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Bitcoin’s value function

In this guide, we cover how and why Bitcoin has value and where it derives its value from

Value is an abstract concept. The way Bitcoin has value is linked to the way it operates and to the fact it has a known limited supply.

Without security, Bitcoin wouldn’t be valuable. Without decentralisation, Bitcoin wouldn’t be valuable. Without censorship resistance, Bitcoin wouldn’t be valuable. Without an upper bound, Bitcoin wouldn’t be valuable.

My point is simple: Bitcoin’s value derives from all its properties, not from a single one.

What is intrinsic value?

Former trader and risk analyst and now essayist and scholar Nassim Taleb said:

“The minority rule will show us how all it takes is a small number of intolerant virtuous people with skin in the game, in the form of courage, for society to function properly.”

The way our fiduciary society works is by assigning value by the rule of man. The US dollar has value in the US because it’s illegal to transact in other currencies. The odds you can use USD at a local store in the UK are quite small, the same way you couldn’t use GBP in American stores located in the US.

Legal tendership is what gives our current fiat currency its value. Unlike gold, which has intrinsic value due to its limited supply, paper money exists because governments say so.

For intrinsic value to exist, there must be:

  1. A constant – or fixed but known – supply.
  2. Acceptance by governments and citizens.

 

If an asset has those two properties, it could potentially hold value – much like art or gold. Value can change given the supply and demand. Therefore, we could argue that anything can potentially have value, and we cannot say an asset won’t have value if it respects the two above properties.

Bitcoin’s value is a function of its properties

In addition, for an asset to be valuable, it must also be secure and durable. Bitcoin is both.

It is also censorship resistant, permissionless, and decentralised. Because no one owns the network, no one can stop it.

To fully understand Bitcoin’s value, one needs to accept the following logic: as long as Bitcoin remains…

  1. Decentralised, it will remain censorship resistant.
  2. Censorship resistant, it will remain secure.
  3. Secure, it will remain immutable.
  4. Immutable, it will remain decentralised.

 

Repeat until exhaustion.

Bitcoin’s attractiveness is derived from its properties, which in turn give Bitcoin value. Its value will of course be subject to the laws of supply and demand, and it’s also susceptible to price manipulation by large holders as well as waves of speculative adoption.

Nonetheless, as long as Bitcoin maintains those properties, it will always have value. The price of said value may go up or down depending on loads of factors that cannot be accounted for (like Mt Gox going under or the supply suddenly increasing).

The more people that join the Bitcoin network, the higher price can go and the more decentralised BTC becomes.

Much like the fact that the only being capable of reproducing a human footprint is a human, the only currency capable of reproducing Bitcoin’s value is Bitcoin.

This is the last piece of the Bitcoin value puzzle: that it derives from the fact Bitcoin’s network cannot ever be copied.

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