Why does bitcoin have value?
The value of a thing is normally the utility derived from it. Bitcoin has value because it can be exchanged for things that have intrinsic value. Thus it is practically a form of currency, which is a representation of money. Why then is it seen as money?
My understanding of money is that it is a store of time expenditure. I think money can only be created through work i.e. manipulation of matter. I disagree with the notion that central banks create money. What central banks do is create currency. Currency that is not backed by money will eventually lead to inflation and become worthless. Going by this definition, bitcoin has value because work is involved in its creation. That work, called mining, involves finding a solution to an equation. The result of that work, called proof of work, results in the award of a bitcoin. That proof of work is another reason for its value. Each bitcoin is backed by a unique equation that is the result of work. Thus, each bitcoin has a unique number, kind of like the number on a currency note. Therefore, it cannot be counterfeited. A 3rd reason for its value is its resistance to inflation. There will only ever be 21 million bitcoins. I don’t think that upper limit is a good thing but that is outside the scope of this piece. A 4th reason is its decentralized nature which virtually eliminates transaction costs associated with the traditional monetary infrastructure that has banks charging fees on transactions. The savings on these fees are quite substantial. Bitcoin also enables transaction anonymity. This is a quality it shares with physical money and that privacy is much prized by many for myriad reasons including quite prominently, the philosophy which holds that governments' powers should be limited and information about people's activities should not be automatically accessible to government and its agents.
So, these are the reasons why bitcoin appears to be money.
It is used as currency because a currency is a medium of exchange. Fiat currencies have value because at worst, one can use them to pay for government services. Using the USD to illustrate, it has value because the largest economic actor in the world is the US government. It accepts the USD as payment for taxes and other services. Therefore US citizens hold it for primarily that reason. Everyone in the world wants to do business with the US and its citizens, so the rest of the world holds dollars so they can pay for goods and services produced in the US. Unlike fiat currencies, bitcoin does not have any such automatic demand. Unlike commodity currencies - gold, salt, cowries etc., it lacks intrinsic value because the equation underlying each one does not, so far as I know have any real world applications. Even if it does, usage of the equation cannot be restricted. And so, I wonder why bitcoin is viewed as money. Could it be that the world has evolved to a stage where symbolism is valued more than practicality? Because it appears to me the main attraction of bitcoin is what it symbolizes - novelty, technological innovation and philosophical actualization.
I do not understand why anyone would pay even $1 for a bitcoin. But then again, I do not understand why people pay huge sums for memorabilia, or for art or worst of all, wines that will not be drunk. There have been papers arguing that bitcoin itself is worthless but the concepts it actualized - distributed ledger, block chain, anonymity, peer to peer transactions are more valuable and important. I agree with this view because these are things that have practical application especially as the world continues being digitized. I concede that my inability to see the value of bitcoin may be due to a deficiency in my understanding. Otherwise, how can so many smart people spend so much money acquiring it? However, considering people can be stupid in following the crowd, such wide interest does not invalidate my opinion.
Iron Noder 2020, 1/30