Bitcoin Tails

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Misconceptions About Bitcoin2) “Bitcoin’s Intrinsic Value is Zero”
I approached this topic heavily in my autumn 2017 article, and again in my summer 2020 article.

To start with, digital assets can certainly have value. In simplistic terms, imagine a hypothetical online massive multiplayer game played by millions of people around the world. If there was a magical sword item introduced by the developer that was the strongest weapon in the game, and there were only a dozen of them released, and accounts that somehow got one could sell them to another account, you can bet that the price for that digital sword would be outrageous.

Bitcoin’s utility is that it allows people to store value outside of any currency system in something with provably scarce units, and to transport that value around the world. Its founder, Satoshi Nakamoto, solved the double-spending problem and crafted a well-designed protocol that has scarce units that are tradeable in a stateless and decentralized way.

In terms of utility, try bringing $250,000 worth of gold through an international airport vs bringing $250,000 worth of bitcoins with you instead, via a small digital wallet, or via an app on your phone, or even just by remembering a 12-word seed phrase. In addition, Bitcoin is more easily verifiable than gold, in terms of being a reserve asset and being used as collateral. It’s more frictionless to transfer than gold, and has a hard-capped supply. And I like gold too; I’ve been long it since 2018, and still am.

Bitcoin is a digital commodity, as Satoshi envisioned it:

As a thought experiment, imagine there was a base metal as scarce as gold but with the following properties:
– boring grey in colour
– not a good conductor of electricity
– not particularly strong, but not ductile or easily malleable either
– not useful for any practical or ornamental purpose

and one special, magical property:
– can be transported over a communications channel

If it somehow acquired any value at all for whatever reason, then anyone wanting to transfer wealth over a long distance could buy some, transmit it, and have the recipient sell it.

-Satoshi Nakamoto, August 2010

Compared to every other cryptocurrency, Bitcoin has by far the strongest network effect by an order of magnitude, and thus is the most secure in terms of decentralization and the amount of computing power and expense that it would take to try to attack the network. There are thousands of cryptocurrencies, but none of them have been able to rival Bitcoin in terms of market capitalization, decentralization, ubiquity, firm monetary policy, and network security combined.

Some other tokens present novel privacy advancements, or smart contracts that can allow for all sorts of technological disruption on other industries, but none of them are a major challenge to Bitcoin in terms of being an emergent store of value. Some of them can work well alongside Bitcoin, but not in place of Bitcoin.

Bitcoin is the best at what it does. And in a world of negative real rates within developed markets, and a host of currency failures in emerging markets, what it does has utility. The important question, therefore, is how much utility.

The pricing of that utility is best thought of in terms of the whole protocol, which is divided into 21 million bitcoins (each of which is divisible into 100 million sats), and combines the asset itself with the means of transmitting it and verifying it. The value of the protocol grows as more individuals and institutions use it to store and transmit and verify value, and can shrink if fewer folks use it.

The total market capitalization of gold is estimated to be over $10 trillion. Could Bitcoin reach 10% of that? 25%? Half? Parity? I don’t know.

I’m focusing on one Bitcoin halving cycle at a time. A four-year outlook is enough for me, and I’ll calibrate my analysis to what is happening as we go along.