The intrinsic value of Bitcoin
Very often, people argue that Bitcoin does not have a “real value” because it is not backed by anything. But those same people probably haven’t considered that, in fact, the “real value” of the world’s fiat currencies is also zero. Our home country of Switzerland was among the last to move away from the gold standard and sell off their gold — and at a very bad time too considering the low price price of gold then. These same people might also say that you can’t eat gold, or that gold does not pay dividends. You can’t eat cash either and, between negative interest rates and inflation cash is even worse than gold these days when it comes to dividends. However, this article is not meant to become another rant about devalued fiat currencies or more unfair treatment by the Wall Street fraternity; the point here is to think about what actually makes something valuable.
What makes gold “valuable?”
Bitcoin is sometimes described as “digital gold.” Of course, such a statement has the goldbugs jumping for their guns and crying foul. Nonetheless, there are many valid comparison points. Like Bitcoin, gold is difficult to mine and its supply is limited. Gold also has important physical properties that make it incredibly useful, such as its efficient electric and thermal conductivity, its resistance towards most chemical reactions and acids, its anti-bacterial properties, etc. By nature of its rarity and its usefulness, gold is valuable because it is needed and because it is hard to get. If you want to get your hands on some gold, you basically have two choices. You can do it the old fashioned way and take a shovel, dig-up, sieve, and refine the raw gold. Let’s not factor in the time it takes to discover a sufficiently large deposit, nor the inefficiency of a single miner. The effort and time it takes to unearth the desired amount of gold has an equivalent amount of energy, or simply an equivalent cost. Not much gold is left above the ground, and the amounts that are just aren’t sufficient for industrial mining operations. Typically, mines today have shafts going thousands of meters into the earth. Perhaps this illustrates even more the unavoidable price-tag per ounce for a rare, needed material that is literally wrestled from Earth’s crust. And of course nobody who invests 1000 USD to do all that work and mine an ounce of gold would be willing to sell it for 900 USD. The amount of resources that are necessary to mine it create a natural starting point for the price. Mines that operate at a loss won’t be in operation for very long.
If you don’t want to go through all that trouble of going out and digging for gold, paying with your time, energy, and resources, but you still want to obtain gold, then there is just one other option; you have to buy it from somebody who prefers money over metal. Either the seller, or one of the previous owners of this lump of gold had to invest their resources in the first place. As we discussed above, the gold did not just pop into existence by wishful thinking; every piece of metal that has already been mined does not need any more energy or resources. In a sense, it “stores” the resources needed to mine and refine it, absorbed as part of the metal’s value. These resources — in essence the energy — cannot be released again, of course. Gold is not a battery of some sort. But the energy would be needed otherwise if that piece of metal was still in the ground. Undeniably, there is some real value in gold. Resources, especially energy, are real values.
Can there be digital gold?
Now, let’s take a look at Bitcoin, or any other crypto currency that has been “mine” by a POW (proof-of-work) algorithm, which is often described as a wasteful algorithm. Just a side-note: erecting a 5m thick concrete wall around a bunker to protect the precious metal that’s stored inside and employing an army of guards to nanny the precious bars 24x7 could be regarded as wasteful.
Bitcoin, just like gold, has some additional properties that make it desirable. The underlying blockchain technology that makes Bitcoin possible is the safest database in the world. It is protected and maintained by an enormous global army of decentralized computers that can detect every single bit that is not in its proper place. It has a practically unbreakable history which can be used to record or notarize real-life events and facts, and you can use this blockchain to build your own payment system, or make use of the existing one that came with the Lightning network upgrade. As Bitcoin is digital, it cannot have any physical or chemical use cases like gold, but still these extra digital features are valuable to people because they aren’t available in any form other than blockchain. And in both cases, whether we’re talking about the properties of gold or the properties of Bitcoin, you must have some in order to benefit.
Much like gold, if you want to have Bitcoin for one or another of these reasons, then you have two ways to go about getting some. You can either set up some mining gear and mine it, or you can buy the Bitcoin from someone else who prefers the money to the Bitcoin. Again like gold, mining Bitcoin used to be a lot simpler than it is now. In the beginning, when there was almost no competition, it could be done at your desk with a home PC. There was also a time when gold could be found without ground-penetrating radar and excavators. You could find it in the rivers and mountainsides with little more than a pan and a shovel. That gold is now probably part of someone’s necklace or bullion or bar. (Or maybe part of a sunken treasure still waiting to be found.
It’s much the same with Bitcoin. Many of those early bitcoins are now part of someone’s fortune, or tucked into a deposit held by Grayscale or the Vinklevoss bros., or maybe even lost forever in a forgotten paper wallet. The energy cost for mining — and just as we did with gold we’ll ignore the fact that it takes a lot more than just a home PC these days to mine Bitcoin — sets the range of the Bitcoin price. Miners simply turn off their equipment when they get to the point where they would make a loss anyways.
Intrinsic Value is a Universal Truth
It’s funny, but true, to think that Bitcoin is also a store of the energy and resources that went into its creation, and that this fact contributes to its inherent, intrinsic value. It’s a law of the universe that you can’t just release that energy back into the air (or do something more “meaningful” with it as some outspoken critics would say) in much the same way that you can’t release all the energy embodied in gold by it’s difficult production process. But still this value is there, because it saves you the same amount of time, energy, and resources needed today to mine it all over again yourself.
This same fact goes for anything precious or valuable. The only important factor in the whole equation is how badly you need these precious things: Bitcoin, gold, platinum, etc. — it doesn’t make a difference. Whether you need them for their properties as a currency, a medium of exchange, or for their inherent characteristics, is your own business. Most of the people who have no use for Bitcoin don’t understand it, and the same can be said about gold. This makes gold and Bitcoin spiritual twins; one has been born into the physical world, the other into the digital.
