Bitcoin’s True Value
Blockchain may well be the defining technology of our generation. But when Satoshi Nakamoto first dropped his whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” it met little circulation and was only discussed among those entrenched in the cryptography community. The concept, that a purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution, remained just that: conceptual. For how long Nakamoto had worked on this idea is impossible to know as Nakamoto remains anonymous, however his (or her) timing was incredibly prescient. Six weeks prior, on September 15, 2008, the world watched its plummeting markets reach a watershed moment with the fall of the Lehman Brothers, sending the world into a full-fledged international banking crisis. Four months later, on January 3, 2009, the first fifty bitcoins were released by Nakamoto on the “genesis block,” with an encryption: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”
Claiming that the financial crisis of 2008 led to the advent of Bitcoin is possible to conjecture and impossible to prove. Regardless, the social and economic landscape of 2008 and 2009 was a fertile breeding ground for the new concept, which completely removed the need for a bank to act as a trusted third party in financial transactions. Essentially it was a big middle-finger to the man. Instead of putting our trust, and our money, in the hands of banks that can lend it out freely, we can put our trust in a ledger that is time-stamped, transparent, permanent and decentralized. The concept was truly revolutionary, but there was very slow progress and it took years to lift-off. Why? Because of how we view money.
Some people have a hard time investing into a currency that doesn’t have its basis in anything physical. For decades all of our money was backed by gold; governments had a physical asset and paper money and coins were a representation of that value. This is no longer the case — now, the value of our money depends on the stability of the government in whose jurisdiction it is being issued and used. The reputation of the government gives the money its value today. Cryptocurrencies have no government, and they have no gold. This unremarkable truth has sent a lot of people away from engaging in this new market, and has left even the eager asking: where do cryptocurrencies get their value, and how can we trust them?
To answer this question without completely boring you, we have to quickly jaunt through the writings of a German economist named Ludwig von Mises, who wrote on the theory of money’s origins. In his “regression theorem,” he explained how money gets its price in terms of the goods and services it obtains. He concluded that the value of money traces backward in time to its value as a bartered commodity, and this is the only way it can have value.
For example, would cows have been used as money had we not been able to eat them? Would gold have had money value if it had no value as a commodity first? The initial value of money, before it becomes traded as money, originates in its direct utility. So what is the direct utility of bitcoin? You can’t eat it. You can’t make a dress out of it. You can’t take a bath in bitcoins. It appears to be an exception to the rule, but it isn’t. The direct value of bitcoin is inherent to the technology itself, and it has been evolving with it ever since: it’s both a currency and a payment system. The payment system gives bitcoin its value, and the currency denotes that value. This is made possible because of blockchain, and one may even go so far to say that the direct value of bitcoin is its basis in blockchain technology.
Now, for the first time in monetary history, money and payment systems are one and the same. Instead of using PayPal to transfer the euro, or a credit card company to lend a dollar, the value of the bitcoin is interwoven in the payment network, and expresses the value of that network. The direct value of bitcoin is not the currency unit itself, it’s embedded in the innovative system on which it was built. Bitcoin grew in popularity not because people believed they were picking up gold (although this later became the case), but because they were curious about blockchain technology. When bitcoin’s value was zero, investors were still trading, experimenting and asking themselves: is this real? How does it work? What are its possibilities?
As the network continued to expand, more people were willing to trust this new currency, and as a result its value continued to rise. Because of our mutual trust in this payment system a single bitcoin is now worth $5,539.65. The value of blockchain, with its potential to touch every aspect of our society, may literally be limitless.
