Bitcoin was called a bubble and not worth anything the same way 4 years ago as it is called the same today, yet it was there the whole time.  People have a tough time understanding how computer bits generated out of nothing can have value.  The fact that Bitcoins are limited and that they have value beside the fact that they are limited is something that people have a tough time understanding. Most people can understand that they are limited but what a little harder to understand is  the value proposition of Bitcoin.

So for something to have value and to have a price it has to not only be limited but it also has to have utility.  People have to get around the misconception that just because something is digital that it is not real or it cannot have value. we actually live in a digital world, we are around the internet all the time, we all get tremendous value from things that are digital almost every waken moment of our lives. So digital things do have value.

The amazing innovation Bitcoin had was that it was the first thing digital but also figured out a way to create scarcity in the digital world, actually nothing that was digital was ever scarce before, you could always copy some computer file. So how do you make a digital currency that is actually limited in number? That was the great innovation Bitcoin had. Bitcoin is useful and scarce so now it will, of course, have a market price.

A lot of the utility though is outside the mere act of transferring data because Bitcoin is a data transfer mechanism, the data is restricted and its called coins but its no more coins than an mp3 file is a symphony. So what are some of the periphery benefits that people can get from Bitcoin you can’t get by holding gold in your underpants?  Hiding gold in your underpants might be fun to do once in a while, but ultimately money needs to be used for all the various things that we do economically every day and Bitcoin just excels at all those things.

Transferring value to someone else instantly, with no fee, with no restriction, with no geographic issues is tremendously valuable, that is where Bitcoins value comes from. It allows people to transfer wealth between any to points in the world instantly without any third party. So as long Bitcoin has a dollar price of at least 1 penny or more, and the fact that you can transfer it this way, means that the system works and the more people use it the more its price will climb in order to accommodate the new users.

People say Bitcoin has no intrinsic value as if intrinsic value is something that can even be directly measured, but obviously dollars have no intrinsic value. Dollars are either digital in which case they are the same as Bitcoins except that they can be replicated to hyperinflation or they are pieces of paper and coins which have no value fundamentally as they found out in Zimbabwe where the only use they had for paper money was to burn it for heat. Bitcoins have no intrinsic value, they are only valuable in so far as they are a medium of exchange and the more people climb on the Bitcoin bandwagon the more places there are to trade Bitcoin for tangible goods and services. and thousands and thousands of other merchants have come on board accepting Bitcoins, so the moment that you can start trading something for a tangible good it has the value of that tangible good that you can trade it for, that is the connection of money to stuff.

Intrinsic value is a term which is misused all the time, actually nothing is intrinsically valuable, gold was not valuable before humans walked the earth and found value in it. Nothing has value intrinsically, it is all subjective in the eyes of the one doing the valuing. Before the advent of the internal combustion engine and in particular cars, oil was considered a horrible by product. If you drilled and found oil it was like the worst thing ever. It was considered a pollutant and now of course the world is driven by it. So if intrinsic value existed the oil would have it prior to the discovery of how to use it. But it became valuable once people figured out how to use it. Value is always a subject of property. The value of anything in the world is a result of how useful and how scarce it is.

The movability of the bits is very important. if you want to memorize your Bitcoin address, you can actually keep your money just in your head, which is tougher to do with gold, particularly lots of it. But to be your own walking bank and be perfectly secure is hard to grasp because normaly you log in and something is somewhere, with paypal it sits all with a central computer but in this distributed information exchange system called Bitcoin you can yourself be your bank, cross borders and since your brain crosses borders your money can cross borders with you.  This is one reason why on a competitive level Bitcoin outcompetes gold used as money because the payment system is so much superior to what you would have with gold.

The ability to transfer a million dollars worth of value between any to people instantly anywhere with no other party being involved for free and no restrictions whatsoever is just absurdly useful. All one has to do is to understand that this one function, this ability of people transacting across a distance is valuable, which is obvious. Then the fact that Bitcoins are scarce and there are only so many Bitcoins that can be used in this network in the way described means of course that Bitcoins must have a value. you can say that today’s price is incorrect and totally inflated relative to adoption, what you cannot say is that Bitcoin does not have a price.

What I also never understood is when people say the price of something is too high. The price is just what it is, what people agree on at that moment in time. It’s like saying someone is too high or too short, well he is just the height that he is. What I can understand is when the federal reserve is printing all this currency and causing  bubbles and busts so people say “the price of something is to high because there has been an artificial expansion of the currency supply, there is stimulus in this particular sector etc.” but that is the result of a lack of scarcity whereas every Bitcoin that comes out of the creation process, is harder to come by then the previous one. A price is whatever people believe it is in the moment and if price is not driven through artificial means like an inflation of the currency supply, which cant really happen with Bitcoin, so in this case the price is discovered through the free market.

What is maybe fair to say by someone is that Bitcoin is 90% just speculators thinking that it will be worth something in the future and maybe the current price is not sustainable. This can be debated. what on the other hand is not a fine point to make is that just because bitcoin is digital, means it has no value and that the real value of it is zero so it can’t be used as money. Unfortunately some of the gold bugs think this way and say the value of bitcoin should be zero. This is incredibly backward looking and harmful for the entire purpose of it. Kindle books are all digital, does it mean they are in a language nobody understands!? internet is largely digital and some of these gold bugs express their opinions on a blog, using digital mediums!?

I understand that argument can be a first initial reaction but after you think about it for more then 5 minutes you should understand that it’s silly. If you look at the people who say buy and hold Apple stock, IBM stock or GM stock you can say that generally the people who buy it do it with the hopes of it going up in value and don’t buy it with an in-depth knowledge about these companies, business’s, CEO’s, managers, strategies, etc.

Majority of them buy the stock saying just they think a particular stock will increase in value. I think the wast majority of people in the stock market can be classified as speculators in that they are just buying it because it’s going to go up. So why is there this massively different standard for Bitcoin?

Everyone is a speculator in almost every market activity they do. Speculation is important and useful and we do it all the time. It is the way prices get discovered.

So for starters I only wish that people give Bitcoin a little more thought and don’t just make quick conclusions about it but try to understand the obvious benefits of it that we never seen before with money and economics.  Part 2 coming soon.

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