What Gives Bitcoin Value? How to Make Your Token grow.

Bitcoin is currently trading at over $7,000 a coin. In the next ten minutes I can create 21 million new Ethereum or Waves tokens. They will have the same features of Bitcoin — blockchain, decentralised, no third party verification — but they will probably be considered worthless. Why does Bitcoin have value but my new tokens do not?

In my last post I outlined that price and value are functions of belief. They are human creations. Currencies in particular only have value because we imbued them with value. However I also pointed out that saying price and value are functions of belief is NOT the same as saying they are vapourware.

Here is a guide to how to create value in your coin or token. Much of what I say can also be found in the Bitcoin Enhanced White Paper.

Let us start with three coins: Bitcoin, Monero and Dogecoin. Their market caps are $125 billion, $2.2 billion and $600 million respectively.[1] Each of these pieces of crypto-graphic code has a set of beliefs that underpins its price. Likely beliefs for the coins include:

Bitcoin: peer to peer exchange, greater personal autonomy and freedom

Monero: privacy

Dogecoin: fun, helping out.

It is beliefs such as these that give these coins their current price. No government has compelled their use. They are not backed by assets. So the source of worth is clear. People have created this value from the things they believe in.

Tip: Ensure your coin stands for something people believe in.

Notice these beliefs do not have to be like a corporate Purpose and Values statement. The coins are simply structured to reflect these beliefs. Bitcoin was the first trustless currency built on the blockchain. Monero’s code has focused on individual privacy. Dogecoin has kept its price low so it can be easily used for online tipping and has participated in do-good campaigns such as getting the Jamaican bobsleigh team to the Olympics — the beliefs of the coins are embedded in the way they behave.

Tip: Make sure your coin is structured to reflect its core beliefs, and make sure you believe these things yourself. Bullshit gets you nowhere.

Just because this link between belief and the price of a currency is not code you can publish on Github does not mean it is not real.

In the 1990’s a management book came out called Built to Last. In the book authors Jim Collins and Jerry I. Porras outlined how companies with a purpose beyond just making money performed better than their peers. In follow up research looking at the S&P500 group of companies, their claim was substantiated across a range of metrics including net profit margin, return on assets, return on equity and return on sales.

[1] https://coinmarketcap.com/

The performance of strong culture firms compared to weak culture firms from the S&P 500. Source: https://drive.google.com/file/d/1zkK3x5ruc_iOZUYVeFQJGmZHnVAunBmS/view?ths=true

Tip: Values (belief) are the source of value (price).

People’s strongest beliefs tend to be transcendent — something that goes beyond simple self interest. For example, Bitcoin was not the first to encapsulate the desire for greater freedom and self-determination. The Boston Tea Party, the Declaration of Independence, as well as the nationalist movements in many countries over the last hundred years have been driven by the same desire. While Dogecoin’s playful, feel-good values around sharing and the appreciation of others may sound whimsical, they are still about enabling a person to move beyond themselves.

Dogecoin encapsulates beliefs of fun and sharing

The transcendent nature of our strongest beliefs suggests that making more money is not the best way to promote your coin. That is not to say that self-interest and greed to not play a part in determining the price.[1] But these motives are unlikely to sustain your project in the long run. Your currency has to stand for something else, have other beliefs embedded in its fabric for it to have the best chance of succeeding over the long haul.

The follow up research into S&P500 companies also showed that the largest companies were also those driven by a strong culture of more than profit.

Tip: Transcendent beliefs enable success over the long term.

[1] Cole Garner has mapped the role of greed in the successive Bitcoin bubbles. “The Market Cycle Wears No Clothes: A Psychosocial Field Guide to Cryptocurrency’s Most Important Pattern”. https://medium.com/@cryptology.jones/marketcycle-4e5407d0c68

As S&P 500 firms grow in size a strong culture becomes increasingly important. Data as of 2003. Source: https://drive.google.com/file/d/1zkK3x5ruc_iOZUYVeFQJGmZHnVAunBmS/view?ths=true

Why does belief create price and better financial performance? Why are transcendent values more effective than self-interest? The reason takes us to the heart of the value-creation process — transformation

It is likely that companies with a purpose beyond profit perform better and last longer because there is less friction between people. People are able to align themselves with the firm’s purpose. When most people are able to do this then a transformation occurs — people cease behaving simply as individuals and start participating as a whole. This change in the way the company, or currency, operates is called a phase transition. It’s a critical element in the value creation process.

Phase transitions also occur in nature. When the plug is pulled from a bath the water starts to rush out. But very soon the water molecules align themselves in a whirlpool or vortex structure. A phase transition has occurred and the result is that the water flows out of the bath faster.

Vortices of water form from the alignment of water molecules. The structure enables water to flow faster — the system has improved its performance.

In the Bitcoin Enhanced White Paper I suggest you can see successive phase transitions taking place in the price history of Bitcoin.[1] Bitcoin’s price slowly grew as coin holders increased their alignment around the core values embedded in the project. At a certain point others came in looking for a quick profit. Because they were not aligned with the core beliefs of the coin a bubble occurred and the system lost coherence. When the new people either began to understand what they had invested in or left, the price began to rise again as the system again went through its phase transition and re- established its coherence.

Tip. Create enough alignment around the beliefs of the currency for a phase transition to occur. This gives stability and longevity. In the early stages expect the currency to go in and out of the aligned state — you will see this reflected in price bubbles.

Creating a phase transition may not be easy. Over 1,000 crypto projects have failed already in 2018.[2] They can be added to the list of 590 dead fiat currencies. [3] Chances of success are likely to improve once people are conscious of the role of belief and the importance of system wide alignment for their project.

Built to Last companies took the alignment process very seriously, growing their own leaders and hiring people who “fit in”. Coin drops, Foundations and T-shirts are just some of the ways crypto-currencies seek to create and maintain this alignment around their project. Whether they succeed or not one thing is clear — vapourware and belief are not the same. Vapourware offers nothing while belief is the basis of Bitcoin’s value.

[1] https://bitcoinenhanced.io/

[2] https://ethereumworldnews.com/more-than-1000-cryptocurrency-projects-have-failed-in-2018/

[3] https://trader2trader.co/2012/11/28/list-of-590-dead-currencies-demonetized-r-i-p/