Why is Bitcoin worth anything?
A wonderful question. The right question. The first question anyone should ask when they first hear of this digital currency that was invented out of thin air by Satoshi Nakamoto, a pseudonymous character with biblical levels of foresight.
And the answer to the question is, as it turns out, another question.
Why is the money in your wallet worth anything?
Why is gold worth anything?
I can't eat gold. If I find myself in the middle of a societal meltdown with nuclear weapons being fired, anarchy in the streets, and governments around the world completely collapse, the only thing that will have any value will be bomb shelters, weapons, food and clean water. I can't eat gold or defend myself with it, so it's "intrinsic" value could disappear pretty quickly.
But moving on from total anarchy, humans don't worry too much about weapons, bomb shelters, and having more than a week's worth of food in the fridge. We want to hold something of value that will allow us to acquire a variety of things with as much convenience as possible. What we call money has existed in one form or another for longer than recorded history. I think of money more as a language rather than a human construct. It seems money evolves in every human society, and was not "invented" as such. Money is simply a tool to communicate value. For more on the history of money please read Nick Szabo's article here.
Money has evolved from shells, pearls and gold to abstracts of those in the form of written promises of the delivery of a precious metal like gold. Only in very recent history have we witnessed this being even further abstracted to become simply the written items themselves, backed by nothing more than the hope that others within one's own country continue to value this currency.
Your Australian Dollar, as stable as it is, is almost guaranteed to depreciate to the tune of 2% or more every single year... even more if you factor in the fact that the biggest cost of living is usually acquiring a home, and property is left out of the consumer price index (CPI) changes.
So your precious Australian (or US or whatever) dollars are depreciating second by second as long as you leave them in your pocket. This leaves the average citizen with little to no incentive to save or accumulate their money.
Why does our money depreciate each year?
This is because of the current system of banking we live under, where banks can issue loans without having the same amount of cash on hand. Here's a great explanation for Australians.
Not all countries are as fortunate as Australia to have their money depreciate at only 2% per year. Venezuela has become a meme with the levels of inflation they're currently experiencing. And throughout history, when the money supply has been overwhelmed by enthusiastic governments and central bankers, there have been many occasions of hyperinflation, rendering everyone's savings worthless.
Why Bitcoin still has value 9 years after its birth.
Bitcoin was not the first digital currency invented. Others that went before were able to create a way of sending and receiving digital tokens between individuals, in the hope of creating currencies for the internet. It turns out governments don't particularly like others inventing their own money, and these efforts were quickly shut down.
The challenge was to invent a system where there was no central authority or computer recording who owned what. A distributed system was the dream of those who hoped for such a currency. But having a distributed system meant there was the risk of people "double spending" their coins. (Double spending, as the term implies, is when I spend the same coin more than once.) A way was needed to keep a record of all transactions in a distributed manner that ALSO prevented double spending.
Satoshi Nakamoto's great leap forward was solving this problem by cryptographically linking (chain) groups (blocks) of transactions to previous blocks of transactions, making it more and more difficult to change the record the further it went.
Satoshi dropped off the planet a few years into the project. Plenty of people have their theories as to who the person is/was, but regardless, Satoshi is not relevant to the continuation of Bitcoin.
Early on in Bitcoin's life, Bitcoin certainly wasn't seen as much more than a fantastic experiment by a handful of people in the cryptography community who understood what had just happened. But day by day, more and more people learned how clever this "blockchain" idea was, and seeing some people were happy to accept Bitcoin in exchange for Pizza, perhaps they too would like to own a little of this currency.
The way new Bitcoin comes into existence is through a process we call mining. Miners attempt to find an answer to a complicated mathematical equation, and the first one to succeed wins the privilege of processing the next "block" of transactions, and is rewarded with some new Bitcoin as well as all the fees paid by the transactions they process.
At launch, 50 new Bitcoin were created approximately every 10 minutes. But every 4 years that number halves. As I write this, only 12.5 new Bitcoin come into existence every 10 minutes. By the time I hit retirement age, it will be 0.048 Bitcoins per 10 minutes.
Eventually there will be no new Bitcoins, and miners will only receive the transaction fees each time they create a new block.
The final number of Bitcoins in existence will be a hair under 21 million. Bitcoin can be divided into very small fractions, up to 8 decimal places, making very tiny transactions possible (Yes, you can own a little bit of a Bitcoin.)
It doesn't matter how many more miners start mining Bitcoin. The mining difficulty changes to match the amount of computing power thrown at Bitcoin, keeping the new blocks around 10 minutes apart. Thus everyone knows up front exactly how many Bitcoin exist today, how many will exist tomorrow, and how many will exist in 200 years. (Note, the number is actually less due to accidental loss and deliberate destruction of some Bitcoins.)
No-one is in control of Bitcoin. There is no organisation or company who has a say on how the code should be updated or what will happen with Bitcoin. There's no-one a government can shut down or kill to end the Bitcoin project. The people who own "bitcoin.com" or "bitcoin.org" or "@bitcoin" on Twitter or "/r/bitcoin" on Reddit do not speak for Bitcoin. They are just part of the vast Bitcoin network that has no central governing authority.
And we know Bitcoin has a capped quantity. Compared to everyday currencies like the dollar, no central authority can issue more Bitcoin into circulation, effectively devaluing everyone's money. And compared to commodities like gold, it matters not if the price goes up or down. When the gold price goes up, more gold is mined, creating a downward pressure on the price. This cannot happen with Bitcoin.
Anyone with an internet connection can send Bitcoin to anyone else with a Bitcoin wallet address. It's not faster than Visa or Mastercard for buying your groceries. But for sending money to your relatives in the Philippines, it's WAY faster, and cheaper, than using international bank transfers, PayPal or any other current system. And I can send it to whomever I choose. I don't need permission from government regulated companies like banks.
So lets reassess the key points about Bitcoin.
- No-one is in control of it.
- It has a fixed supply.
- I can send it to whomever I choose.
These are the key reasons humans have chosen to assign value to Bitcoin. And these are the reasons, in my opinion, Bitcoin has such a promising future.
No currency in existence has these features. The closest thing humans have ever come to having something like Bitcoin was perhaps gold. Gold is valuable regardless of what your particular government decides to say or do. But Gold does not afford me the ability to transmit it easily or to divide it into very small amounts.
Ultimately, whether Bitcoin will continue to have any value will depend on how many people around the world would like to acquire Bitcoin themselves, either through the exchange of goods or services they offer, or through purchasing it directly, or mining it. And it doesn't take much looking around to see that the number of people who are quite comfortable accepting Bitcoin, or desire to acquire Bitcoin, is only growing.
Even if the demand for this currency were to plateau, supply of new Bitcoin will be decreasing every four years until around 2140.
As I type this I can sell a Bitcoin for around $13,000 AUD or $10,000 USD in a matter of moments. People are lining up to swap ten thousand of their United States of America Dollars for 1 Bitcoin. So the question as to whether Bitcoin has any actual value is well and truly settled.
The only argument regarding Bitcoin now is whether or not Bitcoin will continue to have value in the future.
What I have found among those who claim Bitcoin's value will eventually fall to zero, is a lack of knowledge as to the money supply features of Bitcoin. Perhaps this is the fault of us, the Bitcoin community, in explaining Bitcoin. When we boast about how easy it is to pay for things, one need only look at the convenience of Apple Pay and credit cards to conclude Bitcoin is an inferior technology solving a problem that doesn't exist.
But if you zoom out and look at what makes a particular form of money useful, you can see that it is quite a challenge to find an asset that is quickly liquidated, has a fixed supply, can't be shut down or seized by any authority, and can be transferred with ease. Real Estate is perhaps the best asset if you want something with a fixed supply, but it is painful to liquidate. Gold is great inasmuch as no government can declare it worthless. But try sending your gold overseas. Cash (dollars) is great for quickly swapping for other things, but holding it long term is a guaranteed terrible investment, and you're at the mercy of local governments who want to know what you're doing with their money.
What about all the other cryptocurrencies? Aren't they harder/better/faster/stronger?
There are many other cryptocurrencies in existence today. Some of them have made certain individuals very wealthy, and this hope of instant riches is enticing more and more people into the cryptocurrency space each day. Barely a day goes by without a new digital token or currency being issued.
While many of these coins are currently experiencing price movements that you may be able to profit from, I haven't found a single coin that offers the features that make Bitcoin wonderful.
Let me repeat why I value Bitcoin:
- No-one is in control of it.
- It has a fixed supply.
- I can send it to whomever I choose.
I have not found another cryptocurrency that satisfies the above conditions. In fact, one of the most popular alt coins doesn't even meet number 3. The founders of the coin are on the record as having frozen certain individual's holdings of coins, and have agreed with the US government to freeze any coins requested. Another of the most popular coins has made no formal decision regarding how many of its coins will exist in the future. People have no idea how common or scarce the coin they're buying will eventually be.
Every cryptocurrency other than Bitcoin currently has a founder or a founding organisation that has an oversized influence on any decision regarding the coin in question.
If you want to look further than Bitcoin and purchase alternative cryptocurrencies, I implore you to find out if it meets the above criteria.
The purpose of this essay wasn't to shit on alt coins. I am not threatened by anyone's love for their particular favourite coin, I enjoy learning about how particular coins work, I own a few myself, and I wish you well with your alt coin investment. However, I just wanted to point out that the characteristics that make Bitcoin valuable to me, simply don't exist in any other digital currencies. I see them the same way as you might see the latest social network that claims to be "facebook but a little better". Yeah that's great, but it's missing the one thing that makes Facebook valuable... your friends are there.
In the same way, the 3 things that makes Bitcoin valuable need to exist in a cryptocurrency for me to hold it in the same regard as Bitcoin.
Does this mean Bitcoin will go up in value this year?
I make no predictions as to the price of Bitcoin in the next 10 years. There are too many variables and potential black swan events that make predicting the exchange rate of Bitcoin a fool's game.
However, consider these words from Nassim Taleb
... Bitcoin will go through hick-ups (hiccups). It may fail; but then it will be easily reinvented as we now know how it works. In its present state, it may not be convenient for transactions, not good enough to buy your decaffeinated expresso macchiato at your local virtue-signaling coffee chain. It may be too volatile to be a currency, for now. But it is the first organic currency.
But its mere existence is an insurance policy that will remind governments that the last object establishment could control, namely, the currency, is no longer their monopoly. This gives us, the crowd, an insurance policy against an Orwellian future.