crypto is backed by nothing

in #bitcoin6 years ago

I commonly hear misconceptions about the nature of cryptocurrency and why it is valuable. Some say that it is nothing but a scam or ponzi and is in reality completely worthless, others believe mining and burning electricity gives it value. While there is a bit of truth in both ideas, these people are missing the fundamental concept.

There does not need to be anything 'extra' to make a product valuable. The value is derived from the products usability alone. What is backing the value of bread? Is it the grain? Is it the work of the baker? No! it is just that bread is useful and there is a demand for it at a certain price point. That demand leads to a price discovery on the markets together with the available supply. There is no absolute value of bread.

Of course it is linked to the price of grain. But when grain price moves up, then there is a point where the value of bread will no longer be able to keep up. Bread will transition from a basic product to a luxury one. Cheap factory bread would not become extremely valuable due to containing expensive wheat, it will simply stop existing because its value has dropped below production cost. Instead a new product of hipster bread will appear and that will be a luxury product produced at much smaller scale.
Production cost is not defining the value! It is only constraining the market into a corner, while the market itself contains the sum of all individual expressions of value. Often the two are correlated, but there is a complex relationship. The value of bread is not 'backed' by anything but its usefulness.

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Lets take this to the next level. What is backing your marriage? Is it the rings? Is it a contract and the state?
Of course not! It is the trust you attribute to it. When you realise that that trust is broken or that the marriage is no longer valuable for you, then it is worth nothing. But as long as that trust exists, it is worth a lot, even though it is not backed by any material asset.
Or your relation to your children, not backed by "anything". Your friendships? ...

We see that contracts, social roles and items naturally obtain a value that simply relates to their use-fullness and nothing else. The idea that there is something extra backing the value may seem logical, but it is a fallacy.

What is crypto backed by? It is the trust we put in it. It is the possible usage that we see in the future. The dollar is currently dominating the market for expressions of value and crypto is like the dollar, only better in every possible way.
For the dollar you need to trust the US and the central bank, for crypto you only need to trust math. For the dollar you need permissioned payment channels or physical payement, crypto is open to everyone and permissionless. The dollar is a system of oppression and controll, crypto is free and liberating.

If the dollar can be valuable by realising only such a narrow restricted service, then crypto clearly is valuable. The only thing missing at this point is adoption.

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