The Bitcoin Value
by Rodrigo Borges and Alex Buelau
Cryptocurrencies, particularly Bitcoin, have gained a lot of attention from the media, especially the media specialized in finance, due to Bitcoin appreciation along the last 12 months. Many financial analysts discuss about Bitcoin nature, absence of financial backing, lack of controlling agency, and lack of regulation; but few analysts try to present the reason for Bitcoin’s recently quotation, reaching US$ 10 thousand. Price is determined by demand, but is high demand just reflecting expectation of future price booms, as many classical economists say, or is there anything beyond that?
Imagine if, when Internet came out, people were allowed to buy fractions of that technology? How many people would like to own a little bit of the famous “http” protocol that makes the Internet as we know it today? How much would that be worth?
The natural way of most people when facing a change of great magnitude is to deny it, without at least going deeper into the subject. This is not different with Bitcoin. Thinking about Bitcoin and analyzing it with the mentality of a traditional financial asset will certainly lead to questioning its value, but we are facing a technological revolution, and, like any great change, it requires us to broaden our vision, so that we can see the “new”.
Thus, what we propose is an analysis with the mentality adjusted to the novelty, to allow us to understand the real value of Bitcoin, briefly analyzing its social, economic and legal aspects.
When we talk about Bitcoin, we must clarify that there are two fundamental parts of technology: Bitcoin currency, which runs on a decentralized network of computers, officially called bitcoin network (with a lowercase “b”), and the Blockchain system that makes it all possible.
Blockchain system is the technological innovation that made possible Bitcoin and other cryptocurrencies like Ethereum, Ripple and others (there are over a thousand cryptocurrencies), but Blockchain proved to be not only useful as a payment system. Some countries and companies have used Blockchain technology to better control public spending, raise funds with token issuance, improve real estate transfer records, etc. Blockchain, itself, already has value because of its various uses and enormous future possibilities.
Because it is an open system, Bitcoin and most of the other cryptocurrencies that use Blockchain, act as a platform, allowing easy integration with any other projects and solutions for the most varied sectors of our society. Anyone with programming knowledge can interact and develop products and solutions using blockchain technology, at virtually no cost, allowing the emergence of innovations on an exponential scale. In addition, being open source eliminates many of the risks and uncertainties typically associated with centralized solutions, because anyone can review the source code suggesting improvements or identifying potential security issues.
Bitcoin, being the first and most widespread cryptocurrency, is currently used as “reserve currency” in said industry: practically everyone involved in cryptocurrencies have Bitcoins; all services that accept cryptocurrencies accept Bitcoins, and the price of other cryptocurrencies is commonly accounted for in Bitcoins.
Progresses brought by Bitcoin will reflect on society as a whole, since technology allows a wide range of new functionalities, among them the elimination of intermediaries in any type of transaction, including the ones in financial sector. Nowadays, to carry out financial transactions, we resort to entities of the financial system: we use paper money issued by governments, or digital money controlled by banks, which act as intermediaries.
Financial institutions and governments, by virtue of sector regulation and control, enjoy the trust of society to mediate their payments and transfers of resources. They are responsible for validating and verifying all financial transactions carried out electronically, avoiding the risk of “double spending”, making sure that funds are actually transferred from one person to another, as well as responding to any inconsistency or problem occurred in the transaction, often charging high fees for these services. Governments often abuse this power, see the freezing of savings accounts in Brazilian government in 1990, and the repeated cases of corruption that afflict Brazil.
Using the financial system, in the current molds, we give up our absolute freedom, and delegate trust to corporations/economic conglomerates. In the past there was no alternative because a centralizing agent was necessary, always creating the risk of abuse of power. But, just as Internet has democratized access to information, Blockchain has democratized access to the financial market.
Bitcoin, through Blockchain, has solved the issue of “double spending” without the need for an intermediary (role of financial institutions in “traditional” transactions), removed the trust factor of banks, or rather conferred each Bitcoin holder the power to freely make transfers, regardless of value and without limits, at negligible costs. Said technology has taken freedom, once restricted to physical operations, to the digital world. We are again the only ones responsible for our attitudes, and the only ones responsible for controlling our wealth, without the need for a centralizing agency.
Several analysts say that Bitcoin is a bubble, basing their analysis on technical issues from traditional financial market. The reality is that nobody knows for sure if we are facing a financial bubble, but from the technological, social, economic and legal point of view, we are undoubtedly facing a paradigm shift, which will continue to grow and be developed, even if there is an overflow of this alleged financial bubble.
Innovators around the world, from Silicon Valley to Moscow, from Germany to Africa are creating companies, projects and new solutions to old problems using Blockchain, Bitcoin and other cryptocurrencies. In 2017, companies around the world raised more than US$ 3 billion in investments using ICOs (Initial Coin Offerings), a form of financing by using cryptocurrencies to finance new ideas and projects.
Thus, the great value of Bitcoin is having created a network of motivated people, who believe in a better future, where rules are the same for everyone, information is transparent, power is decentralized, and good ideas are easily executed, financed and rewarded.
- originally published the Portuguese version by Thomson Reuters in December 2017
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Rodrigo Caldas de Carvalho Borges. President of the Entrepreneurship and Startups Committee at OAB (Brazilian Bar Association)/SP — Pinheiros. Partner of LLM — Lucas de Lima and Medeiros Advogados. Specialist in Blockchain and Network Design by Blockchain Academy. He currently takes a specialization course in Blockchain Strategy at Saïd Business School, at OXFORD University. Master of Laws in Corporate Law by INSPER. Specialist in Digital Law and Startups by INSPER. Specialist in Mergers and Acquisitions by FGV/SP. Bachelor of Laws by Pontifícia Universidade Católica de São Paulo — PUC/SP.
Alex Michaelis Buelau., CEO and co-founder of Coinschedule.com, the largest ICO (Initial Coin Offerings) website in the world. An early adopter of cryptocurrencies, he has been a Bitcoin miner since 2013 and has taken part in the development of several cryptocurrencies, including NXT and Waves.
