Value of Bitcoin Is not Currency, It’s just a Technology


If one could combine in a financial asset four key attributes: the anonymity of cash, a guaranty of trustworthiness, the convenience and scalability of digital transfer, and a reliable store of value, you would have an extraordinary product. It would be ideal for champions of individual liberty and anathema to governments seeking to tax and regulate them.

That is the promise of bitcoin currency.

It has succeeded in assuring anonymity and in enabling strangers to transact without the need for a third party like an Amex, Visa V -1.57%, MasterCard MA -1.08%, or a bank to vouchsafe trustworthiness. So far it is at best adequate on scalability and convenience (the system can handle only 7 transactions a second and takes 10 minutes to confirm transactions, though it appears these constraints are solvable. It requires all but the geekiest to use digital wallets which are far less secure than bitcoin itself). But where it arguably fails is as a reliable store of value.


Bitcoin has no inherent value whatsoever.

It is not accepted as legal tender by any government. It is not backed by any assets. It does not represent a claim on either tangible or intangible property. Like art, however, it does have the merit of scarcity. There are currently 13 million in existence. New bitcoins are currently being created at the rate of 8 percent or so annually, a rate which will decline over time, and there will never be more than 21 million outstanding. As long as people are willing to exchange dollars for works of art, an art market exists, and art becomes a store of value. Similarly, as long as people are willing to exchange dollars for bitcoin, it too becomes a store of value. But people were willing to exchange vast sums for tulip bulbs in Holland in the 17th century, for shares in the South Sea Company in Britain in the 18th century, and for the most dubious of dotcom stocks in 2000. Bubbles all.

So the question becomes: does the market for bitcoin represent a stable, long-term store of value? Those who think it’s a con would point to its extreme volatility. In the past 3 years, it has traded as low as $5, as high as $1200, and now changes hands at around $250. They would also cite its illiquidity: all the bitcoins in existence are valued around $3.2 billion. Apparent trading volume is $2 million per day, (approximately a quarter of the daily volume of the typical $3.2 billion company). Moreover, there is no regulation or other mechanism to prevent large holders from pre-arranging trades among themselves to give the illusion of liquidity.

Ownership appears to be more highly concentrated than is the typical stock of the same capitalization. A knowledgeable friend in the business (the former operator of a very profitable bitcoin exchange and one of the most successful bitcoin miners), has stated that more than 50% of bitcoins are held by no more than 20 individuals. They have every incentive to collude in a classic “pump and dump” operation—though of course there is no evidence they act in concert or even that they know the identity of the others. More people are accumulating some bitcoins to have as a small percentage of liquid funds, but not very large quantities.


Leave a Reply