Why So Many Smart People Have Been Wrong About BitcoinsteemCreated with Sketch.

in bitcoin •  last year

Everyday I hear brilliant people argue that bitcoin will eventually collapse to zero because it has no intrinsic value. So, it's a "bubble" or a "Ponzi", they say. Regrettably, many of these people are Chartered Financial Analysts (CFAs) or otherwise have strong financial or economic backgrounds. Consequently, one might be forgiven for assuming that they know about which they speak.

Except they don't. In fact, there's an inverse correlation between the extent one's financial and economic training and the ability to see intrinsic the obvious value in bitcoin. The more of the former, the less of the latter. By contrast, those with strong technology backgrounds have no difficult perceiving the intrinsic value of bitcoin.

Why such disagreement?

Respectfully, financial types almost invariably approach the question of bitcoin's value from the wrong starting point. Thus they reason from the wrong premise. When the premise is wrong, the conclusion will be too.

Specifically, financial types suppose that each bitcoin is a discrete thing. They view them in isolation. Because (in bitcoin's case) that thing is not useful for anything by itself, and because (unlike a share of stock) it doesn't represent a claim to anything that is useful or profitable, they assign it zero intrinsic value.

This ignores the fact things without intrinsic value often nonetheless have great worth as part of a system or network. Oil, for example, was largely worthless until the combustion engine was invented. But combine refined oil with a combustion engine and...presto...suddenly you can make, do and drive things that you couldn't before. And that's pretty darn useful! And since supplies of oil are limited, oil has tremendous and enduring value.

Fiat currencies are similar. The pieces of paper upon which our dollars are printed have no intrinsic value. As paper, they are essentially worthless. And yet because those discrete papers are uniquely capable of liquidating certain types of debts, namely tax liabilities, they have incredible purchasing power. Combine greenbacks with our tax system that is denominated in dollars, and...presto...enduring value suddenly appears.

An engine is a mechanical device that produces work by burning oil. The Bitcoin network (as opposed to each bitcoin unit of currency) is a program (digital machine) that produces an unchangeable record of transactions (something that was impossible before Bitcoin was invented in 2008). Each of those transactions is represented by the exchange of the bitcoin "currency" between "accounts" maintained by a decentralized network of computers. While the significance of a decentralized, immutable transaction record is beyond the scope of this writing, suffice it to say for now that nobody in tech today doubts its usefulness or importance. Furthermore, because the supply of the bitcoin currency is limited, bitcoin's have value (currently about $4,000 per coin, though coins are nearly infinitely sub-divisible).

People in finance fail to grasp bitcoin's value because they simply don't understand how the technology works. Consequently, they commonly recite the fallacy that the the immutable transaction record (commonly called the "blockchain") is valuable, but the individual bitcoins transacted on it are not. This is tantamount to arguing that combustion engines are valuable but the fuel that burns in them is not. A combustion engine without fuel is not an engine. Likewise, a blockchain without without an underlying cryptocurrency is not a blockchain. Combustion engines produce work only when they burn fuel. Blockchains produce an immutable transaction record only when cryptocurrency is exchanged between users. How and why this is so is beyond the scope of this writing, but suffice it to say for now that nobody with any degree of technical competence doubts this fact. The financial types who seek to distinguish between the value of blockchain and the value of bitcoins just don't understand the technology.

Just like paying taxes can't be done without first acquiring dollars, making an entry in Bitcoin's immutable ledger can't be done without first acquiring at least some fraction of a bitcoin. Because making such an entry is useful for a variety of purposes (just like burning oil in a combustion engine is useful for a variety of purposes), and because the number of bitcoins is limited, bitcoins have value (currently about $4,000 per bitcoin).

Because bitcoin is software and its always possible to copy software, financial types also frequently fall prey to the "we'll make more" fallacy. In other words, they will frequently argue that bitcoins can't have value because the supply is not really limited. The supply of bitcoins is unlimited, they argue, because unlike gold or oil, anyone can just create a "fork", or a copy, of bitcoin. Indeed, such copies or forks have already happened on multiple occasions over the last nine years.

The "we'll make more" fallacy is again a consequence of viewing each bitcoin as a discrete thing rather than an integral component of a much larger system. Of course anyone can copy or "counterfeit" bitcoin, but unlike fiat or even gold, any such counterfeits are immediately recognizable as such. Suppose you created a $100 bill that was immediately recognizable by everyone as counterfeit. Would anyone accept it? Of course not. But...why not? Because accepting counterfeit currency is illegal? No, creating counterfeit currency is illegal but accepting it is not. People refuse to accept your $100 bill simply because they know that others, and especially the government (which demands dollars to liquidate tax debts), are unlikely to accept it. The social consensus of our monetary system determines what is (and is not) genuine and valuable.

Just as the US government will not accept anything other than US dollars in satisfaction of tax debts, nobody may transact on the bitcoin network without genuine bitcoins (of which there will ever only be 21 million). It's impossible to "con" the bitcoin network into accepting any other cryptocurrency, so counterfeits are completely useless when it comes to making an entry on Bitcoin's blockchain. Anyone wanting to transact on the Bitcoin blockchain must have genuine bitcoins, period.

Fair enough, the financial types say, but people can just make entries on other networks/blockchains instead. While this is technically true, it's practically irrelevant. For reasons that are beyond the scope of this writing, the "security" of any blockchain varies in direct proportion to the value of its underlying cryptocurrency. This is not doubted by anyone who understands the tech. Said another way, the value of the cryptocurrency over time is a proxy for the blockchain's security, and therefore its usefulness.

For important transactions, everyone wants to transact on the most secure/valuable blockchain, and that blockchain is currently Bitcoin. Furthermore, as bitcoin's value increases its security and usefulness likewise increase exponentially, creating more demand for bitcoins which in turn drives the bitcoin price higher. This virtuous cycle is known commonly in the technology world as the "network effect".

The network effect is evident in most any social-based technology. Consider Facebook, for example. Facebook, like Bitcoin, is just software. Consequently, anyone can copy it. You or I could start a Facebook competitor at a relatively trivial cost. But, what are the odds that people will choose to use our social network rather than Facebook's? In the absence of some incredible innovation that Facebook can't replicate, virtually nil. Google and Apple, both of which have nearly unlimited financial resources, have been unable to successfully launch a Facebook rival. Why? Because Facebook is simply more useful than any start-up social network ever could be. Why? Because more people are already on Facebook and the whole benefit of a social network is to be...well...social. To connect. Nothing connects today like Facebook, and the same was true three and five years ago.

Even though Bitcoin is far, far more than just a potential medium of exchange, there are few things more "social" in nature than currencies. Currencies are beneficiaries of incredible network effects resulting from social consensus (as my discussion above concerning counterfeits illustrated). As the world's first worldwide, Internet currency (among a great many other things) bitcoin has a tremendous first mover advantage (akin to that of Facebook's five years ago). In the absence of some catastrophic technological failure (which seems increasingly unlikely given that Bitcoin has run uninterrupted for nearly 9 years now) or the arrival of an innovative competitor with technologies that Bitcoin can't replicate (is Ethereum such?), Bitcoin's network effect lead seems nearly insurmountable.

In conclusion, bitcoins have use value because they are limited in supply and constitute the exclusive means of transacting business on the world's most secure blockchain network. For transactions of importance, people will generally prefer more secure blockchains over less secure ones, and Bitcoin is the most secure. As blockchain use cases increase exponentially over time, demand for bitcoins will increase exponentially. Given their strictly limited supply, this should lead to additional price increases which in turn make Bitcoin exponentially more secure and useful, driving further demand. Barring a catastrophic failure of the technology or the arrival of a competitor that is far, far better, Bitcoin's network effect advantage seems insurmountable.

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This is fantastic, Sean. I only got half way through and will read the rest later (Saturday means some time with the kids!), but I was thinking this would make an excellent YouTube video. I wonder, would you be interested in collaborating on that? You supply this content and the go-ahead for me to use it, and I could put together a video presentation of reading this along with some visuals of the things you're describing. I think it could be a really useful, helpful presentation. Would take some hours to put together, but I think it would be worth it. Would you want to see these ideas presented that way? I could make it a special episode of @ubf. I'd certainly give you credit for all the content of ideas. Let me know what you think.

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I love this idea, Luke. Let's make it happen.

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Excellent! I've put together a recording and starting putting some images to it already. I really like it! I'm learning a bit more about video / audio editing through the process as well. I may actually start on a fresh edit since I just learned some better approaches. Heading to a baseball game now, or I'd keep working on it. I'm excited about this content. :)

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Great job with the video! Clearly presented and well complemented with the visual production.

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Thank you!

Great writing. I love the combustion engine analogy because your right, spot on. Most of the people I know to wont touch Bitcoin for fear its a scam all the while watching me acculturate much faster in live by using it. I wonder what it will take to wake these people up. Can it be ignored any longer if say it hits $10k or higher? I don't think so and it will hit that. Great read Sean.

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It will be ignored by mom n pop for years to come. Most people ignore gold. For btc to have the same market as gold were talking 300k usd per btc. Massed wont adopt before 1 mill usd coin

Sean, this is the finest discourse I've seen on the value of BTC when juxtaposed with fiat and commodities anywhere! Well done, resteemed, and shared!

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Thank you. I'm grateful.

I know this sort of people who see Ponzi everywhere, even in their relations with people. It can be a lifestyle we don't know about
Resteemed

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But they can't see the biggest Ponzi. Pension funds.

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Haha. A lifestyle. Thats hillarious 😂

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Could be...lots of weirdness out there. Great read...

Even if you smart, you can make a mistakes.

it has bridged the gap in transactions across the world,its ease of use and speed in exchange has made it solve problems that the current financial systems are unable to solve!

Crypto is the future of The Currency in the world and BTC will be the Great Grand Daddy for all CryptoCurrencies. The surge of BTC to $4k from a fall in such short time gives a glimpse of what can be its Value by The end of Fall 2017. Everytime i think BTC, i pity the guy who once bought a pizza for 30 or something BTC.
P.S. Thanks for previous Upvote...It took the Payout to nxt level...You still are No1 And Most Valuable Upvoter on My Steemvp.com profile. Thanks a Ton

Am extremely surprise, it looks like most people are not open to research even when all the information they require is right before them, yet they still doubt it.

I love your post and here's why. I've been following Bitcoin and blockchain technology for a while but only on the surface. I've been in technology business for decades so it's not hard for me to be open to cryptocurrency in general and the technology in particular. However, I'm wondering how I will explain all of this (blockchain, exchanges, Bitcoin vs Ethereum vs Steem vs...) to my accountant at the end of the year so he knows how to process alt currency income. That's why posts such as this are so great. Your analogy of oil combined with an engine to produce work or value can be used to show folks how to get their head around this new technology and way of thinking. We have been brainwashed for so long, it takes a lot for people to think outside the box.

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Couldn't agree more.

People said the same about mobile devices until they exploded.
Everybody was like "oh its such a gimped device it will never rival my PC" and then, the iPhone came out and we all know what happened next.

This is great! I just saw Luke's presentation of it.

I love the point about fiat money deriving its value from the unique ability it has to pay taxes. This is often strangely overlooked in mainstream economics from what I have seen.

High IQ can be a dangerous think...Overthinking to much.

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This is true.

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Still better than low iq. Underthinking is worse :)

I think this 'misunderstanding' is deliberate.
There was a sudden, sustained spate of high profile articles talking about how exciting blockchain is, while dismissing bitcoin.
I wrote one of my earliest posts about it.

Great post, easy to read and understand, many posts out are not as well written as this.

Great insight and analysis. I'll refer people who want to understand bitcoin's worth to this article. The blockchain may turn out to be even MORE valuable than the systems that financial experts currently love. Transparency, immediacy and independence are perks that are hard to let go once you have them.

I thought you may like to check out my latest post?

https://steemit.com/art/@michaellamden68/street-art-in-kuala-lumpur

Maybe even an element of curation could potentially be in-order??

This an outstanding write up @Sean-King! Resteemed
Tweeted and added to the Steemit social channels.
https://twitter.com/RandyHilarski/status/897293557823922176

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RandyHilarski Randy Hilarski tweeted @ 15 Aug 2017 - 03:07 UTC

Why So Many Smart People Have Been Wrong About #Bitcoin
@Steemit

steemit.com/bitcoin/@sean-… / https://t.co/TL5rwgC1Od
https://t.co/NxAsKTyQcf

Disclaimer: I am just a bot trying to be helpful.
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Thanks for Resteeming this @hilarski. It's how I found it.

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Thank you @hilarski for sharing, what a wonderful piece!

@sean-king, man you are welcome at my home anytime, if only I had you around when the family attack my passion for cryptos lol! You explained everything so well, thank you.

At this point only rapid advances in quantum computing could pose a threat to bitcoin, leaving that there's nothing stopping cryptos in general from staying here!

reSteemed

Fancy denying such greatness? (scoffs)

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The streets will flow with the blood of the non-believers...

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Do you have T.P. for my bunghole? I would hate for my bungholio to get polio.

I also thought at first that bitcoin is an ordinary pyramid. But now I understand that this is not so.

i agree about the bright future. but bitcoin is not only numbers. the way i see it its above all a social movement which is being expressed in economic/financial terms. after all its inception had this idea incorporated

Let them say what they like to say by 2020 1bitcoin will be $50000. MARK MY WORDS

In the US the IRS has stated that Bitcoin is considered property. Putting a value on any property is determined on supply and demand, quality, etc.

My thoughts about Bitcoin being purchased with fiat US dollars makes the pot of soup diluted in value. I know the US dollar isn't the only currency that is purchasing the cyrpto's, but paper money is worthless, thus buying anything with paper money puts any real property value difficult.

An interesting concept could be local state or area control where a coin is created with property for property purchase. The example would be gold, silver, cars, guns, food, etc traded for crypto currency, thus property for property. Paper money which then government can't directly buy into crypto's and only the people can buy and no government is allowed to.

Gold eagle and silver rounds (3).jpg

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Paper money is worthless, thus buying anything with paper money puts any real property value difficult.

It's funny, because most would say quite the opposite, with regards to crypto currency. It's so ironic, isn't it?

Thanks for this. I am sending to my brother who happens to be one of those financial types you mentioned so frequently. Upvoted.

Most of theses financial types also claimed there was nothing wrong with the sub prime mortgage market as junk assets were assigned AAA ratings right up until it all came crashing down 8-9 years ago. The people who saw it coming were few and far between and they were often labelled as crackpots. They had their day though...especially the few hedge funds who managed to acquire the equivalent of short positions right before it happened. Even government regulators helped contribute to it and didn't see it coming til it hit em right between the eyes.

I don't put much stock into what the talking heads on CNBC and other financial media say.

Excellent post. The facebook - bitcoin argument is so important.

Yikes, this is brilliant.

I already knew everything you said, of course, but I've never been able to articulate it half so well. Thank you.

Nicely done. I personally doubt bitcoin will ever be useful in the way that a $20USD fiat paper bill is useful. But each BTC can be immensely valuable in the way that 20 pounds of gold is immensely valuable.

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Cash will be gone soon.

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Coming soon to a bank near you, no more cash, everything is digital - which makes the ICE NINE freeze easier to implement

what i like about cryptos is the way it shows in practice how value of something is created from scratch... this helps a lot to understand other currencies etc.

i think cryptos have value because it is superior financial instrument. this is small step for cryptos, but giant leap....

people are yet to comprehend that cryptos and blockchain are the only possible way to transact any type of cash with those properties

  • anonymously
  • instantly
  • globally
  • decentralized
  • securely

all conditions are still to be met in one currency but but is proven to be possible

@sean-king, awesome!!. I have had a few chartered accountant friends who had argued about short life of bitcoin and I was not anyway competent to counter them, given my limited knowledge of cryptocurrency.
I am going to print this blog out and circulate among my accountant friends so that they can see and understand why bitcoin is the currency of future and it is here to stay.
Thanks for a well written blog. Much appreciated.

OMG! I thought it was an aweful article. Words and terms like blockchain and bitcoin and intrinsic value seem to me as being conflated.

I'm all for the blockchain technology as a leger. Bitcoin is fine for being a fiat currency. And I use the term currency loosely . At least it isn't issued bearing interst. And I certainly love seeing the two combined to drive central banking into obsolescence. But to say, or imply, bitcoin's intrinsic value is its network strength that it currently has amongst users and observers of cryptocurrentcies is hog wash.

I can take a piece of gold, whether it is coined or not, place it on a stye that might form on my eye or yours and it will begin rapid healing and become significantly smaller in a relatively short period of tme. Hours to a day or two. This is usefulness or value that gold contains, although not its only one.

Outside of a group keeping score on a leger of who has the encoded result of a machine generated equation, what can a bitcoin do? Remove any logs you might see in my eye?

informative post thanks for sharing!

Maybe they're not really all that smart.

"Blockchains produce an immutable transaction record only when cryptocurrency is exchanged" hmmm..not sure that's true?

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How so? How can I make an "entry" into the blockchain unless I transfer at least a fraction of a bitcoin from one account to another? Am I missing something?

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Well, Maidsafe/Safecoin for example is mined by users dedicating hard drive space to the project, but maybe I'm the one missing something?
Thanks

Great article. I also believe that the BTC price will dramatically grow in the next few years. I am also a fan of IOTA. I know that IOTA will replace bitcoin in many many areas. Especially the micropayments as bitcoin allows me too few transactions per second and I believe it could take a while until the Lightning feature will be added. Especially because of the miners who are scared about this development.

IOTA is definitely cool but the problem is here the missing incentive (because no mining is needed for transactions). There could be other cryptos like Verge, PivX or Monero which will be still used for the black markets and could turn the market cap up. But most of the non-techies only know bitcoin. That's also the reason why bitcoin is the winner of the race even if it's a bit outdated.

They don't want to see it on New heights

When people find out that money is the same as bitcoin but bitcoin can't be inflated more than 21m they will buy, bitcoin. I don't understand what's stopping them.

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People are scared and sceptic and lack info. They have so much faith in the powers that be, that they will get mad at you for criticizing them/it. But evetually they will join in. But most people wont get into bitcoin before the governments or banks tell them to. When the state controlled media at one point will tell us on air that the banks has given up and all the top dogs has fled to some tax haven, then and only then will the masses convert theit inflated wothless fiat into a mere 0.0000000001 btc at 1mill usd per coin.

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I think so too, got on the btc train a bit late but I'm glad I'm on now.

As i see it,BTC is being pumped right now.All alts are going down,for a 2 weeks now.I believe that it will go very high,but it will drop very low to.

My nephew when prompted by his mother to explain bitcoin (she never heard of it) said it was a way to buy things illegally. Seems the silk road debacle has tainted bitcoin for those in the matrix.
Back then i didnt understand bitcoin's value but thanks to this article i understand a lot more.

Yeah! That is true, that includes me when I had the chance back then to buy as many as I want, but failed to belief then.
follow @polaleye50 for more helpful tips
HOW TO CONVERT YOUR STEEM/SBD TO PHYSICAL CASH TO SPEND AND WITHDRAW ON ANY ATM MACHINE

Again brought up bitcoin with a relative...this time my sister who is in charge of the entire network for a school district on Long Island, NY. Her response was that it was used by the ransomware bandits implying it is an underground, semi-illegal scam. I am quite happy to have bought one bitcoin before the fork for $1200, some ether and some litecoin. All the rest of the relatives sitting around had never heard of bitcoin and did not want to know anything about it. Amazing head in the sand way to live life.

A analogy could also be made with the art market. What drives the price of a Jeff Koons into the millions? The intrinsic value of the material of a plastic balloon dog is negligible.
One of Jeff Koons’s “balloon dogs” just fetched a record price, but who owns the rest of the litter? Is the art market going to collapse? What do the economists say about that?
What would happen in that case to the collection of Jose Mugrabi, The Man With 800 Warhols I think his son Alberto Mugrabi can sleep easy, the market is not going to collapse, and if he has any bitcoin, they are safe too!
I was so intrigued that I spun this off into a new post, concentrating on the art market: Bitcoins, Koons, Warhol, Mugrabi and the Art Market

Brilliant work sir. This would be a great read for Mr. Jamie Dimon who utterly hates bitcoins. Thanks for writing this article i have now an answer to those who always ask me why so many experts view cryto as fraud or a ponzi scam. This one deserves an upvote. I'll be following you as well. I would like to also ask permission if I can make a Filipino version of your article all credit will be yours just want to make sure that my compatriots understood your article specially those who do not have a very good command of the english language.

@sean-king - I just discovered the post today, and not only is the content well written but it also resulted in a collaboration with another steemian which is even better!