https://bitcoinnews.com/bitcoin-has-real-value/
“Bitcoin is a Ponzi scheme!” “It has no intrinsic value!” “It’s a speculative investment!” The internet is full of so-called “experts” deriding bitcoin as a useless asset with no real value. All the while, the money we use in our day-to-day lives is gradually going to zero. The fact is this: Bitcoin has more intrinsic value than any fiat currency.
What Gives Money Value?
We’ve all grown up in a world where money is a tool of the state. The government is in complete control of monetary policy, a central bank issues the currency, and the rest of us simply use it day to day without any understanding of how it works or why it matters.
Of course, we’re all familiar with terms like inflation, and we’ve all made reference to “printing money” at some point. But most of us never really think about what the government is doing to the cash in our pockets every day.
We accept that money has value because, to us, that has always been the case; currency has value because the government says so. (Or is it because we say so?) If we decided the government was wrong and our (their?) money doesn’t actually have value, who would be right?
The Origins of Money
Historically, money was any commodity that could be expected to hold its value over time.
According to Carl Menger in “The Origins of Money” (1892), the ancient Egyptians and Mesopotamians used commodities such as barley, shells, and livestock as mediums of exchange.
In Ancient Greece, iron bars were used. Eventually, coins were minted from gold, silver, and other precious metals as a way to transfer value.
That’s essentially what money is: a means of storing and, thus, transferring value.
If I work, I’m contributing value to the economy. I can be paid in food, or some other commodity that I need, in proportion to the value that I contributed.
However, money affords me the option of holding that value so that I can cash it in later in exchange for something that might not have been available when I was paid, or that the person paying me might not have had.
It also gives me the option of storing value and saving it up so that I can exchange a lot of value for something very expensive.
Money naturally evolved to enable people to store value across time so that they could cash in on that value when they needed to, and for what they needed.
The intrinsic value of a currency is determined by what it’s backed by. It may have a market value that is higher than its intrinsic value, for example, if there is high demand compared to the currency’s supply.
Mostly, a currency’s value is determined by how useful it is and how scarce it is.
Why Were Precious Metals Chosen For Money?
Precious metals are a form of “hard money,” literally money that is hard to produce (and therefore inflate).
Not all societies used precious metals for currency. It largely depended on the availability of these metals and the ability to mint them into coins, bars, or jewelry. In East Africa during the 1800s, glass beads were used instead.
However, precious metals were often used for a number of reasons:
- Scarcity: Precious metals like gold and silver are rare and difficult to separate from their ores, making them difficult to produce.
- Durability: Gold does not corrode or degrade over time, making it perfect for storing value over long timescales.
- Divisibility: Precious metals can be easily separated into smaller quantities. A gold bar can be melted down into smaller units or even just cut in half.
- Acceptability: Precious metals have luster, a shine to them that makes them attractive and gives them an innate value. Money must have social acceptance to be a useful unit of exchange.
- Uniformity: Because precious metals are easily recognizable and verifiable (it is easy to test if a coin is solid gold or gold-plated lead), they are difficult to counterfeit.
- Portability: Precious metals can be minted into coins. The need to store and carry money makes coins ideal.
For anything to be considered money, it must fulfil these requirements. Currency naturally took the form of precious metals because they tick all these boxes.
It just happened; there was no central authority that decreed it must be so. Money is a natural phenomenon, and it arose because these six characteristics are necessary for exchanging value in a functional economy.
Money has value because it does this job.
Introducing Fiat Money
For thousands of years, currency was something organic. All over the world, societies of differing sizes and technologies used different commodities as money according to the ability of those commodities to satisfy the requirements of a currency.
Then came fiat money.
Fiat money refers to a currency that isn’t backed by an actual commodity. Fiat is Latin for “let it be done” and is sometimes translated as “by decree.”
Historically, money had value because a commodity was found to fulfil the six needs of money previously established. Currencies naturally arose that could meet the task of storing and transferring value.
Fiat money changed that. Fiat money has value “by decree,” or essentially, “because the government says so.”
What Gives Fiat Money Value?
Fiat money must have value, otherwise, no one would use it. We wouldn’t accept payment in a currency that was worthless.
And we know inflation happens, which is when a currency becomes less valuable. But how can it become less valuable if it has no value to begin with?
So fiat money must have value.
But if fiat money isn’t backed by any actual commodity, how can it be worth anything?
Simply put, fiat money has value because we all agree to use it.
There’s some degree of choice in this, but ultimately we’re pretty much powerless to do anything about it.
If you live in the U.S. then you use dollars. U.S. dollars are fiat cash, created by the Federal Reserve or the banking system it holds under its wings. Theoretically, if everyone decided to stop using dollars, they would be worthless. In practice, it’s more complicated.
The U.S. government pays its employees in dollars. Taxes have to be paid in dollars. Fines and tariffs are all paid in dollars. The dollar is also legal tender, meaning merchants have to accept it.
In essence, the government has tools to ensure that dollars get used. As long as they get used, they’re worth something.
This is what gives fiat money value. The fact that we have to use them because the government says so, and we’re all used to this, so we don’t even question the value of the cash in our pockets. Because we don’t question the value, we have faith in it, and this collective faith also gives the currency value.
Sounds fine then, right? If it ain’t broke, don’t fix it.
The problem with fiat is not that it has no commodity to back its value. The problem is how that value changes over time.
Government-Mandated Inflation
Most governments have inflation targets. The Bank of England in the U.K. and the Federal Reserve in the U.S. both set inflation targets of 2% per year. This is typical of advanced economies.
What this means is that the central banks of most counties aim to devalue their currencies by an average of 2% per year.
But why? Why would a country have a deliberate policy of aiming to make its currency less valuable every single year?
There are many potential answers to this question, and which one you believe may depend on how cynical you are.
A Keynesian economist will tell you that a small amount of inflation is healthy for the economy because it stimulates growth by encouraging people to spend or invest their money rather than save it.
An Austrian economist will tell you it’s all a cover to keep the public naive to the fact that they’re being robbed.
Whether or not you believe in government conspiracies or collusion between the rich and powerful, it’s important to examine the actual effects of long-term inflation.
Why Can Inflation Be Good?
One somewhat understandable rationalisation for inflation is that, as the economy grows, more cash is needed to provide liquidity for transactions within that economy.
Imagine there was only $100 in the entire U.S. economy. Each dollar would be worth billions in today’s dollars because there would be so few to spread over the entire economy.
It would be extremely difficult to trade because each dollar would be worth so much and can only be divided into 100 cents each.
Also, most citizens would not have any money at all as even one cent would be so valuable that it would exceed the net worth of most citizens.
The logical solution would be to print more money. That would devalue each dollar, but it would allow more dollars to be shared around so everyone has enough liquidity to facilitate business and trade. If the economy grows, it might be useful to expand the money supply to lubricate economic activity by ensuring that there are enough dollars for everyone to make the transactions they need.
This means ensuring that individual dollars and cents are low enough value that you can make microtransactions at the lower-value end of the economy.
Expanding the money supply ensures that the currency doesn’t become too unwieldy as the economy grows.
The problem is with how the new money is distributed.
How Is New Money Created?
Central banks can “print” new money in several ways:
- Lowering reserve requirements for commercial banks.
- Providing loans to commercial banks.
- Quantitative easing (purchasing assets from the private sector).
Government bonds are essentially government-issued debt. Someone (a citizen, institution, or another central bank) buys the bond, and the government promises to pay them back with interest after a period of time.
Until the loan is paid back, new money enters circulation when the government spends it.
Commercial banks also add to the money supply when they issue loans to their customers. They just add numbers to your account, and viola! New money is created out of thin air.
Commercial banks are only allowed to loan out a certain multiple of the money they actually have in reserve. This is called fractional reserve banking.
If the government mandates a 20% reserve, a bank can only loan out five times what it has in deposits because it must always have in reserve 20% of what they’ve loaned out.
If the government lowers the reserve limit to 10%, banks can now loan out up to ten times what they have in reserve, meaning they can increase the money supply by double what they could before.
Similarly, central banks can provide loans to commercial banks to bail them out of bankruptcy or keep them afloat during economic hardship.
Quantitative easing is a mix of government bonds and loans from the central bank. Essentially, the central bank creates money by issuing credit, except instead of issuing this credit to a commercial bank, it uses it to buy government bonds.
This amounts to a government issuing debt to itself, which it can theoretically do indefinitely and never run out of money. Since it can always pay off the debt with new debt, there’s no limit to the potential money supply.
Inflation Is Theft
When the money supply increases, but your personal wealth stays the same, your money loses value.
Think of each dollar in the U.S. economy as a share of the total money supply.
When central banks “print” new money, they dilute your share of the money supply with new dollars — new “shares.”
If you have $1 in an economy that only contains $100, then you own 1% of the money supply.
If the central bank prints another $100, but you still only have $1, your share in the money supply drops from 1% to 0.5% because you now have $1 out of $200 instead of $1 out of $100.
Essentially, the central bank has just stolen 50% of your wealth.
This is what happens every time the central bank creates new money by issuing government bonds, or a commercial bank adds to the money supply by issuing a loan.
Theoretically, the new money is distributed throughout the economy in the form of government spending and commercial credit.
In reality, commercial banks get larger and larger shares of the money supply to buy up real estate and loan out to businesses, and the government can spend huge sums on things like new aircraft carriers.
All this is paid for with your money. Remember, when they print new money, they haven’t actually added value to the economy.
When the Federal Reserve prints new dollars, the value of all the dollars already in circulation is reduced by the value of all the new dollars.
All they’ve done is diluted the value of your wealth and taken the difference for themselves.
Money is being taken straight out of your pocket: It’s the greatest heist in human history.
Eternal Inflation
It seems logical that inflation can’t last forever. If you continuously devalue a currency, eventually, it becomes worthless.
When this happens very quickly, we call this hyperinflation. However, this is happening very slowly (although it’s now speeding up) all over the world.
The entire world economy is built on an inflationary model where growth is fueled by debt, and the debt is constantly outpacing the growth.
This is intrinsic to fiat currencies. Fiat money isn’t backed by any commodity. It has no intrinsic value beyond the use we have for it and the faith we have in it.
But what if that faith disappears? What if we no longer see the dollar as a safe store of value? What if we no longer need it because there are alternatives that are better suited to fulfilling the role of money?
If inflation continues (as all central banks aim for with their annual inflation targets), then the value of the inflating currencies will continuously fall.
The main force fighting against this is economic growth. As economies grow, their currencies become more valuable, assuming all else stays equal.
If economies stop growing, however, and the money supply continues to increase, then the value of the currency can fall dramatically.
Looking at the purchasing power of major currencies like the U.S. dollar or the British pound over the past 100 years, it is clear that the value of these currencies has dramatically decreased even relative to the growth of their economies.
And this was during 100 years of near-constant economic growth and a golden age of peace and global commerce from the end of the cold war to the Russian invasion of Ukraine.
The money supply is increasing faster than ever, and economic growth is slowing down. Clearly, eternal inflation is not sustainable.
Bitcoin: The Best Money There Is
Bitcoin is the most perfect form of money that has ever existed.
Unlike fiat money, there is no government “decree” that says it has value. Governments don’t order taxes to be paid in bitcoin, nor do they mandate that it must be accepted as legal tender.
Unlike every other currency in the world issued by a central bank, people use bitcoin for one reason only: It works.
Bitcoin’s Ability To Function As Money
Bitcoin satisfies all the requirements of money:
- Scarcity: Bitcoin is coded to have a supply cap of 21 million. It cannot be inflated and is, therefore, inherently scarce.
- Durability: Bitcoin cannot be destroyed. The network is maintained by miners expending huge amounts of energy, and as long as the network is up, anyone can transact with their bitcoin.
- Divisibility: Each bitcoin is divisible into 100 million satoshis, up to 8 decimal places. This means there is a cap of 2,100,000,000,000,000 (2 quadrillion and 100 trillion) satoshis.
- Acceptability: The number of people holding bitcoin and the number of merchants accepting it as a means of payment continues to grow. It is already an established currency and is legal tender in El Salvador.
- Uniformity: Each bitcoin is equal to every other bitcoin, and the security of the network means they cannot be double-spent (counterfeited).
- Portability: Bitcoin is the most portable currency in the world. It can be sent anywhere with an internet connection, and the information to access your holdings can be carried in the form of keyphrase information on paper or even by memory.
Clearly, bitcoin does the job that money evolved to do. Mechanically, it works great as a currency.
Bitcoin vs Fiat vs Gold
Gold is obviously a great choice to use as money. Or, at least, it was historically.
It’s scarce, durable, it has intrinsic value, and a long established history as being the basis for entire economies for thousands of years.
Fiat currency does have some advantages over gold, though.
It’s easier to digitally divide fiat money into smaller values than it is to physically divide gold. Fiat can also be transported electronically, whereas gold is expensive and difficult to physically transport.
Both gold and fiat have some deficiencies. They can both be seized by governments or powerful bad actors. They can also both be counterfeited by producing convincing copies. Fiat money can also be inflated, which is essentially legal counterfeiting (or counterfeiting is illegal inflation).
Bitcoin combines the best of both and avoids all the flaws.
It’s inherently scarce, like gold. In fact, it’s more scarce, since the global gold supply increases by about 2% per year. Fiat can be printed infinitely, and can therefore be inflated into oblivion. Bitcoin can never be inflated once it reaches the cap of 21 million bitcoin.
Bitcoin also has the divisibility and portability of fiat currency, owing to the fact that it’s a digital asset and so doesn’t suffer the physical limitations of gold.
Similarly, the Bitcoin network has been shown to be remarkable robust. The network is secured by vast amounts of electricity (more than the consumption of many countries) which means even entire countries could not hope to attack the network.
As long as the network is up (it has a historical 99% uptime, which is unprecedented for such a large data network) then the bitcoin are secured, making Bitcoin incredibly durable.
This same energy-backed security makes it impossible to counterfeit bitcoin, making it more verifiable (or uniform) than either gold or fiat.
Does Bitcoin Have Intrinsic Value?
It’s tempting to think that bitcoin is like fiat money in that it has no intrinsic value.
Fiat money only has value because we have to use it (due to legal tender laws and taxes etc.) and because of the faith we have in the issuing government.
But we don’t have to use bitcoin, and there’s no issuing government, central bank, or any central authority.
So if bitcoin doesn’t have value because we’re forced to use it, nor because we have faith in an institution issuing it, why does bitcoin have value?
What Backs Bitcoin?
In a literal sense, bitcoin are given value by the marginal cost of their production.
Miners have to invest capital in the form of electricity costs, mining equipment, employee salaries, and property costs in order to mine bitcoin. They do this with the understanding that they will be able to sell the bitcoin they mine at a profit.
This initial investment gives bitcoin value in a similar way to how our faith in fiat money gives it value.
Except bitcoin miners actually have to demonstrate that faith beforehand by investing the capital to set up a mining rig. This means bitcoin have inherent value as capital had to be expended just to bring them into existence.
The price of bitcoin is correlated with the cost of production because miners will hold their bitcoin if they can’t sell it at a profit.
This creates a support in the price of bitcoin which keeps it above the cost of production.
If the price does drop below that cost, miners will switch of some of their mining rigs to lower costs.
In these ways, the price of bitcoin is kept higher than the cost of production. The cost of producing bitcoin therefore provides it with intrinsic value in much the same way that physical commodities have intrinsic value tied to the cost of producing them.
Gold, for example, is expensive partly because it’s scarce, but partly because it’s very expensive to dig up and separate from the earth.
Bitcoin thus achieves the “hardness” of gold without the environmental effects of having to dig it up. This makes bitcoin an incredibly pure form of hard money.
Bitcoin’s Electricity-Secured Value
Every aspect of bitcoin that makes it so useful as a currency is enshrined in the code of the Bitcoin network.
The Bitcoin network is maintained by nodes, which keep complete records of the blockchain, and the miners, who process transactions and add blocks to the chain.
The miners use the Proof of Work consensus mechanism, in which computational power is used to solve mathematical puzzles in order to decide which miner proposes the next block.
As more miners join the network, the more difficult the puzzle becomes. This is to maintain an average block time of ten minutes.
The hashrate (computational power) of the network is what secures it against bad actors. Anyone wishing to attack the network would need 51% of the hashpower. For anyone to join the network and try to attack it, they would need to generate double the current hashrate plus 1%.
The Bitcoin network currently uses more electricity than most countries, and that electricity is powering specialised processors that are specifically designed to generate as high a hashrate as possible as efficiently as possible.
This makes it an almost impossible task to attack the Bitcoin network. For this reason, counterfeiting bitcoin by doublespending is practically impossible.
It also adds to the trustworthiness of the network, as users can be sure that the infrastructure that supports their transactions is secure.
Because of these factors, bitcoin’s usefulness is secured by its electricity consumption. Thus, the electricity consumption of the network provides bitcoin with intrinsic value because value must be expended (in the form of electricity) in order for bitcoin to exist and be used.
Fiat money has no intrinsic value because nothing has to be expended in order to bring it into existence. With bitcoin, just like physical commodities, its existence is dependent on expending resources.
Why is Bitcoin Useful?
The Bitcoin network is a modern marvel beyond just the usefulness of bitcoin as a currency.
The network itself provides a decentralized, trustless, immutable, transparent, peer-to-peer payments settlement system to anyone on the planet with an internet connection.
More than half the world’s population lives under an authoritarian regime.
To those of us living in economically developed democracies, Bitcoin might not seem necessary. To people facing strict monetary controls at the hands of tyrannical despots, it can be essential.
In 2021, 1.4 billion people worldwide were unbanked, leaving them without modern financial services that so many of us take for granted.
As stated, the Bitcoin network provides anyone with an internet connection a way to send and receive remittances in bitcoin.
Bitcoin has already been tried and tested in this area. Venezuelans relied on bitcoin to hedge against hyperinflation and circumvent central authoritarian monetary controls
While remittances in dollars were subject to government fees and could take weeks to process, remittances in bitcoin have only small miner fees and are nearly instantaneous.
Bitcoin has also been used as a hedge against hyperinflation in Zimbabwe, as well as for avoiding financial surveillance in China, escaping financial censorship in Russia, and getting access to remittances in refugee camps.
As a store of value, bitcoin is capable of replacing gold while being far less damaging to the environment to produce, despite what critics say about the electricity consumption of the Bitcoin network.
In fact, bitcoin mining has been shown to be beneficial toward facilitating renewable energy build-out.
Why Do Critics Call Bitcoin a Ponzi Scheme?
We can’t know for sure why critics of bitcoin continue to claim that it’s nothing but a speculative investment propped up by the “greater fool theory,” the idea that its price is only going up because new “fools” keep coming along to invest in it.
It could be the case that they genuinely don’t understand bitcoin, why it’s valuable, or why money even works the way it does.
How many people can explain fiat money? How many people have even heard of fiat money, despite using it everyday?
There are plenty of people who believe the Earth is flat or that the moon landings were faked, purely because they don’t understand it.
There are millions of people who will never accept something they don’t understand. Unfortunately, in the case of bitcoin, many of the people who don’t understand it are politicians, journalists, and even economists.
Even Warren Buffet, who can hardly be called a fool when it comes to the world of investment, has said some pretty ignorant things about bitcoin.
Of course, it’s possible that something far more sinister is happening.
It may well be that the politicians who oppose bitcoin are doing so because it gets in the way of their ambitions to further centralize power and monetary control.
It’s no coincidence that bitcoin’s rise has seen the advent of a new form of money: Central bank digital currencies (CBDCs).
Decentralization of power, financial freedom, and privacy should be concerns for all of us. Bitcoin might just be our best hope of steering away from the potential dystopia that centralized digital currencies are sure to create.
If nothing else, Bitcoin gives us a hope for a better, freer future.
That’s what I call value.
The post Bitcoin Has Real Value: Beyond the Ponzi Scheme Narrative appeared first on Bitcoin News.
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