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What Makes Bitcoin Valuable?

An asset with a high price does not necessarily mean it is valuable. Conversely, an asset with a large fluctuation in price does not mean its value is only a result of speculation. Bitcoin's value comes from several benefits it provides to people, and we can compare Bitcoin to other assets that are considered valuable to better understand the value it provides.

One indicator that an asset is valuable is if it remains valuable across time (Saylor). Gold is one example of an asset that has successfully maintained its value for over a millennium.  Another indicator that an asset is valuable is if investors increasingly invest in that asset. An example of this is property. In my opinion, Bitcoin's price does not represent the value it provides because its price changes primarily due to speculation rather than fundamental indicators of success such as the adoption of the technology by the public.

Instead of looking at Bitcoin's price, we can look to Bitcoin's unique characteristics to better understand the value it provides. 

Consideration #1: Bitcoin's Rules and Design

Bitcoin's supply is designed to be scarce and predictable. Only 21 million Bitcoins will ever go into circulation and the schedule of their emission is unchangeable. This is different from the rate of increase of a fiat currency which is decided by economists influenced by short-thinking politicians. The emissions of Bitcoins is maintained by Bitcoin's decentralized consensus mechanism, proof of work. This is different from traditional financial systems that require trust to be placed in the system to use it. In this capacity, Bitcoin's design is more similar to using cash, than digital financial services like PayPal or online banking.

There are disadvantages and advantages when using a decentralized currency with a fixed supply. The most notable disadvantage is it results in a more volatile price compared to controlled fiat currencies, making it a challenging medium of exchange. For example, it is impractical to spend $100 on groceries one week and $200 the following week as a result of a currency's volatility. The advantage of Bitcoin's fixed supply and emission schedule is it may make it a better store of value than an inflationary currency like the US dollar. Bitcoin's scarcity is outside the control of any centralized entity, which is especially important in countries that have currencies controlled by corrupt governing entities. This is the value it provides to individuals, allowing people to safely store their wealth.

Consideration #2: Privacy and Providing Banking Services to Those Who Cannot Access Banks

Another reason Bitcoin is valuable is because it provides an alternative way for people to transact with one another, without the need to give up their privacy or be accepted into a traditional financial system. Anybody who has an internet connection can hold, send, and receive Bitcoin. Bitcoin at its core is only software and allows billions of people who cannot open bank accounts to hold their wealth. What is not typically ignored by your Finance Bro are the +2.5 billion people who cannot open bank accounts because they lack access to a physical bank, proper documentation to open a bank account, or a basic education of what it means to store wealth (Antonopolous). Bitcoin solves this problem. Interacting with the blockchain provides pseudo-anonymity, meaning your financial information is private unless somebody connects your account number to your identity. This is because the blockchain is open, meaning any account number can be searched on the internet and the entirety of an account's transactions can be seen by anyone. This is where the pseudo in pseudo-anonymity comes from. People who claim cryptocurrencies are tools for money laundering conveniently ignore this fact. These critics are also unaware of the enormous amounts of money laundering done by banks, and that the number one currency used for money laundering is not Bitcoin, but the US dollar (Ammous & Antonopolous). Bitcoin is free to use for everyone and provides access to a digital method of storing value across the world without having to trust in any central authority. The fact that anybody can use Bitcoin without identification is not a disadvantage but a feature. Our financial lives should be private without being scrutinized by banks, as it always has been historically. I believe this is the misunderstood aspect of Bitcoin.

Consideration #3: Immutability and Finality

All transactions that have occurred on the Bitcoin network are irreversible. They are computationally impossible to reverse (barring future quantum computing advancements). This means that all funds you control and have received cannot be undone or changed by a centralized authority. There is a living proof of the transaction that will forever exist. The ability to publicly keep track of this financial information without it being able to be manipulated by those in power allows for increased financial freedom. Bitcoin is a technology that cannot be removed from the world, it is simply software released in 2009, regardless of whether governments ban its use.

In summary, Bitcoin provides an alternative way to store and exchange money in a way that is open, immutable, transparent, free, and decentralized. That is why it is valuable.

A note on sources

I regularly base my opinion on the excellent work produced by Andreas Antonopolous, Gavin Wood, Saifedean Ammous, and Michael Saylor. I try to cite them correctly throughout this article, although who exactly said what may have errors.

A note on sources

I regularly base my opinion on the excellent work done by Andreas Antonopolous, Gavin Wood, Saifedean Ammous, and Michael Saylor, and try to cite them correctly throughout, although who said what can get mixed up over time.

#1: We return to a gold standard. 

A ‘return to the gold standard’ is an argument made by economist Dr. Saifadean Ammous. Ammous argues that the need for a decentralized currency like Bitcoin may be unnecessary if we return to the gold standard. The gold standard refers to the dollar supply being fixed to the amount of gold held in reserves. In other words, the gold standard ensured the dollar’s increase in supply was restricted to the ability to mine gold. Gold is naturally scarce, divisible, and does not deteriorate, making it a good store of value and backing for the dollar. Bitcoin is like gold as Bitcoin’s design prevents its supply from being tampered with due to its decentralized consensus mechanism. It is divisible, scarce, does not deteriorate, and provides the added benefit of being cheap and fast to transport across far distances. The US dollar was taken off the gold standard primarily to finance WW1 as the financial demands for a world war lasting several years was not feasible with a currency backed by gold. The dollar was removed from this standard as an alternative means for funding the war without raising taxes significantly. Said differently, governments cleverly stole people’s wealth by changing the rules of the dollar by deeming it less valuable in the future by increasing its supply. The consequences of going off the gold standard have become blatantly evident by the reduction of the purchasing power of the USD by over 96% since the end of World War I. In the unlikely return to a gold standard, the need for a cryptocurrency like Bitcoin may become unnecessary. 

#2:  A different cryptocurrency becomes a common medium of exchange. 

Bitcoin is the first and most decentralized cryptocurrency. New cryptocurrencies are being developed that rely on new cryptographic techniques, consensus mechanisms, and designs. This allows for new innovations in computer science like decentralized applications or app-specific blockchains. In my opinion, the idea that another cryptocurrency will overtake Bitcoin as a means of exchange is not a question of 'if' but 'when'. There are three purposes of a currency: a medium of exchange, a store of value, and a unit of account. Antonopolous frequently adds ‘a method of control’ as a fourth purpose and I agree with his addition. Many cryptocurrencies are better means of exchange than Bitcoin and will eventually dominate Bitcoin. This is because less decentralized cryptocurrencies are more efficient as there is a trade-off between efficiency and decentralization, although a less decentralized currency is a less compelling store of value. For example, if you are investing in Ethereum, every software update that happens, your money is at risk. This risk does not exist in Bitcoin. 

The question arises, ‘How will Bitcoin be impacted when another cryptocurrency dominates as a medium of exchange in the world?’

The answer is that nothing will happen to Bitcoin technically speaking. Although, it may have a large influence on the public perception of the value Bitcoin provides as a currency if a different cryptocurrency dominates our perception and people begin using it as a store of value. 

#3 Centralization risks and human tendencies.

In a decentralized system, if one aspect becomes centralized, it may cause the system to fail. 

Scaling Solution Centralization:

If layer 2 and layer 3 technology succeed in making Bitcoin a durable means of exchange, it may result in the centralization of control of large amounts of the currency by companies that offer services on layer 2 and layer 3 levels. 

Pool Centralization:

If a small number of mining pools control a large portion of the hashing power, there is the possibility of collusion. 

Hardware Centralization:

The production of chips used for mining Bitcoin is controlled by a few companies. If a monopoly occurs, collusion between companies may interfere with Bitcoin’s decentralization. 

Human Tendencies:

Bitcoin is supported by a group of developers that are people who can be manipulated. While the developers alone cannot end Bitcoin, they can create polarization, support hard forks, and behave in ways that hurt Bitcoin's reputation as being ‘human-proof’.

#4 Quantum Computing.

I am not a cryptographer so my knowledge on this topic is limited. Bitcoin security could be compromised in the future because of advancements in quantum computing, although Bitcoin communities are already prepared to transition to quantum-resistant algorithms.

Market capitalization is a metric that attempts to measure a company’s total value determined by the stock market. This metric can then be used to provide a relative comparison between different companies. A cryptocurrency's market cap is calculated by multiplying the number of tokens emitted by the price of the token.

Example: 20 Bitcoins (in circulation) x $50 (price) = $1000 market cap. *Bitcoin's market cap is much higher in reality*

I believe that market cap is a poor metric for cryptocurrencies for the following reasons.

Reason #1: The goal of a cryptocurrency is not to have a large market cap.

The goal of Bitcoin is to provide a decentralized, immutable, open, neutral, and free-to-use currency to store and exchange value. None of these purposes are related to maximizing Bitcoin’s market cap. Antonopoulos describes this point clearly in one of his talks explaining that “Bitcoin was not created to be the richest currency.” This also extends to Ethereum as it attempts to improve upon Bitcoin by allowing applications and networks to be built on top of it, facilitated by its turing-completeness and virtual machine. Ethereum’s objective is also not to become ‘the richest currency’. This is one reason why other metrics ought to be used.

Reason #2: Comparing cryptocurrencies using market cap incorrectly assumes all cryptocurrencies are the same.

Some cryptocurrencies resemble shares in a company while others are the currency of a network. This difference results in market cap painting an inaccurate mental picture of a cryptocurrency’s purpose and success. It is more accurate to use market cap when comparing the value of projects that use a cryptocurrency as shares. This is with the caveat that the market cap of smaller cryptocurrencies can be artificially inflated.

Reason #3: There are better metrics to measure the success of a blockchain.

Bitcoin attempts to be a store of value and a medium of exchange. We can evaluate Bitcoin's success as a store of value by determining if people are buying and holding Bitcoin, similarly to how people treat gold. We can evaluate whether it’s a successful medium of exchange by analyzing the number of places that accept Bitcoin as a form of payment. This framework extends to the problems solved by Ethereum. We should evaluate the success of these technologies on the basis they succeed in fulfilling their intended purposes, not by 'being rich''.

The Dave Ramsey Show is a financial advice show that is one of the most listened-to radio shows in the US. I listen to Dave Ramsey and recommend his show. Ramsey published an article titled ‘Is Crypto a Good Investment’ which I believe misrepresents cryptocurrencies and blockchain. I will explain in detail where I disagree with Ramsey’s analysis. I’ve copied the relevant sections from the article and highlighted them in blue.

Full Article:  https://www.ramseysolutions.com/retirement/investing-in-cryptocurrency

“Is investing in crypto a good idea?

Nope.

Next question.

Okay, don’t get your tinsel in a tangle. Hang around, and we’ll dig into all the reasons why cryptocurrency is bad. You’ve probably heard stories of people making millions (or losing millions) investing in cryptocurrency. But here’s the million-dollar (or million-bitcoin?) question: Should you invest in cryptocurrency? Despite what every loudmouth on the internet yells at you from their digital soapbox, buying cryptocurrency isn’t a safe bet for your investing future. In fact, more than 80,000 Bitcoin millionaires who were living high on the hog saw their accounts drop several zeros during the crypto crash of 2022. Easy come, easy go, right?”

Characterizing a cryptocurrency as ‘good or bad’ is inaccurate as it is only a piece of software people interact with. It does not possess human qualities.

“What Kind of Investment Is Cryptocurrency?

Cryptocurrencies are digital assets people use as investments and to buy stuff. You exchange real currency, like dollars, to buy “coins” or “tokens” of a certain kind of cryptocurrency. You’ve probably heard of some of the big names in cryptocurrency: Bitcoin, Dogecoin, Litecoin and Ethereum. But there are actually thousands of types of crypto out there.

Crypto investors buy crypto and hope it goes up in price so they can sell it for a profit. You know, “buy low, sell high” and all that jazz. Investors might buy and sell Bitcoin or any of the other cryptocurrencies lots of times as the price goes up and down. Or they might stockpile it, planning for the day when it’ll grow into a fortune that will make all their digital dreams come true.

And in the last couple of years, some people were raking in lots of moolah by investing in crypto. But the crypto market was in a bubble, and the thing about bubbles is that they pop. And that’s what happened in 2022 when two cryptocurrencies (Luna and Terra) collapsed. Panic set in and the crypto market lost about $2 trillion in value.2 That’s 2 tril straight to nil!”

People buy cryptocurrencies for different reasons. One common reason is that people believe cryptocurrencies are a better store of value than the US dollar. This is because the rate of a cryptocurrency like Bitcoin going into circulation is not decided by a small roundtable of economists. Instead, its supply emission is coded into the software and is unchangeable. This reason is ignored.

“Cryptocurrency has an unproven rate of return. Cryptocurrency is exchanged person-to-person on the web without a middleman (like a bank or government). It’s like the Wild West of the digital world—but there’s no marshal to uphold the law.

Because crypto has very few regulations, there’s no pattern to the rise and fall of its value. You can’t figure out the changes or calculate returns like you can with growth stock mutual funds. There just isn’t enough data, or enough credibility, to create a long-term investing plan based on cryptocurrency. Don’t play poker with your financial future here.”

Criticizing cryptocurrencies for being unregulated is the equivalent of criticizing a Cheetah for being fast. Cryptocurrencies were created to provide an alternative method of holding value and doing finance out of the control of a centralized authority. This includes governments and banks. A core principle of Bitcoin is enabling true control and ownership of your money (self-custody) thereby providing greater financial freedom.

The lie we have been told that, 'you must hand-over your financial information and control to us for your safety ', is the same fallacious line of argumentation used by governments to justify incredibly intrusive data collection techniques for supposed safety. The fact that banks and governments cannot interfere with Bitcoin is a feature of the technology, not a limitation.

“Cryptocurrency has lots of unknowns. Crypto lives up to its name in that it’s pretty cryptic. Think about it: Nobody even knows who founded Bitcoin! Only a small percentage of people in the world really understand the blockchain technology crypto is based on. And ignorance makes you vulnerable.”

A person writing a paper about cryptocurrencies that fails to understand how the technology works, and then suggesting that ignorance makes the reader vulnerable is amusing. The author is better off writing, “I don't understand blockchain technology, direct your viewership to a more knowledgeable source”.

Addressing cryptocurrencies as ‘cryptic’ is a pet peeve of mine. Critics of cryptocurrencies are so ignorant that they are not even willing to learn why 'cryptocurrency' is the name of the technology.  Cryptocurrency comes from combining the word cryptography, or crypto for short, with the word currency. Cryptography is a branch of computer science that focuses on creating secure ways of transmitting information using different encryption techniques. The reason this is the word used in ‘cryptocurrency’ is because the network of a cryptocurrency is secured by cryptographic algorithms. To understand the value cryptocurrencies provide does not require a bachelor’s degree in computer science.

“We always tell people that if you can’t explain your investments to a 10-year-old, you have no business investing in them to begin with. You’re setting yourself up for a big mess.”

“Bitcoins are coins that run on the internet that cannot be controlled by anyone.” I think this is understandable for a 10-year-old.

“P.S. Even though it might seem like everyone and their grandpa is investing in crypto, most people say they’re still hesitant to put any money into it (72%) or don’t trust cryptocurrency at all (68%). One study showed that only 8% of Americans feel positively about crypto, which coincidentally is the same percentage of Americans who feel positively about The Bachelor franchise.”

People have been so successfully brainwashed by governments and banks that crypto is viewed as ‘sketchy’, and should not trusted. Bitcoin requires zero trust to be used, it is a trust-less system. It requires less trust than any other financial system today. It is a system of holding and sending your money to people without having to trust anybody.

“And hackers aren’t the only ones stealing crypto. FTX, one of the largest platforms for buying and selling crypto, went belly-up in November 2022 after its founder, Sam Bankman-Fried, was arrested and charged with fraud for stealing money from his customers’ accounts. FTX customers lost billions of dollars.”

This analysis is disingenuous at best. This crime was a result of a corrupt centralized system, not blockchain technology. People willingly handed their funds to a company to control. Blockchain allows you for the first time to have full control of your funds digitally. People who chose to trust FTX resulted in their funds being stolen. If anything, this point should reiterate the importance of true self-custody of funds.

“Crypto just seems to attract seedy characters. Now look, we’re not saying everyone who uses cryptocurrency is a bad guy who’s dodging the government and making shady deals on the black market. But if someone wanted to commit a crime and fly under the radar without being tracked, cryptocurrency is going to call their name.”

The number one currency used for money laundering in the world is the US dollar. Any person who characterizes a currency as a tool for money laundering has a hidden agenda. With any currency, a small number of people will use it for bad purposes. Arbitrarily characterizing a currency by one use-case is disingenuous.

Bitcoin is the first decentralized currency that is free-to-use, open, decentralized, trustless, neutral, and immutable. One of the main features of Bitcoin is self-custody, meaning true control of your digital money, similar to physically holding cash in your hand. This is not the same as using a banking app on your phone or computer. While they are both digital, what underlies these financial services is different.

Buying a Bitcoin ETF does not provide the same control of your funds compared to buying and holding Bitcoin on the Bitcoin network. Instead, you are entrusting the system of traditional finance to ensure your funds are secure and accessible. Bitcoin was created as an alternative to the current financial system by doing finance out of the control of banks and governments. By buying Bitcoin through the current financial system, you are unsubscribing from the best features of the technology. In my experience, there is resistance in learning how to buy and hold bitcoin in a crypto wallet as this is more work than simply adding a Bitcoin ETF to a portfolio.  

Here are some reasons I suggest holding Bitcoin as it was designed, instead of buying a Bitcoin ETF or holding it on any other financial service.

#1: You are unsubscribing from a predatory financial system.  

Banks actively participate in money laundering, predatory lending, and misusing customers funds. Banks also are not transparent with their customers. They do not inform customers about their practices and are unwilling to provide services to many people, such as those who do not have proper documentation. Buying and holding Bitcoin on the Bitcoin network means participating in a financial that likely more closely resembles your morals, assuming you believe everybody should be able to save and invest their hard-earned money. It also means entertaining a system that anybody can be a part of. There is no requirement to be able to open a crypto bank account. More than two billion people in the world cannot participate in the current financial system, and by buying Bitcoin, you are participating in a system that lets everybody save and invest, not just those who are privileged and can access today’s banking services. I believe banking should be a right, not a privilege. Taking part in Bitcoin directly contributes to a system of finance that does not discriminate. 

#2: You control your money unequivocally.

When banks and fintechs hold your Bitcoin for you, they also can restrict access to your funds. They also may become bankrupt, suffer cyber-attacks, or commit fraud. There are a plethora of risks that are evident in the terms and conditions when using a bank's or fintech's services. Holding Bitcoin does not require you to skim over hundreds of pages of legal documents citing risks before using its services because it is a decentralized network that is incorruptible. It is immune to such fraud, cyber-attacks, and bankruptcy, among other risks.

#3: If you invest in Bitcoin because of the value it provides, take part in that value.

Bitcoin was designed for people to use, not to be a speculative asset. Holding Bitcoin on the network will show you what it means to interact with the technology you are investing in and allows for more control over one's funds in the case of hard-forks.

Reference:

I base a lot of my opinion on the incredible work done by Andreas Antonopolous and recommend his work. 

The rationale for investing in Ethereum and Bitcoin is different, so to directly compare them is misleading. A more appropriate approach is to compare Ethereum to other blockchain technologies like Solana, NEAR, Cosmos, Avalanche, or Algorand. This is because the problems that Ethereum and Bitcoin were built to solve are different, and other blockchains are closer in competition with Ethereum than Ethereum is with Bitcoin. 

Why I believe Bitcoin is the best investment:

I believe Bitcoin is a better investment than all previously mentioned cryptocurrencies because it was designed to be a long-term store of value similar to gold. The Bitcoin software has been minimally altered, unlike the software of other blockchains. Bitcoin was created by an anonymous person and is the most decentralized cryptocurrency. The anonymity of the creator contributes to Bitcoin's decentralized nature, unlike other blockchain projects which have figureheads. I believe Bitcoin is the most likely cryptocurrency to be adopted as a store of value because it has the first-mover advantage over other cryptocurrencies. Other cryptocurrencies tend to follow Bitcoin's price action. The principles that Bitcoin is based on have never been sacrificed by changes to its software. 

I’ve included a few arguments in favour of investing in Ethereum I find interesting. It is not an exhaustive list. 

#1: Ethereum is undervalued because it has an ecosystem of applications and networks built on top of it, with the possibility of facilitating the first successful decentralized application at scale.

#2: An increasing number of applications rely on Ethereum as a backend, and this may increase Ethereum’s value in the future.

#3: Ethereum, or a cryptocurrency on top of Ethereum, will overtake Bitcoin and dominate as a medium of exchange, increasing Ethereum's value. 

#4: If an Ethereum compatible blockchain is adopted as a new method to keep track of some type of asset, it may increase Ethereum’s value. 

Bitcoin is the first currency out of the control of people, it is free to use, forever unchangeable, designed to be limited in its supply, and cannot be controlled by any government; a way to hold your money where nobody can control it, like holding cash in your hand, but instead, a digital cash. 

A blockchain is just a database. You can think about a blockchain as a spreadsheet with transaction information. 

No. 

Bitcoin and Ethereum solve different problems. If you are looking to make an investment in a crypto-asset that most closely resembles investing in a long-term store of value, Bitcoin is better. If you are looking for a short-term gain in the crypto market, I would recommend going to the casino instead.

Dave Ramsey. 

I recommend reading 'Mastering Bitcoin' by Andreas Antonopolous. It's free to read online and provides a technical breakdown of Bitcoin.

Blockchain is complicated because it is heavily based in computer science, economics, and game theory. If you haven't studied these topics, naturally these terms and ideas will sound foreign.

Bitcoin's volatile price comes from people speculating on it going up or down, its supply not actively being adjusted by economists, and as a result of it not adopted by a large number of people. Its volatility has fallen significantly since its release in 2009. 

"If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes." - Warren Buffet. In other words, if you are trying to get rich quick, you are gambling.

I believe Bitcoin's price is irrelevant. Bitcoin's price is a result of speculation. I am interesting in seeing the degree to which Bitcoin succeeds in fulfilling its principles of openness, decentralization, transparency, immutability and being free and the degree to which people begin (or not) to adopt it as a store of value. Sacrifices made to these principles or a failure to see a visible adoption of Bitcoin as a store of value is more detrimental than price fluctuation in my opinion. Most of this line of thinking I've borrowed from Andreas Antonopolous. 

My advice is to never trade crypto.