The Value of Crypto – Utility vs Speculation
I have supported the utility of Bitcoin for many years. For me the use case is more about the utility as currency. It is hard to believe how fast the time goes by, and how crazy things are today. The same can be said of life and time, but the focus of this post is on Bitcoin, and cryptocurrency in terms of worth. This post examines the utility as currency versus day trading and leveraging in terms of value.
Do you recall hearing of a new computer currency that used cryptographic mathematics created by a wizard call Satoshi Nakamoto in 2007. Maybe you read the white paper, or heard of the first transaction in 2009. Were you optimistic that trust in mathematics using a decentralized ledger could replace a central banking system, and function as currency? There was value in this utility, and to top it off it is also immune to inflation. Many of us heard about this and understood the necessity, as we had seen the bailouts and corruption in the financial sector.
There were a great number of people that shared the excitement but did not have the ability or motivation to collect rewards from a blockchain in terms of mining. There was a buzz at bitcoin.org, as the problem of double spending had been solved. The first transaction of the Bitcoin currency, in block 170, takes place between Satoshi and Hal Finney. The year is 2009 and New Liberty Standard publishes a Bitcoin exchange rate that establishes the value of a Bitcoin at US$1 = 1,309.03 BTC, using an equation that includes the cost of electricity to run a computer that generated Bitcoins.
Who would take it, why would someone use it. Then your got wind in mid 2010 of the first transaction where Laszlo Hanyecz, offers to pay 10,000 Bitcoins for a pizza on the Bitcoin Forum. At the time, the exchange rate put the purchase price for the pizza at around US$25. By the end of 2010 Bitcoin had a one-million dollar market cap, there was speculative trading, and an app for mobile devices.
Bitcoin is an open source platform offering everyone the ability to look at the code, submit bugs, and if you have the skill set you can participate in development. However the open source model is not new, but the concept of a decentralized public ledger known as the Blockchain that facilitates trade has proved profound.
Bitcoin has utility in a large part because it functions as currency. Without getting into the debate of intrinsic value, there is value in the ability to make and take payments ideally, anywhere there is an internet connection. The decentralized nature ensures there is no monopoly on this utility. I suppose the monopoly could be debated if we look at how the network is setup and consider who is ruining the larger nodes. However for the sake of this article, I propose the value of bitcoin is the utility to function as currency. In order to function as currency the price needs to be stable, and bitcoin has been a volatile ride that has prevented large scale adoption. As I type, sites like New Egg and OverStock take bitcoin but it is typically directly converted to US Dollars because of how fast the value changes.
I think the current price is based more on the volatility rather than the utility. As mentioned above from the beginning people were speculating with Bitcoin. The volatility that is negative for the currency use case, serves well for use in trading. Today there are exchanges offering leveraging and as more people want to get in on the action we see the price increasing along with the volatility.
I see the altcoin market similar to the value of Bitcoin in that coins either fill a demand not offered by bitcoin, or are just used for the volatility to help day trades. From the smart contracts like Ethereum, or monetize content and grow a community like Steem, there are a vast number of altcoins. From solid players like Litecoin to the pump and dumps that come and go, an encyclopedia could be written on the altcoin market.
One could dedicate an entire article on the forks in Bitcoin alone, something I have not done. My focus is about what drives you to buy/use/hold bitcoin and altcoins. Is it the utility offered, the trading opportunities, or HODL (hold on for dear life)?
As much as I like the utility of the blockchain, I have dabbled in the buy low sell high trade. With the benefit of hindsight the HODL has likely been the best position.
It is an interesting time, and I have commented in other post on technologies like Hashgraph that helps solve the network congestion issue. Hashgraph uses a technology called gossip for the voting required in Bitcoins POW (proof of work). As I mentioned in my comment on an article, I like the tech side of Hashgraph but it is not open source, so I personally do not support it. However it will be people using these technologies that determine value.
One closing thought relates to an advertisement I saw on the web with the KNOWLEDGE man Ty Lopez criticizing that 10,000 pizza transaction, implying it was a dumb move to spend 10,000 BTC based on the value today. It is apparent to me that Ty does not realize that it was the early adopters, and the willingness to use bitcoin that helped fuel the success seen today. As mentioned it is also the early speculators of this new technology that have led to one of the larger use cases today.
The focus of this post is on the use case for currency, and contemplating some of the things that drive the price today. How about you; what is your use case for cryptocurrencies?
For more details on the history visit http://historyofbitcoin.org/
All image files in this post were made available under the Creative Commons CC0