Continuing on from my previous discussion dispelling the myth of Bitcoin volatility, I’d like to delve into another commonly held misconception – Bitcoin: Rethinking Intrinsic Value.
The concept of “intrinsic value” has been a cornerstone of financial thinking for over a century, guiding countless investment decisions. However, some apply this concept to dismiss Bitcoin, claiming it possesses little or no inherent worth. Detractors often argue that Bitcoin’s lack of tangible form and practical utility renders it an inherently valueless asset. They point to the inability to physically hold, wear, or utilize Bitcoin beyond trading it with others.
Gold enthusiasts often tout its versatility in various industries, including electronics and jewellery, contrasting it with Bitcoin’s limited applications. Conventional fiat investors and economists emphasize Bitcoin’s lack of tangible output compared to traditional assets like stocks, bonds, and farmland. However, both groups overlook the fact that these perceived shortcomings are not flaws but rather essential characteristics of Bitcoin’s design.
What is Intrinsic Value?
To fully understand the question of Bitcoin’s intrinsic value, we must first define intrinsic value itself.
“The value that that thing has ‘in itself,’ or ‘for its own sake,’ or ‘as such,’ or ‘in its own right.“ – Stanford Encyclopedia
“An investor’s perception of the inherent value of an asset, such as a company, stock, option, or real estate.” – Motley Fool
The concept of “intrinsic value,” doesn’t hold absolute meaning in a world devoid of human existence. Consider assets commonly perceived to hold intrinsic value, such as gold, farmland, stocks, and real estate. Without humans to derive utility or exchange value from these assets, their worth becomes subjective and ultimately meaningless. Value, therefore, is inextricably linked to human context and the interactions that shape our economic systems.
If a person values wealth preservation, then he must save his wealth in money that cannot be inflated or debased. Or likewise, if a person values monetary sovereignty, then they must use money that cannot be confiscated or censored. This means any form of money with properties that best meet these criteria will then necessarily hold objective value to anyone with the corresponding subjective values.
Bitcoin’s Properties
The question becomes what are our subjective values and do the properties of bitcoin meet these values?
For the vast majority of people, wealth accumulation and preservation are valued favourably. It is for this reason that gold has held a high monetary value for thousands of years.
Gold’s durability and scarcity meant humans with the desire to preserve wealth would use it as money. It was not just gold’s intrinsic properties or just humanity’s desire to preserve wealth that caused gold to be used as money, but both simultaneously.
Bitcoin’s Scarcity
The most well-known property of Bitcoin is its hard cap of 21 million coins. Thanks to its digital nature, Bitcoin is able to offer what no physical object can — absolute scarcity. Unlike fiat money, the supply of which can be expanded with the click of a button. The 21 million supply cap of bitcoin is set in stone for the rest of time.
“The supply of any physical thing can only be limited by the time necessary to procure it: if we could flip a switch and force everyone on Earth to make their sole occupation gold mining, the supply of gold would soon soar. Unlike Bitcoin, no physical form of money could possibly guarantee a permanently fixed supply—so far as we know, absolute scarcity can only be digital.” – Robert Breedlove
Bitcoin’s Censorship Resistance
Bitcoin is an open network and is accessible to anyone and cannot discriminate. More western governments and corporations are fully embracing the idea of censorship. Bitcoin provides a medium in which no one can be censored. Bitcoin does not and can not distinguish between transactions. Any transaction that includes a sufficient mining fee will be included in the blockchain.
Try bringing £100,000 worth of cash or gold through an international airport vs bringing £100,000 worth of bitcoins with you instead, via a digital wallet on your phone, or even just by remembering a 12-word seed phrase. This censorship resistance feature has helped many people fleeing war or corrupt governments in the last few years.
Bitcoin’s Decentralization
Bitcoin’s decentralized nature eliminates single points of failure, unlike corporations with centralized control structures. In contrast to a corporation’s centralized decision-making, Bitcoin’s distributed network spans the globe, preventing any individual or entity from modifying the protocol.
Bitcoin’s decentralized architecture ensures that protocol changes originate from all of its users, not from any single entity. Any attempt by an individual node to modify the Bitcoin code will be rejected by the rest of the network. As the network expands, the consensus required for protocol changes becomes increasingly robust, solidifying Bitcoin’s core design.
Bitcoin’s Final Settlement
Bitcoin aims to settle transactions roughly every 10 minutes. Bitcoin’s ground-breaking feature lies in its remarkable ability to achieve flawless and trust less synchronization across the expanse of time and space. Through proof-of-work, Bitcoin utilizes the laws of thermodynamics to ensure that the system can’t be manipulated and cheated. No one has the power to cancel Bitcoin transactions. Once a transaction has several confirmations, it can be considered irreversible.
“Proof-of-work provides a direct connection between the digital realm and the physical realm. More profoundly, it is the only connection that can be established in a trust less manner. Everything else will always rely on external inputs.” – Gigi
Conclusion
It has been demonstrated empirically throughout generations of civilization that wealth preservation and monetary sovereignty are two preferences shared by most people. Modern-day fiat money falls short in both categories. The Federal Reserve and most other central banks including the Bank of England have explicit mandates to debase the value of their currencies through what are known as inflation targets. In other words, currencies like the British Pound and US Dollar fail miserably at wealth preservation because they are specifically designed not to preserve wealth.
The benefits brought about by Bitcoin may not be as obvious as they are for many people in developing nations. Inflation in the UK and EU has been persistent, but not devastating over the past two generations. After events in Canada and with inflation in the U.K. reaching multi-decade highs, many are now finding that the value proposition of bitcoin is more obvious.
Bitcoin’s utility is that it allows people to store value in something with provably scarce units, and to transport that value around the world. Bitcoin is the best at what it does. In a world of negative real rates within developed markets, and currency failures in emerging markets, what it does has real utility and value.
Bitcoin is a digital commodity, as Satoshi envisioned it:
“As a thought experiment, imagine there was a base metal as scarce as gold and with one special, magical property:
– can be transported over a communications channel
If it somehow acquired any value at all for whatever reason, then anyone wanting to transfer wealth over a long distance could buy some, transmit it, and have the recipient sell it.”
–Satoshi Nakamoto, August 2010
