Doc's Daily Commentary
Mind Of Mav
Why Bitcoin Has Intrinsic Value
This newsletter is a response to the notion that Bitcoin has no intrinsic value. I will be assuming that you are decently familiar with Bitcoin; if you are not, I highly suggest you read the Bitcoin White Paper written by Satoshi Nakamoto. My argument is relatively simple; however, to increase the chance of you following it completely (which should either result in an agreement, or in the discovery of my argument’s flaws) I will be trying to lay out everything slowly. I will gladly read your criticism, so long as you do your best to articulate it and do so with the intent of improving myself and other readers. I would especially urge you to attempt to mentally convert my argument into a more rigorous proof, and tear it down just as one would tear down an actual mathematical proof. Attempt to find the individual underlying assumptions you disagree with. Just because you disagree with my conclusion does not mean my argument is necessarily wrong; it’s possible that only some of my assumptions are wrong.
What is Intrinsic Value?
I’ve looked at a handful of definitions from a few sites, and I think I have a grasp on what intrinsic value means. It seems to be a pretty vague term that describes the abstract quality known value ascribed to something, as opposed to that object’s actual trading price. In other words, the intrinsic value of an object is the theoretical price that it should be worth, while its market value is the price it is currently considered to be worth.
Many kinds of things can have intrinsic value. Usually, it is applied to items for sale, companies, etc. However, it really can be applied to anything. One could argue the intrinsic value of any individual human life is infinite, for example. There is no recreating any unique person; there is only one in the entire universe, for a very short period of time. Based on the principle of supply and demand, that person is extremely rare and thus has a significant value.
When stated like this, I think we should be able to agree that the claim “Bitcoin does not have any intrinsic value” is equivalent to saying that Bitcoin has no utility. If you do not follow, let me continue this line of thinking. Why does a company have intrinsic value? Well, companies produce products and provide services; they provide things people want. Intrinsic value is more than the value of raw assets; it is also the value of services. Consider software in general; there is no denying the intrinsic value of the internet. Despite that, the internet is an abstracted concept; it is a network of computers. It isn’t a tangible thing. However, only a fool would deny the economic, social, and cultural implications of the internet on the world. I would say that if you disagree with me that the internet has intrinsic value, then we have a disagreement in our definition. If not, then you should see that things that do nothing but provide services or utility have intrinsic value. Thus, claiming Bitcoin has no intrinsic value is the same as claiming that is has no useful utility.
Bitcoin: The Currency vs. Bitcoin: The Network
I think this is where most people get lost in understanding the value of Bitcoin; the word Bitcoin means two different things. Fundamentally, Bitcoin is a blockchain-style network. However, in order to interact with this network, the currency named Bitcoin was created. This is crucial to understand; these two are unseparable conceptually. There is no Bitcoin currency without the Bitcoin network, and there is no Bitcoin network without the Bitcoin currency. When people say that Bitcoin has no intrinsic value, they most likely mean that the Bitcoin currency has no value; however, if the currency has no value, then the Bitcoin network cannot function and thus has no value. So, the only logical way to view this dilemma is to view the criticism as being towards Bitcoin as a whole: the currency, and the network.
The foundation of my argument is this: if the Bitcoin network has value, then the Bitcoin currency has value. This is because the currency is the only way to interact with the network. Imagine a ticket to a movie, play, or amusement park. Does the ticket have any value? Well, it is providing you with access to something that you believe to have value. Thus, the ticket must have value. That’s why you’re willing to pay for a ticket; because you do not conceptually see the difference between buying the ticket and buying access to the experience at hand. Thus, if Bitcoin as a network has a utility that you want to use, the Bitcoin currency must have value since it is the only way you can gain access to that utility.
The Intrinsic Value of the Bitcoin Network
So far, we have determined that intrinsic value is a vague concept that describes the hypothetical fair value of something. I have laid out that, if the Bitcoin network has value, then the Bitcoin currency that we can purchase must also have value. Now, let’s figure out if the Bitcoin network has any value. Firstly, what is the Bitcoin network?
The Bitcoin network is the world’s first blockchain network. A blockchain is effectively a linked list. It is a growing chain of blocks that are connected via cryptography. The blocks store data and are permeant on the network. Each block stores verification of the prior block in the form of a hash. If you are unfamiliar with programming or cryptography, it won’t be easy to intuitively understand how a blockchain works. This is the biggest roadblock for cryptocurrency in general. You are right to be skeptical of something you do not understand.
So, how does a blockchain somehow create a secure method of financial transactions? Blockchains allow for an immutable storage of data that is publically visible. This means that once transactions are verified, they are completely public and cannot ever change after the fact. Transactions are verified on Bitcoin using a process called Proof of Work. The network creates dynamically-difficult mathematical problems that computers must solve in order to verify transactions. They have to be hard so that they’ll take a long time; this prevents a series of fast, malicious attacks on the network. One node has to find the solution to the problem, which takes a long time. Then, a majority of nodes on the network must verify that as the solution. Consider a game of Sudoku, where it takes a long time to solve, but takes much less time to verify a solution. Since a majority of nodes must agree before the data is verified, the network can only be attacked by controlling more than half of all nodes on the network.
The Bitcoin network uses cryptography, decentralized nodes, a public ledger, and mathematical theory to create a secure method of transferring wealth between individuals without the need for a trusted third party. You might think you have to trust the network itself; however, that’s not the case. The network is open source, meaning you can view the code and verify for yourself that there are no back doors. You can perform the calculations yourself and determine that it is cryptographically secure. All you need to trust is cryptographic theory which, if incorrect, means no data online is actually secure.
The question you have to answer for yourself is whether or not a decentralized network that allows individuals to transfer immense sums of cash extremely securely, with a tiny fee, in minutes over the internet without a third party has value. You don’t even need to want to use it; so long as you recognize that the network provides a service that has value to someone, then the argument comes together.
The Bitcoin network has intrinsic value because it provides access for individuals from anywhere on the globe to transfer wealth to other individuals. This transaction occurs for a tiny network fee, usually in under an hour with no downtime. There is no need to trust any third party, and the network is cryptographically the most secure network on the planet. Since the network has intrinsic value, Bitcoin the currency has value because the network only accepts the Bitcoin currency.
Bonus — A Currency for Crime?
Another popular critique of Bitcoin is that it is used by criminals. I find this to be an extremely shallow and naive criticism. Yes, Bitcoin has found itself popular with ransomware and other illicit purchases online. However, consider the fact that the vast majority of crime deals in USD. I don’t do drugs, so I wouldn’t know, but I don’t think I can buy cocaine from a shady guy in an ally with Bitcoin; he would want dollar bills. Organized crime has historically dealt in large sums of cash and money laundering has historically been in cash.
I will even raise you and say that anyone who uses Bitcoin for crime is an absolute moron who doesn’t understand how the network works. Check out Blockchain Explorer, where literally anybody can go and look at transactions on the network in real time. You can go back and view the entire history of the network; it is public and accessible. Sure, it can be hard to tag an identity to a wallet address; however, you don’t always need to. If Bitcoin moves to a malicious wallet, you can track the other transactions that wallet makes. You can follow it through hundreds of wallets; exchanges can then ban that wallet, or if they want to exchange it for cash, it’ll eventually lead to more people. Not only that, but most public wallet services link wallets directly to IDs. It would require someone who deeply understand the blockchain to get away with such an act; the only real way to do it is to trade bitcoin with another criminal for cash — since it is cash that is insecure and useful for criminals, not Bitcoin. They would need to transfer Bitcoin to someone who also does not have their ID connected to their wallet and receive a physical object in return. That stolen Bitcoin would have to keep circulating between criminals, which would only serve to increase the watchlist of moron criminals using Bitcoin.
Consider instead physical dollar bills. Yes, they have serial numbers, and they can be traced in numerous ways. However, all methods of tracking dollar bills require knowing which bills will be used for criminal activities before the activity occurs. The alternative is tracing back the bills to each and every person that ever used them, which is virtually impossible as, unlike Bitcoin, physical dollar bills do not have a public record of all transactions. I don’t know about you, but if I were to commit a crime, I’d much rather use dollar bills than Bitcoin knowing my every move will be recorded forever on Bitcoin.
Other Criticisms of Bitcoin
All of this is not to say that Bitcoin is perfect. Bitcoin certainly uses a ton of energy, it is not private, is does not easily support smart contracts, etc. Perhaps I will address more of those criticisms in future articles; for example, to me, the energy problems faced by society as a whole are obviously solved by thorium-salt nuclear reactors. However, everyone else is busy arguing about solar and gas, when nuclear is self-evidently the right option. If you’d like to see an article about that from me, let me know.
Hopefully, however, you have an improved understanding of Bitcoin and blockchains as a whole. I also hope I have convinced you that these myths are simply incorrect accusations given by those who do not understand the underlying technology since, once you understand the strucutre of the network, these arguments are obviously not the whole story.
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