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First, I will briefly introduce my personal background and connection with Bitcoin. After graduating from CS Berkeley, California in 2019, he worked in a software development position at Google. During my undergraduate studies, I started to be exposed to cryptocurrency during the 2017 summer internship. At that time, the price of Bitcoin was still fluctuating around $2,500.
As an enterprising young man in the new era, even though the intern mentor shared many stories of friends who played Bitcoin bankruptcy, I still did not hesitate to jump into the torrent of cryptocurrencies. Unexpectedly, at the end of the year, Bitcoin had soared all the way to a high of nearly $20,000. To be honest, there was no real feeling at the time, just kept a BTC and a few ETH, and no longer cared about it. The subsequent bubble burst was also missed because of a big heart, and luckily left these "legacy". During the undergraduate study time, I also participated in the learning of blockchain technology and open source research projects. I think I have a certain opinion on cryptocurrency, and I also accept a wide range of opinions and criticisms.
In this article, I want to discuss why I think Bitcoin has economic value. This article believes that readers have a certain basic knowledge of cryptocurrency. I will start with three questions to demonstrate this view step by step.
The three core issues are:
(1) What problem does Bitcoin solve?
(2) What needs does Bitcoin satisfy?
(3) How to measure the economic value of Bitcoin?
What problem does Bitcoin solve?
The advent of Bitcoin was accompanied by distrust of fiat currencies.
This distrust is manifested in the suspicion of the central bank's money printing power and the alertness to inflation. Therefore, the designers of Bitcoin fundamentally eliminated unlimited inflation through two features (not to absolutely eliminate inflation, but to set an upper limit on inflation).
By rewarding miners with Bitcoin, the designer maintains the vitality and participation of the blockchain. At the same time, the amount of this reward is set to a convergent series. This design ensures that the upper limit of the Bitcoin issuance is 21 million. Although the total amount of Bitcoin in circulation will never reach this upper limit, and new Bitcoins will be generated during mining, this theoretical upper limit adds a curse to inflation and eliminates the possibility of hyperinflation.
At the same time, because the mining of each block is accompanied by the generation of a certain amount of new bitcoins, it will prompt the miners to form a balance with the value of the rewarded bitcoins. At this balance point, the rewards mined and the cost spent are roughly the same.
A simple thought experiment can prove this balance: if miners leave the market one after another, the difficulty of mining decreases; relative to the Bitcoin reward, the sudden drop in cost will encourage more miners to enter the market. On the contrary, too many miners will drive them to leave the market because of the increase in mining difficulty, which leads to the increase in the cost of obtaining the corresponding bitcoin rewards.
After we learned that Bitcoin has a fixed circulation and spontaneous participation, we set out to demonstrate the value of Bitcoin.
What needs does Bitcoin satisfy?
In my economic philosophy, I usually think that the necessary and sufficient condition for a thing to have economic value is that people have a continuous demand for this thing, and the thing cannot be copied infinitely at zero cost. I will use this view as a benchmark to explain why I think Bitcoin has economic value.
To prove people's demand for Bitcoin, we first need to qualitatively Bitcoin.
Since its inception, Bitcoin has been naturally considered to be a substitute for legal currency. People think that Bitcoin is a kind of currency. But is this really the case? Currency needs to be able to adjust the total issuance according to the development of the market and changes in economic aggregates to ensure the stability of the value of a unit of currency. The limited circulation of Bitcoin obviously does not make it a qualified currency. Because the limited circulation will make Bitcoin have a deflationary nature. When the total market economy increases, if it is used as a currency, the market value of each unit of Bitcoin will also increase. In this case, people will not tend to use Bitcoin as a settlement unit for transactions.
However, it is also the attribute of limited circulation, which gives Bitcoin the function of being a store of value. When people of a certain scale form a consensus that Bitcoin is a commodity that can carry value, its value carrier attribute is established.
Do people have a demand for things that are carriers of value? Why do people need this kind of thing?
The answer to the first question is yes, there is demand. Let's not enter the rigorous logical argument for the time being, but obtain a quick judgment by analogy. The object of the analogy is gold. With the development of society and economy in the 21st century, gold is no longer used as currency, but as an asset or commodity. People's universal positioning of gold is a safe-haven asset and value carrier. This is a manifestation of consensus. As a similar commodity, Bitcoin will be regarded as an emerging gold safe-haven asset and value carrier. In order to hedge the demand for fiat currency inflation, both institutional and individual investors often turn it into a demand for such assets.
This leads us to the third question.
How to measure the economic value of Bitcoin?
If Bitcoin is no longer regarded as a currency standard, but as a gold substitute, the market is still very broad. Although physical gold still has many characteristics that Bitcoin is difficult to replace, such as not being dependent on electricity and the network, digital currencies led by Bitcoin also show unparalleled advantages. The digital attributes of Bitcoin give it natural advantages in comparison with physical gold-divisibility, long-distance transfer, and so on.
Comparing today's gold market value of about 8 trillion U.S. dollars and Bitcoin's market value of about 360 billion U.S. dollars, Bitcoin's development space is still broad. We believe that the total market value of gold or bitcoin should be positively correlated with people's demand for the product (combined consideration of demand and tightness). With the recent large-scale institutions such as Paypal, Square, MicroStrategy and other companies buying Bitcoin as a strategic reserve, more and more financial institutions have begun to recognize the commodity attributes of Bitcoin as a value carrier. With the increasing amount of funds joining the Bitcoin consensus circle, we can expect the price of Bitcoin to rise even more.
The comparison with the market value of gold is given here as a starting point. I won't do Bitcoin price estimation for the time being, because no one can predict the future. To paraphrase Lei Gong's words, tomorrow's affairs, we will know the day after tomorrow.
