What do Bitcoin and the US Dollar have in Common?

Apart from being currencies is there anything else that Bitcoin and the US dollar share in common? Yes. Both have no assets backing them. Since the US dollar left the gold standard in 1971 it has had nothing to support its value. If the dollar collapses dollar holders have no recourse. They will lose everything.

Bitcoin is the same. So is every other crypto and fiat currency I know of with the possible exception of the Venezuelan Petro . None has underlying assets supporting them.

With no underlying assets does that make investing in these currencies risky?

Before answering that question let us ask another: what gives Bitcoin its value?

The initial answer on my lips was that Bitcoin’s value is based on its ability to enable peer to peer transactions without the need for a central authority. Right? Wrong.

I can create an ERC-20 or Waves token in minutes. They also would enable peer to peer transactions without the need for a centralised authority but they would be considered worthless.

So what gives Bitcoin its value? The answer is belief. People believe the token can do these things. Bitcoin’s price is not the result of a feature of the token — something external to people that confers value. It’s something internal, something people confer from within themselves.

This is the often overlooked takeaway: value is a function of belief. It is what we believe about something that gives it value.

Image Credit: http://ericksonian.com/reality-about-beliefs

As more people believe in Bitcoin, that belief gets easier. A little like the 100th Monkey effect, at first that belief is passed on person to person. Then at a given point something happens. The belief goes mainstream. In science this point is called a phase-transition, changing a system’s properties so that its components become more aligned. Because so many people now share the same belief it becomes easier simply to accept the belief as your own than to oppose it. The belief in the value of something has acquired durability.

At a critical point belief goes mainstream giving the system robustness

This durability helps to answer the question whether investing in currencies, fiat or crypto, is risky. At a certain point the value of a currency is taken for granted. It then takes a significant shock for the currency to lose its value. Historically currencies die due to hyper-inflation, political change or war. Bitcoin could lose its value overnight if its blockchain was hacked. These are risks, but the point is that once the belief in value passes a critical threshold the currency has resilience — something else that Bitcoin and the US dollar both share in common.