saved 30% on your taxes. Years later a normal investment would be taxed when you sell it. The value years later might have mostly gone up due to inflation (dollar going down) but you are taxed on the whole "profit". This can make it where investors have a very hard time to get ahead. If you are invested in Bitcoin you could go to a tropical island, like Anguilla, walk up to an ATM and cash in some of your Bitcoin. No government collects any taxes at that moment, or for the years that you held the Bitcoin.
Given how bad the tax on fake profits normal situation is, this Bitcoin savings/investment is far better.
Moving money is cheaper/faster
Compared to credit cards, wire transfers, western union, etc. Bitcoin is a cheaper and faster way to move money. There is also no waiting in line and paperwork. The old system sucks life out of commerce at a high rate. Businesses that keep using that will have a disadvantage compared to those that use Bitcoin.
Fair money
With US dollars the government and large banks can borrow money from the central bank at crazy low interest rates compared to what normal people have to pay. Also the money the regular people have ends up going down in value (inflation). This is unfair and gives extra advantage to those already big and rich companies and hurts the common man. This is so unfair that many people want to "opt out" and use some other money. Bitcoin has worked better for people most of the time since it came out.
To get an idea of the scale of this, the USA has printed trillions of dollars. This really steals value from all existing dollars, all around the world, and gives value to the government that printed the new dollars. It is best to think of this as an "inflation tax". The USA collects an inflation tax on most of the world, without most of the world understanding that. Diabolical.
The cost that Bitcoin miners spend on electricity to run their equipment is trivial compared to the scale of theft in legacy money.
Simple Secure and Scalable
Bitcoin has a simple blockchain that can fit on an ordinary computer. It is something that people have checked over very carefully. The computation that goes into stamping each block makes it incredibly secure. Still the fees for on chain transactions are only around $2 most of the time recently.
With Lightning Bitcoin scales to any number of transactions and with really low fees (like a penny) that finish in a second or two. It is sort of like having armored trucks that move money around and electronic wire transfers that move money between accounts.
These two together have solved the online payment problem. It is such a good solution that it is possible nothing will be enough better to get people to switch for decades. Payments in 1 second and for a penny are just hard to beat by enough to matter to anyone.
Note that to use Lightning you have to setup a channel using some Bitcoin on-chain. So using Lightning sort of provides a demand for Bitcoin.
When fiat fails
I run some Bitcoin ATMs in Anguilla (see bitcoin.ai). There are people here who send Bitcoin to family in Venezuala. The fiat currency there is failing. The government is taking a cut on money wired in by using a fake exchange rate. They don't get a cut on Bitcoin sent into Venezuala. The government also has price controls on things sold in the local currency at stores and shelves are usually very empty. But you can call a guy and order groceries and pay in Bitcoin and they deliver what you want. So Bitcoin is helping people get by when their local fiat money is failing.
If the US dollar fails, nobody is going to trust other fiat money either. The only real alternative will be Bitcoin. Even if you think there is only a small chance of the dollar failing (I think it is a large chance) having some Bitcoin can be a form of insurance. If more and more people are buying Bitcoin as insurance against a failing dollar, then the price of Bitcoin will go up.
Simple Supply and Demand
The supply of Bitcoin is currently only growing by 6.25 every 10 minutes and this rate is cut in half every 4 years. Currently this comes out to about 1.7% per year (6*24*6.25*365/19000000). It will keep cutting in half every 4 years though. The number of people using Bitcoin is growing at a much faster rate. If demand is growing faster than supply, then we should expect the value to trend upward.
Tax Evasion is a crime
Mish points out on twitter that some of the above can get you in trouble for tax evasion. So lets be clear that I am not giving out any tax advise. In Anguilla there is no income tax or capital gains tax.
Let me also point out that in hyperinflation it can be impossible to both follow the laws and survive. The population ends up having to use a "black market" to trade without deadly amounts of inflation tax or other taxes. Note that black market really means free market, but breaking laws. So maybe just think back on this post if/when your survival depends on buying stuff on the black market.
To be clear on the eventual problem. Imagine you buy potatoes for $1000/bag and the next day sell them for $2000/bag. The government will claim you owe them tax on a $1000 profit. Then you go and try to buy more potatoes and your supplier is now charging $3,000/bag. So really you did not make any profit. If you follow all the laws you will be broke very soon. So the people who live through hyperinflation are the people willing to break the laws.
So if the world gets hyperinflation the fact that Bitcoin can help black markets operate without government approval is an advantage and will increase demand for Bitcoin.
Sanctions Evasion
People inside Russia can no longer use their Visa and Master Cards to pay for things online. They could use Bitcoin to pay for things. Countries (say India and China) want to buy gas and oil from Russia but SWIFT payments are blocked. Both these oil buyers and the consumers inside Russia could get around the sanctions by using Bitcoin. There has already been much talk of using Bitcoin and I would not be surprised if it has already started. I would also expect it to grow really fast as people explain to their friends how they were able to order stuff.
The fact that no company or country can stop this makes Bitcoin valuable. If Russia were to announce that they are selling oil in Rubles or Bitcoin it could make Bitcoin go up in value more than it made the Ruble go up.
Properties of Money - Best Money So Far
A good money needs to be:
1) store of value
2) medium of exchange
3) unit of account
To store value it should not be something that governments can print unlimited amounts of or that is easy to counterfeit. Bitcoin can not be counterfeit
An ideal medium of exchange could be sent electronically anywhere in the world without needing help or permission. Bitcoin is far better than anything else. You don't need banks wire transfer, or western union, or express mail, to send Bitcoin. It can not get lost or stolen in transit. Nobody can censor/block Bitcoin transactions, while normal money can need government approval for movement. It is trivial to check that you got paid with good Bitcoin. In contrast you really need to spend effort to check paper money or gold to be sure it is real and still run a risk of accepting a fake.
While Bitcoin has gone up in value for people who hold it for years, it can be very bad at storing value over short periods. So currently Bitcoin does not do so well on this. There is reason to hope that as it gets more and more users it will become less volatile. Fiat money looks like it is becoming such a bad store of value that the world may be looking for a replacement.
Unit of account. Bitcoin is more Fungible than any previous money. Can divide it down to 1/100,000,000th trivially. All parts are identical. Difficult to get gold below a gram.
In the coming years Bitcoin may be viewed more and more as the best money. The best money should win in the long run.
Bitcoin Age VS US Dollar Age
It is sometimes argued that Bitcoin is too new to trust and that the dollar has been around far longer. The original dollar was backed by gold but since 1971 it has not been backed by gold. So the current form of the dollar is only 51 years old. Bitcoin started in 2009, so only 13 years ago. However, it is open source so people can inspect every line of code. There are no secrets in how Bitcoin works. Computers check digital signatures and add transactions to the blockchain every 10 minutes.
The Fed has humans making decisions and they are clearly flawed. They said "sub prime is contained" and "inflation is transitory" and were wrong. No human choices with unknown motives or reasons, like with the Fed. Also, the Fed has not allowed any audit of their gold holdings, so we can not be really sure how much gold they have. It was really the gold they had in 1980 and the fact that it got to 800/oz that saved the dollar then. So you could even say that it is only 42 years that it has been unbacked.
Things on the Internet with open source mature faster. It is sort of like 1 Internet year is equivalent to 4 regular years in finance. If there was some problem with Bitcoin software it really should have been exposed by now.
The problem with the humans running the Fed is they can let inflation get out of control. The history of unbacked Fiat money shows this time and time again. It really seems like the risk of failure for the dollar is higher than for Bitcoin.
You don't need a bank so no risk from bank failure
Migrant Money
Option on next world currency
Similar Articles found after writing above
- Why is Bitcoin Valuable? - NYDIG
- Why do Bitcoins have Value? - Invetopedia
- Why do Bitcoins have Value? - Ryan Haar - time.com
- Why does Bitcoin have Value? - binance.com
Update July 18, 2022
Bitcoin can not be turned off or have its monetary policy adjusted. The Fed has a bunch of humans that try to influence the market both with "verbal guidance" and buying and selling different things, and adjusting the Fed Funds rate. Their adjustments can help and hurt different people and companies. Predicting what they will do, or being told, can make a huge difference to your financial future. Bitcoin is not at the whims of humans.
Convincing and timely as the HODL is a painfuL trade of late. Fiat goes to O's... always does as you have shown. BTC is tech money, a well designed technological solution to the problem at the very base of the western empiricaL global order.
ReplyDeleteThis is a great post, thanks for writing it.
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