The underlying value of fried air (BTC)

Check out our new platform 👉 https://thecapital.io/

Published in

The Capital

6 min readDec 5, 2020

Dutch version
A much-heard argument against Bitcoin is that Bitcoin does not have an underlying asset and, therefore, it is just like fried air, a Tulip bulb mania, a pyramid game, or a bubble that does burst once.

On the other hand, Bitcoin fans usually reply that the price of Bitcoin is determined by the supply and demand on the market and that the real value of bitcoin is its use case, so it is the decentralized counterpart of the failed Fiat system. This is true, of course, but also a bit short and easy, and not convincing for the skeptics. In this story, we will investigate what the intrinsic underlying value of Bitcoin is.

Energy and labor

All equipment/business/services that we produce, use, consume, and/or further process on this earth have a cost price. The price at which the device, product, service can be produced/delivered. PLEASE NOTE: We are talking about the cost price here, not to be confused with the value.

We are going to do some philosophical work now.

My thesis is that the basic cost price for everything in this world is composed of only two components and that is Energy and Labor.

Energy and labor that is needed to realize the manufacturing process.
To make a car you need steel. That is made from iron ore. That ore is extracted from the ground by large machines and melted in blast furnaces. So the cost price of that iron is entirely determined by the energy and human labor needed to convert it into steel. The raw material (the ore) itself is of no importance because it is mined from the ground free of charge. It only gains value when it is mined by energy and labor and further processed. After that, the steel is converted into a car with the help of again a lot of energy and labor.

Bear in mind that as human beings we do not create anything but only transform. From iron ore to steel and from steel to car.

All atoms from a car are already in the ground and are property of all earthlings and are transformed into a car by transformation processes. And the only thing needed for that is Energy and Labor.

It can be argued that a cost price consists of many more components as normal economic thinking teaches us. Like for instance, housing costs, depreciation of tools, etc., but also those tools are a product of Energy and Labor, no more and no less. Also, factory buildings, office work can essentially be brought back as products of Energy and Labor. Sometimes it is 10% energy and 90% labor, and often, it is 90% energy and 10% labor.

Also, gold and other precious metals cost is determined by the amount of energy and labor to mine and process it into those shiny bars. So for every product in the world, the cost price is determined by the amount of energy and labor put into it to make the product.

It’s also nice to think that the Energy we need for all those transformation processes is actually also free. That is the sun. All forms of energy we use on earth are a derivative of the sun. Petroleum/gas, biomass and wind are just concentrated solar energy that is present in our piggy bank, the earth. Apart from nuclear energy, which is based on the physical state of substances, it is also a finite source of energy. So if you continue to reason, the cost price of everything can only be traced back to Labor.

Value

But an article/product is not traded for the cost price. And a product is only traded if it has value. This is where two things come into play: the scarcity of a product and the supply and demand for the product on the market. A product that has a high-cost price but for which there is no demand will be valued low and vice versa a product of which the supply is limited compared to the demand but of which the cost price is low can still get a high price. The value is determined by the cost price plus the scarcity and the market of supply and demand. A car is not really a scarce product and is therefore traded for a price that is only a little bit higher than the cost price. Gold and other precious metals are traded for a much higher price than the cost price because it is scarce while demand is quite high.

The same is true for Bitcoin. Each bitcoin costs a certain amount of energy and labor to make it. 99% energy and 1% labor. It currently takes about 180,000 kWh of electricity to “mine” one Bitcoin. At an average kWh price of $0.05 (in low energy price countries like Canada or China), a bitcoin costs about $9000 in power for the mining equipment. But because of the scarcity, people are now willing to pay about twice as much as the cost of one bitcoin is.

With Bitcoin something special is going on because the cost depends on the value. If the price of Bitcoin becomes lower than the current cost price, a number of miners will stop mining and unlike gold mining, the number of mined bitcoins will remain the same. This means that the cost price of a bitcoin will drop to the point where it is lucrative to mine. An equilibrium is found.

We have now reached the point where we can say that the cost price of something is determined by the amount of energy and labor that has to be put into it to make it what it is. But that the value is determined by scarcity and the market of supply and demand.

Euro and Dollar

Now it is interesting to note that there is one article on earth that is not a product of Energy and Labor and that is Money/currency. After the link with the gold standard was released, money no longer has a cost price. So it is not a product of energy and labor (a bit to print the banknotes and mint the coins but that is negligible). There is also no scarcity. If there is a shortage we simply create it by making debts to pay off our previous debts.
So money has no cost and no scarcity. Yet we assign value to it based on “trust”. We have agreed with each other that that piece of paper on which 100 is written represents a value of €100,- and we all trust that someone else also believes that. And through that “trust” an entire financial industry has been built.

So it’s strange to think that Bitcoin doesn’t have an underlying value when there is clearly a cost and scarcity and a market for supply and demand, and that on the other hand a lot of trust and faith is needed to give Money its value without that value being based on any form of energy, labor and scarcity.

Other articles of this author are:

https://twitter.com/thecapital_io

The underlying value of fried air (BTC)

Check out our new platform 👉 https://thecapital.io/

Energy and labor

Value

Euro and Dollar

Written by Aat de Kwaasteniet