Bitcoin Is Backed
Compare the properties of gold, fiat money, and Bitcoin to understand the nature of each.
After 15 years, the cliches are still circulating—It’s a Ponzi Scheme! It has no intrinsic value! It’s Tulipmania! Even if you’re not into Bitcoin, these are what you might call midwit memes. They circulate precisely because the average person is susceptible to the errant talking points of fear, uncertainty, and doubt (FUD). Happily, Underthrow readers are not midwits. In this article, David Veksler dispels one of the biggest Bitcoin cliches.
Bitcoin is not "backed by nothing." The utility of the Bitcoin network supports the value of Bitcoin. But I don’t want to get ahead of myself.
Gold
Let's compare Bitcoin to gold as a form of money. Gold was (theoretically) redeemable 1:1 by metal. It became a medium of exchange because it has non-monetary value—it's shiny and resistant to corrosion, making it useful in jewelry and industry.
But is this the primary reason gold is valuable?
No. Gold's primary value lies in its monetary uses. Non-monetary demand (or the non-industrial demand premium) represents just a tiny fraction of gold's overall value.
What about the monetary premium of gold?
We can examine silver, once the world's reserve currency in the 19th century but now almost entirely demonetized. The gold-to-silver ratio changed from 15:1 in 1915 to over 100:1 today. This indicates that approximately 85 percent of gold's price is due to its monetary premium.
The choice of gold as money isn't coincidental — its material properties made it suitable. However, the non-monetary demand for gold (often mistakenly referred to as its "inherent value") is not the primary reason for its value. Rather, it's these material properties that make gold an effective form of money. If a new element with even better properties (like a fixed supply) but no industrial demand were discovered, the substance could supplant gold.
In summary, gold is primarily valuable because of its material properties, not its non-monetary uses.
Fiat
Now, consider fiat money.
Fiat money is backed by legal tender laws, including the obligation to pay taxes in fiat. This creates a demand for fiat, as taxpayers and debtors must acquire it from the central bank. The backing of fiat ultimately stems from the threat of violence against those who refuse to contribute a portion of their income to the State. This threat serves to link the currency's value to the economy's size. In the case of the dollar, its relative stability and the strength of the U.S. military tie it to the global economy.
In short, the value of fiat money is linked to the extent to which the State is willing and able to confiscate a portion of the economy for its purposes.
What about Bitcoin?
Bitcoin
Bitcoin consists of the distributed ledger (blockchain) and "bitcoins," the native asset of the Bitcoin ledger. The ledger is valuable due to its intrinsic properties, such as censorship resistance, speed, cost-effectiveness, divisibility, and immutability. Competition for space on the ledger gives bitcoins their value.
More specifically, it's the anticipation of future demand for ledger space, as most Bitcoin holdings are speculative based on this future demand. Therefore, Bitcoin is not just a digital collectible. While a collectible may hold value, it lacks the security guarantees of the Bitcoin protocol, which is what provides bitcoins with utility.
Evidence that Bitcoin's utility backs its value is its initial popularity on black markets, where buyers and sellers used Bitcoin for transactions, often selling it shortly thereafter. It was only after being validated as a reliable medium of exchange that speculators began buying it as a store of value.
To summarize, bitcoins are valuable because they are required to utilize the Bitcoin network. It's the intrinsic properties of the Bitcoin protocol, not the scarcity of bitcoins, that make the token valuable.
Let's compare again.
Gold is valuable because the intrinsic properties of the material make it suitable as money. Fiat is valuable due to the threat of violence by nation-states. Bitcoin is valuable because the intrinsic properties of its protocol make it ideal as money.
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“The ledger is valuable due to its intrinsic properties, such as censorship resistance, speed, cost-effectiveness, divisibility, and immutability. “
Well said. Maybe it’s already subsumed in what you said, but I would add the property of transportability especially when it comes to crossing state borders.
I used to see arguments that bitcoin couldn’t be money because it didn’t satisfy Mises’ regression theory and couldn’t trace its value back to its value as a commodity. But this never really made sense to me. If you think of bitcoin as a commodity, the things you mentioned are properties that gave it value from the start, so bitcoin as money could trace its value back to its useful properties.
I follow David Veksler. But I am puzzled by his statement that "It's the intrinsic properties of the Bitcoin protocol, not the scarcity of bitcoins, that make the token valuable." This can't be true. Certainly there would be no Bitcoin if the protocol did not enforce its properties; but one of its essential properties is its scarcity: No more than 21 million can ever be mined. Would gold lose its value if suddenly no more of it could ever be found? No. Would gold lose its value if it could be created as easily as summer daydreams? Yes. Scarcity is an absolutely essential property. Also, I think that David should avoid applying the word "token" to Bitcoin; that word should be reserved to describe artifacts created on a non-native blockchain with no inherent check on the number created (e.g., memecoins, memorabilia, etc.).
It's the Austrian Regression Theorem that insists that money must have an original commodity status before it can become money. These economists maintain that its "direct use" as a commodity provides the "objective" counting value of its "subjective" or "indirect" monetary value. The "direct/objective" value and the "indirect/subjective" value are linked by being traceable to some historical acts of barter. Konrad Graf tries to place this original commodity value of Bitcoin in its "geek value" (in its being "cool"). Any theorem that needs such contortions is certainly suspect. Laura Davidson (https://mises.org/library/bitcoin-regression-theorem-and-emergence-new-medium-exchange) offers a solution to this problem (assuming that it is one), by saying that some price structure, and not commodity status, has priority. Her argument is compelling.