The Paradox that is Bitcoin's Value
One of the more difficult concept to grasp when trying to understand bitcoin is where it gets its value from. Everyone that has looked into Bitcoin has at one time or another wondered what it was that gave Bitcoin its value. One can watch numerous Peter Schiff YouTube videos where he argues that Gold is more valuable than Bitcoin because Bitcoin has no true value. You can watch further videos of Scott Nations arguing with Peter Schiff, taking the view that Gold has no value because it has no value. The irony ironically lost on both of them.
The reason for their confusion is due to human's tenancy to think of things in a linear fashion. We believe things have a beginning, a middle, and an end. One must of course wonder what came before the big bang, which is a never ending quest for a beginning to all beginnings. The truth is the nature of the universe is one of duality. Perhaps The Heart Sutra put it best,
"All things are by nature void, they are not born or destroyed, nor stained or pure".
Things can be without a start, in the way we think of starts. Gold had value once people started valuing gold. And since people value gold, gold will always have value. It will never lose its value, because there is value in having a store of wealth that does not tarnish throughout time. Gold provides this service. This cannot be destroyed, but it can be created or duplicated.
Satoshi Nakamoto understood this conundrum, and even more understood how to solve for it. He simply completed the first transaction. One of the most elegant proofs to one of the most difficult questions I have ever observed. A trick I used to use when approaching a proof in an exam. I'm sad to say I may have gotten this one wrong. simple assume untrue, if what follows is a contradiction your hypothesis is proven correct. Question: will Bitcoin have value. Answer: assume untrue, and see if anything else prevents it from working. Then implementing this theory in reality is a simple act of entering a state in which it is true that Bitcoin has value. Complete a single transaction. In doing so you give Bitcoin a value. It's just a question of finding that value in terms we are familiar with, mainly dollars (or Gold for some of us older souls).
The fact that there was one other person willing to accept it as a means of transporting value quickly and cheaply across the globe, gives Bitcoin value. Since there is a need for the service Bitcoin can provide it will always have value. That value is equal to the number of people that require that service, and chose Bitcoin as a provider of that service. Visa and PayPall are testaments to Bitcoins value. Bitcoin just cuts out the middle man, in the same way Gold cuts out the government when storing ones long term wealth. Have you ever wondered why you need a bank or company in between you and the seller of goods if you are shopping online? The answer is one of trust, and with Bitcoin you have solved for the issue of trust. You no longer need a company in the middle charging you billions of dollars in fees.
Bitcoin didn't have a beginning, because the need to transport value has always existed. We have simply begun to use this new technology because we were shown how, with the first transaction. In that same sense Bitcoin, and Gold, will have no end. Unless people forget how to use them, which is highly unlikely, they will continue to serve a purpose and thus have value.
The volatility is thus the issue. Until one realizes that in the long term it will be irrelevant. Exponential growth is unsustainable in the long run. The value of Bitcoin is only going up so rapidly is because the ecosystem is growing so rapidly This is an unsustainable growth rate at some future date. But imagine you could look into the future and see the world that exists. At that time Bitcoin will be a global payment system, having stabilized in price. People will not necessarily hold Bitcoin for long periods, but they will use it to transfer money because it is the cheapest most trust worthy method of completing transactions.
People who are early adopters of this new technology are simply aware of the fact that the future value of Bitcoin is much much much higher than the current price. They are in a sense investors in Bitcoin, and for there commitment they are being rewarded handsomely. Others can also take advantage of this arbitrage in pricing, or they can watch. Either way ideas do not end, and we cannot unlearn how to use Bitcoin. Unless you think more people will not start to use Bitcoin as it becomes more convenient, I feel the clear set of actions one should take are clear.
The last argument is one of competition, what prevents others from coming to market. People that still use Gold today will have an understanding of the response to this questions since Silver has always co-existed with Gold. I used to wonder the same thing. But then I started working in insurance, and I observed humans nature. I've come to the conclusion that Brand power is an extraordinary thing. As is the advantage of being first to market. It is often the case that we predict that Brand Drug sales will fall off of a cliff once a generic comes to market. This rarely occurs. Even with added incentives to use the cheaper alternative, people often go with the Brand they've heard of. We attempt to educate them, and point out that the same ingredients are used in both drugs, but they still prefer the Brand.
Human nature is one of starts and end. We take time to build trust, and once trust is established we do not lose trust very easily. This can be observed with most currencies currently in existence. Governments, or more accurately in most cases private central banks, have all removed the gold from behind the currency. But what happens when the next generation comes along. They observe the currency, or the Bitcoin, and trust that it will work because its part of the world as they've always known it. Online shopping is the obvious choice for a millennial that's always had it as an option.
Bitcoin's network is representative of the number of people that trust the Bitcoin brand, and give it value. Similar to how Apple's network or Googles network of users are what give them value, Bitcoin's community is what gives it its value. That value is reinvested in the form of an improved network. That is, Bitcoin becomes more difficult to hack, a more efficient network to transfer money, and irons out its bugs. People who observe Bitcoin being used are more likely to use Bitcoin because they hear about it first and most, and it has the biggest ecosystem of users. Just like people in Canada use Visa because it has the largest ecosystem.
It is very difficult to penetrate the moat a brand creates. Look at Warren Buffet's portfolio and you will see Coca Cola, Apple, and Kraft. This is because he understands brand preference. Vendors may chose to use whatever cryptocurrency they desire. People that are investing in Bitcoin are aware that Bitcoin will be one of the cryptocurrencies they decide to take. If vendors want to do business with the Bitcoin community, which at this point is $70,000,000,000 then they will have to accept Bitcoin and join that community making it larger in a reflexive manner.
So by all means invest in multiple crypto currencies. I own a small amount of Ethereum, but I also on a small amount of Bitcoins. Because Bitcoin will be one of the survivors; we've passed the point of no return. That being said, the reflexive nature of Bitcoin, and crypto currencies in general make it very likely that it will eventually enter into a bubble. Perhaps when it's big enough for Stanley Druckenmiller to point Goerge Soros in the right direction. We are far from that point. Just keep in mind that exponential growth is unsustainable, and that the value of the system is based on the number of transactions. When the system stops growing, people will use it mostly for transactions.
People will most likely have made so many billions of dollars off of their small investments that they'll have forgotten how to objectively value Bitcoin. Champagne problems for future us. For now, the growth is sustainable and appears to have long term staying power. When you start to see Bitcoin accepted everywhere Visa is, and PayPall out of business, then you can start considering a slow down in user growth. It is still very early on.
Dahlsom