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What is Bitcoin and why does it have value?

What is Bitcoin and why does it have value?

Posted by Daniel Larimer on .

What is Bitcoin and why does it have value?

Posted by Daniel Larimer on .

There is a vast difference between what something is and what it is used for. Money or currency is an attribute of how something can be used, but does not give us a clear understanding of what something is. Anything can be used as money provided it is sufficiently durable, divisible, fungible, transportable, and resistant to counterfeit. Cigarettes are a commodity but can be used as money. Gold and Silver are metals (also a commodity) that have been used as money. So what is Bitcoin when it is not used as money and why does it have value?

Prior Attempts to Answer the Question

“What is Bitcoin?” Such a simple question that is incredibly hard to answer in just a few sentences. Back in 2010 I started a bounty for someone to create a video describing what Bitcoin is and how it works. Today the winner of that bounty is the most watched video for explaining Bitcoin to the masses.

Since that time many things have changed. There is a new video out that when viewed next to one another demonstrates just how different things are. What was once an open network of equal peers has turned into a network with super nodes producing the vast majority of all blocks.

I think it is time to take a fresh look at what Bitcoin is and what it is not. My own understanding of Bitcoin has changed over the years and with it how I explain Bitcoin.

What is Bitcoin?

A bitcoin, known as BTC, is a fraction of all BTC in circulation which is collectively known as Bitcoin. In other words, a bitcoin is a share of a whole known as Bitcoin. But what is this whole that we all know as Bitcoin and why does it have value?

I have found that the easiest way to understand Bitcoin as a whole is to compare it to a small company. Every company has owners, provides a product or service, generates income and pays expenses. At the end of the day the value of a company is derived from its ability to earn a profit.

In the case of Bitcoin, its service is the ability to transfer shares of its ownership, its income is transaction fees, and its expenses are miner rewards and fees. Bitcoin has value because people derive value from the service it provides.

The question remains, if Bitcoin generates revenue from transaction fees then why does someone want to own a share of Bitcoin in the first place? I mean, how much profit could there be in charging transaction fees to transfer a worthless share from one person to another?

The value of Bitcoin is the result of people coming together under a common desire to create economic freedom. It is no different than someone creating a club where membership brings a feeling of belonging and purpose. It is a public sign that you are doing something to change the world. It indicates that you want change and are willing to put your money where your mouth is. This is the ultimate source of all value in Bitcoin. Without this group membership value, the first Bitcoins would never have found a market nor established a price.

Something happened along the way that changed Bitcoin forever. Its price started to grow and with it the belief that bitcoins could one day become a world currency. People started buying bitcoin because they wanted to get rich, not because they wanted to change the world. Money, power, and greed became the primary motivators for those deciding to buy Bitcoin. In the process Bitcoin became detached from its fundamentals.

Bitcoin has become disconnected from its original source of value and is now mostly trading upon speculation. If we were to evaluate Bitcoin as a company then it is losing some $300 million dollars per year as it issues new shares to pay miners to consume electricity. Its value as a club of visionary idealists is unable to support such a huge economic loss. Bitcoin is unable to earn enough in transaction fees to cover its cost of operations. This means for all intents and purposes a bitcoin is a share of a company that reports an annual loss equal to 10% of its market cap (and 5% from July 2016 onwards).

Based upon this analysis of what Bitcoin is, we can only assume that its long-term price support will be based upon its value as a social status symbol. The more centralized and regulated Bitcoin becomes the less it retains of its original value and the more it depends upon greed fueled speculation. This is the heart of the volatility of a bitcoin. Fear, uncertainty, and doubt in a battle with irrational exuberance and greed will drive Bitcoin for many years to come.

The Heart of Bitcoin

For me Bitcoin goes beyond any particular ledger, blockchain, or technology. Bitcoin is an idea, a vision, and a hope for a better world. Bitcoin proves that freedom loving individuals around the world can come together to produce tools with great value. The Bitcoin blockchain is the first experiment among many as we learn how to work together to create a free society.

In my opinion the Bitcoin blockchain has failed to achieve our goals, but the Bitcoin vision has succeeded beyond any of our wildest imaginations. I have started BitShares because I want to remain true to the founding principles of Bitcoin. I think it is time for us to stop focusing on the technology that divides us and instead focus on the principles that originally brought us all together.

BitShares is just one technology that will contribute to the massive growth of the free market ideals upon which Bitcoin was originally founded. Hopefully we can create a self-sustaining micro-economy around BitShares that can achieve the vision of Bitcoin now that we have freed ourselves from a $300 million dollar albatross. If you value life, liberty, and property then join us as we work to take the next step on the journey Satoshi started.

Las Vegas Speech - October 2014

I gave a speech at Inside Bitcoin, Las Vegas about the Bitcoin ideal and the need for change in the Bitcoin ecosystem. Check it out:

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My name is Daniel Larimer and I am the founder of BitShares. My mission in life is to find free market solutions to secure life, liberty, and property for all.

The purpose of this blog is to help create a free society by encouraging people to join our community which is centered around Bitshares, a next generation fully decentralized crypto-currency exchange. I use Austrian Economics to engineer the economic incentives which make freedom and non-violence profitable.

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