How to Think of Valuing Bitcoin

Do you question if Bitcoin has value? What value does Bitcoin serve in the global economy? This quick read attempts to answer these questions.

Why does Bitcoin have value?

Bitcoin is a digital store of value with sound money principles that is separate of any government issued currency. As a separate entity without a centralized institution backing the currency (like the Federal Reserve Bank with the US Dollar) Bitcoin relies on a distributed network of computers around the world to provide the infrastructure for the digital store of value.

Without Bitcoin we must trust in a third party to transact on the internet. This isn’t ideal.

“Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust-based model.”

Satoshi Nakamoto, Bitcoin whitepaper

In the paper ‘Bitcoin – A Novel Economic Institution’ Bitcoin is described as a financial system without a centralized authority.

Bitcoin fundamentally shifts how a financial system distributes trust, eliminating the roles of several institutions that rely on centralized authorities and creating an ecosystem based on computer science and cryptography.

In contrast to a central bank that controls monetary policy, or a commercial bank that controls the custody of assets, or a payment processor that controls consumer transactions, the Bitcoin network and all of its participants oversee all such functions, as
shown below.

By cutting out the third parties Bitcoin provides value by allowing for the exchange of any amount of money anytime to anyone anywhere.

Bitcoin allows for wealth to be protected and owned wholly. This is counter to the US Dollar and all other government currencies (EUR, YEN, etc). Instead of inflating away the value of $1, Bitcoin was built to protect the value of it’s network through it’s design.

For me, this is most easily recognized by these memes below

Why is there demand for Bitcoin?

The demand for digital dollars, a global settlement network, and a hedge against the failure of the existing financial system are three top reasons why there is demand for Bitcoin.

Digital Dollars $$$

According to the expert investor @SuZhu and writer @Hasu “90% of all money today is virtual…Cash has the annoying property that you need to be in the same location to exchange it. 

Countries that have abandoned the use of physical cash altogether are called “cashless”. It can happen without coercion, like in Sweden. In other countries like India, the government has demonetized larger denomination banknotes. In China, digital payments serve as a tool of social control and the backbone for a new social credit system.”

Neutral Global Settlement

Next consider that Bitcoin is a neutral censorship-resistant financial settlement network. As the friction between the U.S. and China continue and world powers continue to collide there is increased risk in trusting the financial infrastructure controlled by one nation or group.

Since World War 2 the U.S. has been the trusted global third party middleman for most of the developed world’s finances via the U.S. dollar. As the U.S. dollar continues to be manipulated by those in power (ex. quantitive easing) it has become clear that there is a need for a way to send money internationally without any legislative red tape.

Hedge Against Failure of the System

Bitcoin as a doomsday insurance is another reason why Bitcoin has value.

Both consumer and sovereign debt levels are at all-time highs relative to GDPs, while interest rates, especially in Europe and Japan, are still zero. When the economy slows down, there is little that central banks can do to ease the pain and kickstart the economy.

Further, a widespread shift in demographics has created a massive gap between future government liabilities and income from taxes.

For example, the US government doesn’t “just” owe $20T in sovereign debt but ten times as much in domestic debt, in the forms of entitlements programs. Many believe that the only way to pay up is by throwing the US dollar under the bus and devalue it to meet at least nominal obligations.

@SuZhu and @Hasu – Investing In Bitcoin

To protect yourself, your assets, and wealth Bitcoin is now beginning to be regarded as a digital gold alternative. Bitcoin cannot be stopped by one government or even a consortium of countries that want to stop it from growing.

Summary / TLDR

Bitcoin has created the possibility of a global monetary system controlled not by
nation-states but by individuals. Bitcoin eliminated the need for a trust-based model and is paving the way for a more predictable financial system everyone can use.

Digital money that frictionless, anyone can join, and can’t be stopped is what Bitcoin provides today. Most of the use cases today are still speculation as Bitcoin’s price is a function of the deferred expectations of growth in the future. Despite the cost to switch to Bitcoin and its complexity, people use bitcoin on the ground today in developing countries, to make unstoppable transactions online, and to own outright their own wealth in a store of value that cannot be taken away from them.

Thanks for reading. Please share comments or feedback below.

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