Unlike paper money, which governments assign value, crypto seems nebulous
Paper money only has value because the Government says it does. How does that work for cryptocurrency like Bitcoin? Does cryptocurrency have value? And, if so, why?
Before 1933, money was gold. Literally. You had $20.67 that was an ounce of gold in the United States Bullion Depository at Fort Knox, Kentucky. President Franklin D. Roosevelt ordered the US off the gold standard in 1933, to inflate the money supply. By 1971, President Nixon handed permission to the Federal Reserve to print paper that the Fed called “money” to goose the economy. These are the dollar bills that we labor, steal or gamble to earn.
All these green bills lining my pocket are, according to the US Department of the Treasury, “not redeemable in gold, silver or any other commodity, and receive no backing by anything… The notes have no value for themselves, but for what they will buy.”
When people say “my money is good for nothing”, they don’t know how right they are. The bills themselves are useless. They buy us goods only because others accept them.
On paper, digital currency seems valueless, too. After all, bitcoin transactions appear as binary digits of 0s and 1s. You can’t touch them, feel them, smell them. In that way, cryptocurrency is even worse than a dollar bill. It’s worse still, since only about 3.3 million people use Bitcoin, and since crypto is built on a combination of game theory, economics and cryptography, which makes it complex and counter-intuitive. It’s, certainly, less intuitive than our other two forms of money: fiat currency (namely government-backed paper and coins) and the physical type (like gold, beads or Cabbage Patch dolls).
But cryptocurrency works on the same principles as do physical assets and fiat. It’s valuable because it’s fiduciary, i.e., based on trust. It’s valuable because it is scarce. It is also valuable because it guzzles about as much electricity per year as does all of Nigeria.
Bitcoin may be intangible, but its value has already reached one ounce of gold last March and increased 7.5 times in value over 2017. Actually, the Bitcoin market cap in October was worth more than investment bank Goldman Sachs Group Inc. and eBay Inc., according to Forbes.
Five years ago, one bitcoin was worth $12. As of this writing, it’s worth more than $10,000, while Bitcoin’s total market capitalization surpassed $41 billion. Its value has doubled in the last two months alone.
Why? Not only because bitcoin is desirable, but also because it has achieved some level of scarcity.
Paper money is inflationary. Prices rise with time. The same loaf of bread that cost you 54 cents in 1979, costs you more than a dollar 38 years later. All of this generous printing of paper bills by the Central Bank makes dollar bills less valuable, so you need more dollars as prices expand. Bitcoin, on the other hand, is deliberately deflationary. It is limited and scarce, which means that one bitcoin gains in value, so you get more for your crypto, as time proceeds.
That was the intention of its unknown founder, Satoshi Nakamoto.
So bitcoiners love bitcoin because they trust it and because it is scarce.
Bitcoin is also backed by humongous amounts of electricity.
At around 300,000 transactions per day, Bitcoin guzzles more watts per year than Iceland and Serbia do. Think of 1,018,762 average American homes powered by electricity for one day. Well, that’s the amount of electricity it takes to power one bitcoin transaction!
As Digiconomist reports: “Bitcoin and Ethereum mining taken together consume more power than countries like Jordan, Iceland, and Syria, with the two combined ranking 71st among all countries.”
It is also interesting to note that “roughly 27 times as much energy is consumed by Bitcoin mining as is consumed by the entire Visa network.”
Finally, “a single Bitcoin transaction could power the typical U.S. household for roughly 5.5 days.”
The mining sources of electricity are so valuable that some bitcoin mining farm communities turn to all sorts of shenanigans to extract that watt bit more of electricity. In China, for instance, Bitcoin miners steal electricity from oil plants.
So cryptocurrencies like Bitcoin have more intrinsic value than do government issued money.
The difference is – and this I think is huge – crypto has largely wound up as some collectible, rather than currency in its utility sense.
Fewer merchants accept bitcoin for payment than did in 2015, largely because most users trade or hoard the stuff rather than use it to buy.
In fact, crypto blogger Arcturnus found that some organizations that accepted Bitcoin in the past either hid or removed their bitcoin donation options. These organizations include Ubuntu, Microsoft, WordPress, Mozilla and Wikipedia. He also found that of the 45,000 merchants that Coinbase says integrate bitcoin, many of these organizations never accepted the currency in the first place or stopped accepting it.
So even though Bitcoin carries fiducial value and even though it contains more intrinsic value than do dollar bills, you can basically trade it only over Bitcoin sites and, maybe, with about 500 online and brick-and-mortar businesses.
At the end of the day, naked emperors tend to carry more power than fashionably clothed commoners. The same with the dollar to crypto. The dollar may be naked – have none of the intensive power that underpins crypto – but to date, I can’t use crypto to pay my bills.
I can’t pay my rent with crypto, nor use bitcoins to buy milk or bread from Aldi, and so forth. The government say-so, or legal tender, means more to storekeepers and to payment gateways than does the endorsement of Vitalik Buterin, Ethereum’s founder, or of Coinbase, the largest cryptocurrency trading center.
And that’s partly Bitcoin’s fault.