On The Intrinsic Value of Bitcoin
Not a day goes by that I don’t hear someone from Wall Street exclaim that Bitcoin has no intrinsic value and, therefore, everyone who buys it is an idiot. Bruce Flatt, CEO of Brookfield Asset Management, for example, recently said, “I don’t know what [Bitcoin] is. But it has no intrinsic value in our definition of intrinsic value. If someone else wants to speculate on it or invest in it, it’s for them. It’s not for us.”
Here is my retort…
Dear [skeptic’s name],
Have you ever seen a Jackson Pollock painting? I’m sure when you looked at one, you thought, “That looks like a three year old threw some paint on the canvas.” Most people think the same thing.
That criticism still will not erase the fact that there is a $45 billion fine art market that has included in the past the sale of Pollock #5, which last sold for $145 million (rumor has it).
Pollock #5 has nothing “backing it,” just a belief among art critics, dealers, collectors and museums that Pollock’s work is worth something. As with all fine art, it has no “intrinsic value” to use a Wall Street term, generates no free cash flow or dividends, does not take out debt to get tax breaks, and has no government backing. Still, there are people who will pay for Pollock #5, and others who will pay more or less for it at a future point in time.
Bitcoin is a Jackson Pollock painting. It represents “trust in technology” rather than “trust in government.” And, as of this writing, there are roughly 300,000 buyers and sellers each day who believe it’s worth something. In fact, there are 20 million Bitcoin digital wallets on the Blockchain desktop/mobile platform alone.
The question is why so many millions of people are willing to buy and sell Bitcoin? First, the Bitcoin protocol has never successfully been hacked (though some third-party exchanges that facilitate the buying and selling of Bitcoin and other cryptocurrencies famously have been). The Bitcoin protocol is an elegant technological solution to the “Napster problem” (called the “double spend problem” of digital assets in the blockchain space), which prohibits an individual from making infinite copies of a digital asset and distributing (or selling) them widely. Once you sell a digital asset housed on a blockchain to someone, you cannot give (or sell) that same asset or a copy of that asset to someone else. To quote our former vice president, that’s a BFD.
When Thomas Edison began selling his direct current system to the world, he was not the first person to be playing with electrical currents, dynamos, and light bulbs. Various tinkerers, scientists and engineers located around the world were trying to find solutions, patent them and bring them to market. But what Edison did was bring together a bunch of different pieces into a complete system that we all know went on to change the world (eventually under a different standard advocated by his primary competitor, George Westinghouse Jr.).
When the individual or group named Satoshi Nakamoto released the “Bitcoin: A Peer-to-Peer Electronic Cash System” whitepaper to a cryptography mailing list in October 2008 (and Bitcoin itself in January 2009), Nakamoto was bringing together various components from different disciplines—public keys as identities, Byzantine fault tolerance, digital cash and linked timestamping, among others — to solve a problem: how to allow digital payments to be sent directly between parties without needing a financial institution to intermediate. In trying to solve a problem that had vexed folks for years, Nakamoto unleashed an incredibly elegant solution to a lot of other problems — the aforementioned double-spend problem that will transform the movie and music industries, proof of provenance of assets that can be tagged with identifiers (which will transform supply chains), reduction of information asymmetry in transactions caused by one side withholding information that should be available to both parties, and even micropayments for amounts that normally would be held in escrow until reaching transaction thresholds before payment.
Digital currencies hold value because they help solve problems through technology. Some have more value than others. And certainly, the market is going through the equivalent of price discovery right now, which means that some things that should be very valuable are undervalued and other things that create little value are overvalued. Wall Street doesn’t bat an eye when a stock goes up 80% on the first trading day of an IPO. These underpricing “pops” in value are the largest when the offerings are the smallest, when price discovery is the most difficult due to lack of information. That’s what the market is experiencing today in the cryptocurrency space.
Technology has spawned a borderless world, where firms can work 24 hours a day to meet clients’ needs. Technology has also altered the medium of exchange itself. Thousands of people around the world actually are paid wages in government-backed currencies to mine virtual gold in the online game World of Warcraft. Players who would rather spend time killing monsters in that virtual world pay real cash to buy that virtual gold from those miners, which allows the players to better equip their virtual characters. This is real money changing hands for digital assets that are only usable on a particular gaming platform. It is estimated that the virtual items market surpassed $52 billion in 2016. Also of note, nearly 60 million people viewed the League of Legends World Championship in 2017, making it one of the most-watched live sporting events of any kind on the planet. (For reference, according to Nielsen live-plus-same-day data, the 2016 Stanley Cup series between the Pittsburgh Penguins and San Jose Sharks averaged just 4 million viewers across the six days.) Digital assets have value and people around the world are willing to not only pay for them, but also pay to watch other people play with digital assets that they themselves will never own.
Before Nixon exited the Bretton Woods agreement in 1971, nations settled their accounts in U.S. dollars convertible to gold at an exchange rate of $35 per ounce. After redemption demands for gold outstripped the gold the U.S. had on hand, Nixon pulled out of the agreement, setting into place a new financial structure for the world — one in which the U.S. dollar was backed by nothing but trust that the U.S. government would pay its debts. Few on Wall Street ever believed that gold would one day skyrocket to over $1,000 an ounce (let alone anywhere near $2,000). But it did.
Like Bitcoin, gold throws off no free cash flow or dividends, has no government backing, and does not allow its executives to ship their personal pets on its corporate jets. But as Jim Grant, editor of Grant’s Interest Rate Observer said in a September 2011 interview in Barron’s, “If a bubble connotes absurdity, what is absurd are the monetary conditions that supported this gold bull market. Gold is an expression of the world’s justifiable distrust of the way our central bankers conduct their affairs…. What I do think is gold is simply the reciprocal of the world’s faith in the institution of managed currencies. It is one divided by T, where T stands for trust. And trust is a shrinking number and will continue to shrink. Therefore, I am still bullish on gold.”
In a world in which the U.S. long-term federal debt actually has been downgraded due to political posturing by an idiot in the U.S. Senate and Zimbabwe can experience 500,000,000,000% inflation, is it really surprising to learn that people have turned to digital stores of value and digital currencies (both blockchain-based and gaming-based) that politicians cannot undermine by overpromising stuff to voters?
Bitcoin was the first full implementation of an exciting new system of solving previously intractable problems through technology, and the foundations that it lays will transform the world. The people who are buying Bitcoin are enjoying the elegance of the solution, and just like with those who enjoy viewing a Jackson Pollock painting, they also enjoy watching other people pay a premium over what they paid for it.
