Why Bitcoin IS Intrinsically Valuable

By Dan Roseman

Image credit: Flickr

Image credit: Flickr

It has been said a lot. Bitcoin is risky because it not “backed” by any government, asset, or commodity and has no intrinsic value in and of itself. It is true that Bitcoin is risky, but not for any those reasons. Bitcoin is risky because it is an entirely new disruptive technology with revolutionary potential in an unknown regulatory environment. The risk lies in Bitcoin’s ability to persevere despite the uncertain regulatory climate and realize its unspoken potential. The jury is still out on that.

Fiat currencies – especially the U.S. Dollar – have somewhat of an “illusory” intrinsic value in that they are legally required to perform certain actions such as paying taxes and purchasing oil. In a way, fiat currencies are intrinsically valuable by state mandate and coercion.

Taxes, for example, must be paid in fiat. And as a result of international trade agreements, oil is priced and traded in “[U.S.] Dollars per barrel,” meaning that countries must purchase and maintain large reserves of U.S. Dollars in order to buy oil. For example, when Germany purchases oil it must sell Euros to buy U.S. Dollars in order to do so. This artificially created demand for the U.S. Dollar (specifically U.S. Treasury Bonds) is made possible by the “petrodollar.” Basically, it works like this:

The Petrodollar System 101

 

Gold and other precious metals are often said to be intrinsically valuable, but why? Because they’re nice and shiny? Because they’re a finite material and expensive to dig up? Sure, precious metals are used in jewelry but what practical use do these metals have aside from aesthetics?

Silicon, on the other hand, is intrinsically valuable as a semiconductor material used to produce microchips that power an entire spectrum of electronic devices. And yet, with silicon selling at an average price of $0.50/ounce and gold at about $1,275/ounce, silicon is worth about 1/40,800 its weight in gold. It seems that the law of supply and demand ignores utility when it comes to gold vs. silicon. Part of that, I know, is due to gold’s long history as a standard store of value.

Bitcoin isn’t physical, so its value can’t be measured by weight. Nor is it debt, so it isn’t measured by interest rate. Bitcoins are basically data, but size doesn’t matter; data size doesn’t determine quantity of Bitcoin. So how is Bitcoin measured and why is it valuable?

Bitcoin is measured by its own finite quantity and valued for its intrinsically valuable function. The Bitcoin protocol has immense intrinsic value as a self-regulating frictionless payment network affordable to almost anyone. Here is a technology that allows anyone to send any amount of money to anyone else in the world at virtually no cost with nothing more than an Internet connection or smart phone. Bitcoin, like the Internet, is one of those innovations that can break down barriers; information barriers in the case of the Internet, and financial barriers with Bitcoin.

What I mean when I say that “Bitcoin is measured by its own finite quantity” is that the value of a single Bitcoin is measured against the strict limit of 21 million Bitcoins that can ever be produced. It is true that there will ultimately be less than 21 million coins at the end of Bitcoin’s production (approximately scheduled for the year 2140) due to accidental loss or destruction of coins, but let’s just say 21 million to keep it simple. The total intrinsic value of Bitcoin as a self-regulating frictionless payment network is measured relative to the strict limit of 21 million Bitcoins and in fact contributes to Bitcoin’s value by limiting supply.

Mmmm.... pie.

Mmmm…. pie.

Owning a single Bitcoin is in some sense like owning 1/21,000,000th of the sum of all benefits created by the entire Bitcoin protocol. While this number may seem small, it may one day be a tiny sliver of an unimaginably immense pie. After all, it is difficult to quantify the total benefits of the Bitcoin protocol (size of the pie) when many of those benefits have yet to be developed or discovered. These developments and discoveries may enlarge the Bitcoin pie to the point where there would be enough pie to cure hunger. And if that day ever comes, a tiny sliver of pie may be more than even Homer Simpson could eat.

By Dan Roseman
Dan Roseman

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4 Pingbacks
Date Source Name URL
19 October 2013 at 10:10am[…] Why Bitcoin IS Intrinsically Valuable ...Why Bitcoin IS Intrinsically Valuable | bitcoinvancouver
19 October 2013 at 12:10pm[…] READ MORE ...Why Bitcoin IS Intrinsically Valuable
22 October 2013 at 3:10pm[…] ...为什么比特币是天生有价值的 | 比特币中文网
25 March 2014 at 5:03am[…] explain value of gold. Silicon is intrinsically valuable as it is used to ...Bitcoin vs Gold: What has more intrinsic value - Crypto Herald
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  • D.R. Allen

    I think it is important that articles be date stamped as it affects their Value.

  • GREE:D

    Agree. Hate it when I find an article somewhere and I can’t figure out when it was written.

  • GREE:D

    If a person accepts Dan’s definition of intrinsic value, then bitcoin has the same worth as say litecoin. I’ve tried to create real world value to monetize in-game, digital items. Understanding value is tricky business. One thing I’ve learned is that value is multifaceted. Utility is only a fraction of what makes something valuable.

  • sotrue

    I don’t think it would mean that “Bitcoin has the same worth as … Litecoin” (or even some multiple of Litecoin). I think it means that 1 Litecoin should be valued at 1/84,000,000th of the sum of all benefits created by the entire Litecoin protocol. This also is not yet known. But, for the ways in which Litecoin is identical to Bitcoin, it adds NO value. It is yet to be seen if the differences (4 times the coins, scrypt, and 2.5 minute block creation) add enough value in their own right to usurp the value of Bitcoin either through displacing it or through remaining a viable (enough value added) alternative.

  • Dan

    My bad; I should have put the date at the top (note to self). The date of the article is 10/19/13.

  • D.R. Allen

    Thanks Dan. The tip is in the jar :-)

    With the current consistent rise in the price, my tipping wallet is almost brimming over. (Oct 21)
    Each time I read something I like, I send the equivalent of 25 cents, but my tipping wallet never seems to have less in it.

    I think this is the point of your article, so the proof is in the pudding, or pie.

    Oh the Joy of Bitcoin!

  • Dan

    Tip received! Thank you so much! If the price keeps behaving the way it has, I’ll be enjoying a nice pie desert tomorrow evening. Cheers!

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  • GREE:D

    Sorry, the date issue is something Adam should fix. I’m sure WordPress can handle dates. It’s something that detracts from author credibility despite not being their fault.

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