Should Bitcoin Have Value?
A lot of people, most of whom know nothing about bitcoin or cryptocurrencies, talk about how crypto has no value. Typically, the argument goes that bitcoin has no intrinsic value, there is nothing backing it up, so it must be worthless.
The less informed even go so far as to point to the dollar, or other fiat currencies as having value, because they are backed by something.
The problem is; there are no fiat currencies backed up by anything more than the faith that a particular country’s people have in its government.
In 1972 President Nixon took the US off the Gold Standard. Up until that point, each dollar printed, was backed by the gold in Fort Knox. After we went off the Gold Standard, the only thing backing the dollar, was our faith that we could trade it to others for something we wanted.
Intrinsic Value
As long as we were on the Gold Standard, the dollar was backed by something of value…gold. But why is gold valuable?
Most people today will say that gold is valuable because it can be used for a variety of things, such as electronics. While that is absolutely true, electricity has only been used for the last hundred years. Electronics, for about the last fifty.
Yet gold was extremely valuable before that. For thousands of years, gold has been used as a means to store value and wealth, but why?
Well, you can make jewelry out of it. Of course, you can make jewelry out of anything, shells, stones, and twigs have all been used to make jewelry. So why gold?
If you boil it down to the most basic reason, gold is valuable because it’s pretty. Because gold doesn’t oxidize like other metals (including silver) it always retains that brilliant luster, so people desire it.
Gold is also difficult to get. It’s not as common as other metals, and that scarcity increases the value. Gold is heavy, and you have to trust that the amount of gold you get for something, is the correct amount. That’s why gold coins were minted. As long as you trusted the entity minting the coins, you could trust that every coin had the same amount of gold.
Even gold coins get heavy, if you have enough of them. So, first banks, then governments started to print the value of gold onto paper. Basically, it was an I.O.U. that allowed anyone who had the paper, to exchange it for actual gold the bank had in the vault.
In fact, between 1878 and 1964, the US Mint printed Silver Certificates. These were paper dollars that were redeemable at any bank, for the face value in silver dollars.
Scarcity & Utility
Intrinsic value is based on an item’s scarcity, and usefulness. Since gold and even silver was relatively scarce, and the fact that people desired them, they worked well for money. The problem (according to the government) with being on the Gold Standard, was that we could only print as much money, as the value of gold we held as a country.
That cap on how much money could be printed, kept inflation low. Inflation happens when a government (or someone else) dilutes the money supply by printing more money. Those of us who lived through the 1970’s after Nixon took us off the Gold Standard, remember that inflation was the biggest item on the evening news for most of the decade.
Supply and demand is the basis of economics. If there’s more demand than supply, value goes up. If there’s more supply than demand, the value goes down. In finance, the latter is called inflation. Your dollar is worth less because money is so plentiful, and therefore less valuable.
Even if we were still on the Gold Standard, your dollar today would be worth less than it was in the 1970’s because gold is constantly mined. It’s possible that someone could find a vein of gold so large, that it would make gold nearly worthless. It’s not likely, but possible.
So we now know that fiat currency is backed by the promises of governments, that it is worth something. When was the last time you believed a promise from your government? We also know that the supply of gold is still increasing. We can use it as a conductor in electronics like computers, as well as other uses it has. Scarcity has gone down, but utility has gone up.
What if there was a way to make a currency that had a hard cap on how much could ever be made, and the possible uses were nearly infinite?
Enter Bitcoin
Bitcoin was made specifically to answer the problems of fiat currency. There will only ever be 21 million bitcoins. We know this because a specific amount of bitcoins are rewarded to miners each time they verify a block in the chain, and that reward is halved, on average, about every four years.
The last halving happened in August 2016, when the mining reward went from 25 bitcoins, to 12.5, for each block mined. In 2020, the reward will be dropped to 6.25 coins. We know this, because the bitcoin source code is open and available to anyone.
Some basic math (or maybe more advanced, since bitcoin has 8 decimal points) will tell you that the last bitcoin block reward will happen around the year 2140. Until then, new bitcoins are being mined about every 10 minutes.
That solves the scarcity issue, what about the utility?
Bitcoin was created as a way to send value over the Internet. I know, I hear you saying that you can send money over the Internet with a credit card. That’s true, but credit cards started being widely used in the 1960’s, long before the Internet.
With a credit card, you have to put in the card number, the date it expires, a security code, the amount and your name. With bitcoin, you just have to put in the amount, and the address you want to send it to.
Which is easier? Which do you think is more secure?
There is also the fact that bitcoin has the ability to add functionality. While ethereum (and other alt coins) is specifically known for its ability to have and use Smart Contracts, bitcoin has that same potential.
We are at the very beginning of this crypto revolution, and have no idea what it will be used for 20 years from now. Did you ever imagine Facebook or YouTube in 1995?
Bitcoin’s Potential Value
Every time you see a bitcoin “expert” on the news, they are always asked how high the price will go. Generally, they quote anywhere from $100,000 to a million dollars per coin. Most of these are straight out guesses. Those who actually understand economics, usually quote a price around $300,000.
They get this number by looking at what most people are comparing bitcoin to, which is gold, and dividing that by the total number of bitcoins. The value of all the gold in the world is around $7.5 trillion.
$7.5T / 21 million bitcoins ~ $357,000
The actual number is $357,142.86 (rounding up the decimal places). That assumes that the price of gold remains stable, which it won’t. That is the value of each of the total 21 million bitcoins at today’s prices.
Metcalfe’s Law
There’s another way to value the price of a bitcoin. An Electrical Engineer, who co-invented Ethernet named Robert Metcalfe, came up with a way to determine the value of a network. Metcalfe’s Law states that the value of a network is proportional to the square of the number of users on the network.
V=N2
Using ten years of data, Metcalfe’s Law was used to verify the value of Facebook.
If you think about it, bitcoin (and every other cryptocurrency) is just a network of people who hold or use it. Since bitcoin’s ledger is open, you can find out the number of unique addresses, square the number, and you have the value of a bitcoin!
On December 13, 2017, that number peaked at 1,072,861 unique addresses. That number squared comes to $1,151,030,725,321 ($1.1 Trillion)
The thing to remember is that the value of bitcoin will increase exponentially as the number of users (wallet addresses) increase. While there are those who use several wallet addresses in an attempt to remain anonymous, they represent a statistically insignificant part of the total number of users.
What this means, is that every bitcoin podcaster is right. The more people who use bitcoin (or just HODL it) increases the value of bitcoin.
