What is the Underlying Value of Bitcoin?
What is Underlying Value?
A lot of the criticism of Bitcoin - and cryptocurrencies in general - is that they have no underlying value. Underlying value means what you can DO with an item, and what that action is worth. Food has a very clear underlying value because you can eat it, and that action can be worth a lot depending upon how hungry you are! Food is not very similar to Bitcoin though, so let's look at the underlying value of some things that are:
Gold is often used as a direct comparison for Bitcoin since it is limited in quantity and typically used as a store of value. Most of gold's high price comes precisely from it's use as a store of value, but absent that you can still make things out of gold that people want, which is it's primary underlying value.
Fiat currencies (another common comparison to Bitcoin) are given underlying value by the government entity that issues them. Since you must pay taxes, and you must use the local fiat currency to pay those taxes, you're always guaranteed that that currency will have a certain amount of value to all of the residents of that country.
Company stock has underlying value since it represents a share of ownership of the company's profits and a Starbucks gift card has underlying value because you can reasonably expect to be able to trade it for a cup of coffee. I could go on but I think I've made my point.
Bubbles
The term "bubble" (when referring to items or assets and not balls of soapy water) is generally used to describe a situation where the price for an item is vastly higher than that item's underlying value. A common example is the Dutch Tulip Craze in the 17th century. We all have a pretty good idea of the underlying value of a tulip (hint: not much) and for whatever reason Tulips became in very high demand and commanded extremely high prices which creates a "bubble". The term bubble is used because eventually the price for the item will fall back down closer to it's underlying value which is known as the bubble bursting - as the actual soapy water bubbles are wont to do.
More recently in the early 2000s there was a bubble in the stock of "dot com" companies. The prices of those company's shares were driven up far higher than their underlying value - the share in the company's profits - and as always the bubble burst and prices fell back down.
Many have argued that since Bitcoin is currently commanding a very high price yet has no underlying value, it is also in a bubble which will eventually burst and the price will fall to $0, or very close to it. I disagree that Bitcoin is in a bubble and I will explain why.
What is the Underlying Value of Bitcoin?
To attempt to answer this question, I'll refer back to my definition of underlying value above: what you can DO with an item, and what that action is worth. What you can DO with Bitcoin is send it! You can send it to anyone, anywhere, relatively quickly and cheaply. So what, you ask? We can send anything digital to anyone, anywhere, quickly, cheaply, and publicly. This brings us to the second part of that definition - "what that action is worth".
If I send you a digital picture online, I still have a copy of that picture, and I can copy it and send it an infinite amount of times as can everyone else who has it, so the action of sending digital data is not worth very much. That's why we get so much spam email!
Physical items on the other hand, like gold for example, cannot be copied and are not easy or even possible to send to anyone, anywhere. So the action of simply sending physical items places has a lot of underlying value - hence huge businesses like UPS and Fedex to name just a couple. When it comes to money, it also cannot be copied (easily, or legally), and it is similarly difficult to send - so once again, there is underlying value in sending money places which is why businesses exist and charge money to do it.
Anyway, back to Bitcoin - Bitcoin has the properties of a physical item in that it cannot be copied but it is able to be sent to anyone, anywhere, very easily. As I presented above, the ability to send an object that cannot be copied has value, and that is (in my opinion) the underlying value of Bitcoin.
So there you have it - the underlying value of Bitcoin is that it allows you to send something that cannot be copied to anyone, anywhere, relatively quickly and cheaply. You may have been waiting for me to actually provide a number for what that value is worth, but unfortunately I have no idea! I suspect it is very, very valuable though.
At this point, I'll turn it over to you - my readers (and thank you by the way!) - to let us know what you think the value of a Bitcoin is in the comments. Or let me know if I'm totally wrong!
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I don't think it's so much that you can send it as it is that you can transact with it. Bitcoin is accepted in trade for products and services because it is scarce, simple to transact, secure, and perhaps most importantly irreversible.
Bitcoin, like gold, represents a store of value. Whenever someone sets a price for something in terms of Bitcoin, it means they are willing to trade that item for some quantity of Bitcoin. At the moment of that transaction, some quantity of Bitcoin becomes worth some product or service.
Transacting is really just another word for sending. Presumably any time something is sent from one party to another it is part of a transaction.
I submit that bitcoin has a far higher underlying value than gold precisely because it has many of the same properties as gold (scarcity, inability to be copied, etc) but it is able to be transferred in ways that gold cannot.
That's a reasonable argument. It does have a drawback that gold doesn't though. While Bitcoin can be stored as a record, what prevents all Bitcoin in existence from being wiped out if the blockchain is wiped out or corrupted? Especially with mining difficulties increasing and mining facilities becoming largely centralized?
I, for one, run BitCore, but how many "distributed" instances of BitCore are there?
Yes centralized mining is definitely a big risk for Bitcoin but I think once things shake out and prices stabilize and rewards decrease it will no longer be as profitable to set up multi-million dollar mining facilities and that it will go back to being more decentralized. The only questions are will it last that long and at what price will it stabilize?
I think it will last. As for the stabilization price, it's anyone's guess. If investors think of it as a transaction asset, it may keep pace with inflation. If not, anything goes.
People often undervalue the fact that Bitcoin has 1000s of pieces of hardware worth millions of dollars enabling it's utility. Just like the internet most don't understand or place much value on the physical networks that physically make-up the great data exchange...
Think you may be right there! (+thank you - great article!)
And we don't know how many more coins conventional computers will even be able to mine [QPU mining anyone!?] Prices have the potential to get really silly!! Can you imagine buying properties, with a few K Satoshis won on chopcoin?? This could be a reality one day, or just a pipe dream... 1 way or the other, we are living in very exciting times, and Bicoin is part of that! This adds to its value as well, in relation to its significance in the shaping of our history as a planet and a race.
Bitcoin and even Satoshi's have the potential to become very rare commodities one day, within this "digital environment", which seems to be expanding exponentially... (perhaps as a reflection of our collective consciousness).
Humanity is going through a massive shift, and we must all be responsible and respectable in this new era of change and innovation.
More life family!
Considering the fundamental value of the value of money, BTC can not be said to be inferior to the existing currency, its capability is rather high.
I think that the question of whether it is the current situation or not, considering the relative price, "the price is too high".
In the future I think that it will stabilize at the price according to the ability of coins, tokens including Alto.
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it is rather difficult or rather impossible to predict its true value the more the use the better the return