For those who don’t have the time to read the whole article, here’s the point:
Simple Economics:
Value is the worth of goods and services as determined by the market
Explanation (minus economics):
Price per bitcoin, is equal to the trust people have in its worth.
Some will view this as oversimplification, and attempt to debate the inherit qualities of bitcoin, but none of those reasons are more important or supersede that statement above. Stop for a moment, put aside the bias you may have, and think about that statement once more. It is neither for nor against the success of this cryptocurrency, just a foundation for further explanation below.
Before we move forward, let’s simplify that statement even further. Trust equals price.
Photo by Terry Johnston under CC 2.0
Let’s explore the “common” statements we've come to understand, and how it fits into the above:
“Bitcoin is digital currency, and a store of wealth”.
Currency is a trusted medium of exchange, with a stable price and low volatility (variation of price). Now exchange the word "Currency” with “Bitcoin” in that statement.
"Bitcoin is a trusted medium of exchange, with a stable price and low volatility".
I'll let you decided if that rings true to you.
A store of wealth is any easily tradable element that isn’t perishable or subject to depreciation over time. Now provided nothing is subject to a guarantee, we grade how well that element is by its ability to avoid such depreciation. Again, bitcoin has a long way to go before it could be defined as a store of wealth (depreciation along with appreciation). Will it be in the future? Perhaps, but it must compete with a wide array of other methods for protecting wealth.
Only we can decide .
So if it’s not a currency, then why are people buying goods and services with it?
Excellent question
Lack of a better choice, plain and simple. Presently fiat (cash/digital representation of such) is used, and is stable backed by the “full faith and credit” of the nation that issues it. Ah, now we get back to that word, faith being used often interchangeably with “trust”. So it’s the trust of the parties exchanging that currency that gives it value. When either of those parties begin to lose “faith” in that currency, its value is diminished.
Now again, proponents of this definition will go on to explain that bitcoin’s value is more than that “trust”, and the following definitions will be thrown about:
Photo by Nichole Burrows under CC 2.0
Bitcoin Intrinisic value: value is derived of all future income you will get by owning it, or as Warren Buffet would say “the ability of an entity to create cashflow in relation to its net worth”. Stocks are an excellent example and why bitcoin is “traded” much the same way.
Bitcoin extrinsic value: the difference between market price of bitcoin and its intrinsic value. Value that has been assigned to it, by external factors. Only by virtue of some relation that it shares with another object, or set of objects. In this case either fiat (cash) or other crytpocurrency.
Gold, which unfairly is compared to bitcoin, shares both intrinsic value (practical application in manufacturing) and extrinsic value (price people will pay, based on scarcity, future value). As illustrated above, bitcoin’s intrinsic value or practical use is gaining momentum through “trust”, but quickly losing that value based on recent issues (centralization through miner’s control, hard forks, and delays in processing transactions). Its extrinsic value is its foundation, as it’s often the gateway or “backing” of other cryptocurrencies. Any individual who has traded alt-coins (alternative cyrptocurrency) will contest that bitcoin’s fall in value is bad news for them as well.
Just a side note, it’s my personal opinion, which if this post gains any interest I’ll further write about, is the basis of ethereum’s rise based on ICOs. Be sure and leave a comment if you’d like to read that post.
An up vote for this post, would also be greatly appreciated!
If you’re still with me, and agree I’m on the right track, you can start to see how alt-coins derive their value by the same qualities inherit in bitcoin vs. other forms of currency. As such, they may only need to prove better intrinsic value (contracts, voting, security, etc.) in order to gain traction and visibility to a larger market.
Photo by CafeCredit under CC 2.0
So if you're asking yourself the question :
- Should I invest in bitcoin?
- Will it go up or down in value?
The question you are really asking is, do I “trust” bitcoin and willing to back it vs. other forms of currency/commodities. If that trust comes with the understanding that it is not yet a store of wealth but maybe in the future it will be, and as a currency it’s trying to gain that stability then yes, you should.
Basically, bitcoin investing bears similarity to getting married at a young age.
You “trust” your partner will be stable and the value in your relationship will grow. Much like the market, you get that stability only if you are willing to put in what you expect in return. Demonstration of that “Trust” comes from your actions in investing and holding that commodity.