As more buyers flood the crypto markets, the mainstream narrative has largely defined this as a moment of intense speculation for assets of dubious value. For many, cryptocurrencies are just Chuckie Cheese tokens for Libertarians and drug cartels — “faith” based, pretend money created out of thin air.
Bitcoin, the center of the storm, is largely portrayed as a fiat currency backed only by the unreasonable daydreams of nerds and tax dodgers. Seen through this lens, the assumption of crypto markets being in the midst of a bubble and bitcoin being a Ponzi scheme makes sense if you assume bitcoin’s only value is the willingness of an ignorant buyer to buy it. Those who wrongly hold this assumption might be surprised to hear that bitcoin isn’t a fiat currency at all, but is actually consumable and represents real assets.
People narrowly define bitcoin as “digital money”. The word “currency” in cryptocurrency has helped us conceptualize a digital object as having value and being tradable , but it’s also encouraged the false perception of cryptocurrencies being the digital version of paper money. This is similar to the early web being once described as a digital newspaper. Yes, the web can act as a digital newspaper, but it isn’t actually a digital newspaper. And these digital tokens labeled as currencies, can be currencies, but they’re not currencies in the strictest sense of the word.
To explain, lets start with something we’re all familiar with. Google has a search engine which many of us use every day. That search engine is the frontend product of a network of servers, run and developed by Google employees who are incentivized to make their systems as efficient as possible. As an investor, if you’d like to invest in this search engine and further incentivize its productivity, you literally can’t. What you can do instead is buy equity in Google the company (now Alphabet) , who owns the search engine. But Alphabet can do with your capital whatever they wish. They can use that money on their robot cars, balloon based internet, or just pay more dividends. But imagine if instead of the company, you could invest and own the underlying productivity of Google’s network, independent of the risks of the company itself. While this currently isn’t possible with Google, it is possible with cryptocurrencies.
The Bitcoin system operates on a network of servers who’s computing power is generated by service providers. These service providers are called “miners”, who are incentivized to provide and add computing capacity by being granted bitcoin for their services. Like other open source platforms, the Bitcoin system is also developed by teams of developers who further enhance its productivity. By buying bitcoin you are buying a share of the overall productivity and the utility of that network. And yes bitcoin has actual utility.
Since digital objects are conceptual, it’s often difficult for people to understand their value in comparison to more tangible assets. However, the value of the tangible assets we’re more familiar with, like gold, are often due to their conceptual properties. Most of gold’s value is not due to its physical characteristics, but rather its scarcity. For the same reason, bitcoin is a prime candidate as a store of value. Unlike gold, bitcoin lives in the low entropy world of a rules based system that guarantees far more scarcity than gold. By low entropy I mean that fewer events are possible with bitcoin. Unlike stores of gold which can be discovered or over-mined causing its value to decrease, we can accurately project future inventories of bitcoin for the next century. Although its a digital construct, bitcoin has the same properties that make gold valuable and is even able to provide a better store-of-value solution with zero holding costs.
This leads to another valuable characteristic. Unlike most stores of value, bitcoin can be consumed. While you’ve maybe heard of the Bitcoin system using a blockchain, you may not understand what that means. While I’m not going to explain blockchain here since many other people can do a far better job, I can illustrate what makes it so valuable. A blockchain is essentially a distributed database and like all databases, it’s able to store information. Bitcoin’s database is immutable, which means once a record, or in bitcoin’s case, a transaction, is entered, it cannot be changed. Along with the transaction details, you’re also able to add other information as an add-on to the change order. Much like a physical check leaves a little line for you to add a note to yourself, bitcoin transactions allow users to append arbitrary information. If you wish to store data on an immutable database, that unlike most of the datastores commercially available, cannot be accessed by a third party, you are able to do so through bitcoin.
The price of bitcoin and other popular cryptocurrencies is not simply a question of buyer sentiment. By purchasing these cryptocurrencies you are securing units of their networks’ productive capacity and the utility of their systems’ unique characteristics. As an investment, you are gaining the rights to consume or trade this productive capacity, and should these networks become more useful in the future, you stand to gain from your early investment.
You also, of course, inherit their risks. There are many challenges to the viability, functionality and security of every cryptocurrency. This is essentially venture capital, and while it can give you fairly high returns, it can also go to zero. Is the price of bitcoin overvalued? Maybe. But the answer is not a definite no. Like with any asset, it’s worth understating what it is before attempting to project its value . To simply define it as a fiat currency and attempt to value it as such, would logically lead you to conclude that the current price can be nothing less than a bubble. If, however, you consider the role of servers, developers and networks have in your day to day life, you may acknowledge the viability of a new network paradigm and consider investing in its future.
