A friend emailed me the other day with what I would argue is one of the more challenging questions to answer surrounding Bitcoin. That question is:
“What is backing Bitcoin?”
He wanted to understand the “more common notion of a speculative investment being “backed by/based on” some underlying, “transparent” value.”
I, therefore, put together a little response and felt I should share it on Looking Glass as others may find value in it.
Before diving in, if you have any questions, don’t hesitate to comment below.
“I am not investing in Bitcoin because it isn’t backed by anything.”
I have to say. This is one of the tougher questions to answer. People that lack the desire to understand Bitcoin usually use this as their fallback as to why they won’t touch this magic internet money. But that doesn’t mean it holds weight.
With that said, my thoughts surrounding the question, “What is backing Bitcoin?” I would say this question is a misnomer. Why? Value is subjective. It cannot be consistently measured. Something has equitable value because it offers some form of perceived service in the present. In saying that, this perceived value fluctuates, given the environment. For instance:
- Gold is valuable because it is currently the best tangible and scarce asset which cannot be easily co-opted.
- A painting is currently valuable because it is pleasing to the eye, and often, more importantly, it offers status and peer acceptance.
- Apple Inc. is valuable today because of the services and products it offers.
- Bitcoin is valuable at the moment because, similar to gold, it is a scarce asset which cannot be easily co-opted. But, due to its intangible/digital nature, it allows for global permissionless and trustless ~10min transactions.
However, these assets are only valuable in that they continue to be the leaders in their domain and offer a service or use case in the present.
Artists that were widely popular in the 1980s aren’t necessarily popular today because styles and tastes have changed and a lot of that art looks “dated.” If Apple’s products no longer met the rigorous needs of its customers, they would quickly fall out of favour. Glass beads have been used as a store of value in the past, but their supply has proven to be easily diluted. The world is constantly changing, and these changes impact what is perceived to be of value.
In saying all this, an asset or item doesn’t have to be “backed” by something to have value. It just has to offer a viable use case or service better than currently available. And it will continue to hold value until a better competitor or technology arises.
Conversely, just because something is “backed” by something doesn’t mean it has value. If the backing item loses value, so does the object it is backing. And why might this item lose value? Because it no longer offers the service or use case it once did, or better technology arose.
To summarize, value is purely subjective. A down blanket is highly valuable if I live in the artic, but not so valuable in the desert.
When we invest in something, we are essentially betting that it will continue to offer its use case and services into the future and that no other competitor/technology will dethrone it.