What Is Bitcoin’s True Intrinsic Value?
Six years since the invention of Bitcoin, its potential for disruption of global finance has attained wide attention. It has elicited a wide variety of opinions regarding its potential to survive as a currency or payment system. Time and again, Bitcoin’s price has been used as a measure of its likely success and failure. Earlier this year The Washington Post called Bitcoin the worst performing currency in the world, cherry-picking prices at a particular point in time and failing to acknowledge over 1300% gains it has made in just the last two years. During the recent drop in the exchange value, new obituaries were being written every day. According to a site that collects ‘Bitcoin obituaries‘, Bitcoin has died 42 times already in its short existence.
Economists might attribute the cause of this sharp decline in the Bitcoin price to its design. Many have repeatedly criticized its fixed monetary supply as deflationary and characterized this as the currency’s fatal flaw, without much examination of its key feature of infinite divisibility. They argue that it will incentivize hoarding and speculation, making Bitcoin harder to become a transactional currency. They likely are the first ones to respond to the recent price drop by saying “I told you so”.
Is Bitcoin a tool for short-term investment? Its perceived deflationary design really a flaw? One leading voice in the Bitcoin community, Andreas Antonopoulos tweeted a response to some people who were once again proclaiming the death of Bitcoin. He said; “Bitcoin has never been a very good get-rich-quick scheme, but it’s certainly proven to be a get poor quick scheme for those who get greedy”. Then later he tweeted: “Bitcoin, the speculative small-cap get-rich-quick investment scheme is definitely dead too now. Bitcoin, however, is fine”.
Bitcoin is programmable money. In spite of its chorus of critics, it is ushering in a new paradigm as its monetary policy doesn’t fit any existing notion of what currency is. While many people place the measure of its value in its current volatile price and criticize its commodity-based design, its significance can only be understood within the context through which this groundbreaking technology emerged. The true valuation of this currency can only be made on its own merits.
Asset Based Currency
Bitcoin is made to digitally replicate the process of mining gold. Digital currency theorist Noel Jones explains how Bitcoin’s value is derived from “an object’s intrinsic worth”, specifically “real computational work that takes energy–no different from the energy used to dig gold from the ground.”
This design of Bitcoin deriving its value from energy scarcity enabled “digital scarcity”, which Richard Gendal Brown explained as Bitcoin’s irreducible essence, solving the problem of “transfer without duplication” in the digital world. Bitcoin’s power of distributed computation now exceeds the capacity of the world’s top supercomputers, which provides vital security from the threat of counterpart attack. Furthermore, this design that is modeled after an asset plays another important role in the development of this unprecedented technology.
In the article “Bitcoin Obscene Wealth Disparity Is a Feature”, Daniel Krawisz addressed controversy around Bitcoin’s consensus algorithm that rewards early adopters, which many have been quick to judge as an inferior element or a bug. Krawisz explained how this is actually an intentional unique feature, pointing to how it was part of a vital incentive structure needed to kickstart the whole operation and that it has successfully attracted investors who are playing a critical role in developing and innovating the Bitcoin ecosystem. As a matter of fact, CoinDesk’s State of Bitcoin report showed that a tremendous level of capital has been poured into crypto-startups since 2012, with the largest portion invested in 2014. This has been at a much higher rate than the comparable growth period of the Internet.
Bitcoin’s perceived deflationary monetary design is an intentional incentive structure that has shown to be very effective. From its birth to its current toddler state, Bitcoin’s infrastructure has been growing. Public awareness has expanded exponentially just in the last two years. Speculators and investors played a vital part in this process. But now, as Bitcoin moves into a new phase of its development, it sheds another layer of skin to unveil its deeper nature to those who are willing to look beyond the surface.
Precursor to Bitcoin
The conception for Bitcoin grew out of an understanding of money that went beyond modern economics’ view of it. The anonymous creator of this technology, Satoshi Nakamoto once acknowledged Nick Szabo for his contribution of the Bitgold proposal to the implementation of Bitcoin.
Prior to coming to his concept of Bitgold, legal scholar, and cryptographer Szabo looked at the history of money beyond its use for a transaction in markets and within the larger context of governing systems in society. He examined Carl Menger’s account of the origin of money, which is treated as a classical theory in economics. According to Menger’s theory, money that predates the invention of coinage is thought of as emerging markets where commodities were bartered. While agreeing with part of this view, Szabo brought a complete picture, arguing that the origin of money preceded commodity markets. He pointed out how “the double coincidence of wants problem occurs not only in barter exchanges, but in other transactions that were as or more important than barter to hunter-gatherer societies: paying tribute, paying legal fines, bride price, and mortuary distribution (inheritance).”
Szabo thoroughly spelled this out in his essay titled Shelling Out -The Origins of Money, where he traced the precursor of modern money to concrete objects like wampum that were used by our ancient forebears. Calling them collectibles throughout the essay, he noted how their main function was “a medium of storing and transferring wealth.” Szabo analyzed how “for a particular commodity to be chosen as a valuable collectible, it would have had, relative to products less valuable as collectibles”, durability, security, from accidental loss and theft and ease of mutual approximation of value. He noted how “the unforgeably costly commodity repeatedly adds value by enabling beneficial wealth transfers … the cost, initially a complete waste, is amortized over many transactions.” He found how this principle applies to the monetary value of precious metals.
The origins of money reveal how for it to function well as a medium of exchange it needs to have a solid base in the object’s intrinsic value and first had to be a good store of value. With the breakthrough of Nakamoto’s distributed consensus, the idea of production and secure circulation of costly bits in a form of digital gold without third party involvement came to fruition in the open source Bitcoin protocol.
The Origins of Money
Once we see money as something that belongs to the sphere of economy, we abstract it from human relations and complex human activities. As the inception of Bitcoin didn’t emerge from modern economics, a true valuation precedes and supersedes standard market logic. So if it is not the price, then what sets the value for Bitcoin?
In his exploration into the origins of money, Szabo came to see how original money has roots in our deeper human nature. He described how the existence of primitive forms of money revealed that money is tied to human instinct, specifically the “desire to explore, collect, make, display, appraise, carefully store, and trade collectibles.” He also noted human species’ acts of cooperation outside one’s skin; something evolutionary psychologists call “reciprocal altruism” and pointed out how money was connected to this innate universal human instinct.
By bringing out evolutionary biologist Richard Dawkins idea of money as a “formal token of delayed reciprocal altruism”, he elucidated how these forerunners of money provided a “fundamental improvement to the workings of reciprocal altruism, allowing humans to cooperate in ways unavailable to other species.” For instance, he noted how the advent of collectibles enabled higher forms of trade by replacing otherwise needed trust and long term relationships and how it served as insurance for foods shortages, as it created a source of surplus by trading what people cannot immediately consume or store. It also allowed humans to pass wealth on to the next generation and cover what modern tort or criminal law does to settle disputes and remedy damages to avoid revenge and wars.
In this sense, collectibles were a vital invention that could facilitate trade and transactions within social relations that help people cultivate fraternity beyond one’s own kin and expand social bonds with humanity at large. As Szabo put it, “lowered transaction costs for all these kinds of transactions meant greater familial, political, legal and economic cooperation –i.e. the enhancement of kin altruism as well as reciprocal altruism and the mitigation of aggression.”
Token of Reciprocal Altruism
From this perspective, the original money was grounded in human nature and as a medium for storing and exchange it was a token for reciprocal altruism. Daniel Krawisz, the Director of Research at the Satoshi Nakamoto Institute explored the idea of reciprocal altruism in the theory of money. He pointed to how some earlier versions of money were based on commodities and that with Bitcoin, money becomes a “distributed system” which is the “latest step in the evolution of money”, making it possible it to function as delayed reciprocal altruism. He argued how what makes money valuable is “the value of cooperation”. He said, “the value of money is not somehow in the monetary unit; it is in the whole of society and of peoples’ desire to cooperate”.
New apps are now being built in the cryptocurrency ecosystem that are designed to carry this value. Bitcoin tipping apps like ChangeTip provides a platform enabling good will micro-payments (tips) over social media. The popularity of these new apps is growing and Facebook recently followed Twitter’s lead by incorporating this feature. With innovations like this, money more and more can become a language that enriches social networking creating value through relationships.
A deeper understanding of Bitcoin can reveal to us how this new decentralized currency can restore our common intrinsic human value. As the new gold of the digital age and the world’s first truly transnational currency, it links money and the act of transaction back to peer-to-peer social relations based on our kinship as members of humanity.
In a larger evolutionary sense, treating Bitcoin as speculation and judging its success by its fiat price is rather shortsighted. In the long run, Bitcoin’s disruption is much bigger than any of us can imagine. The real significance of this technology could actually lie in its potential for facilitating the creation of truly human values through the innate nature of cooperation.