As I write this, we are very thoroughly in a Bitcoin Bear Market with prices plummeting below the symbolic $20,000 mark. And of course like in any bear market, no pointers and skeptics are bringing up the same old arguments. “Bitcoin is a bubble.” “Bitcoin is finally going to zero.” “Tulip mania!” “Ponzi scheme!” and one of my personal favorites: “Bitcoin’s value is based on nothing except maybe speculation.”
But you see that’s simply not true. Sure, a large part of Bitcoin’s value is market-driven based on supply and demand, but Bitcoin does have real value, more so than most of the things that you invest in. And in this blog, I’m going to outline that argument and explain why.
“Bitcoin has no real value” is just plain wrong
One of the most popular arguments against Bitcoin is the idea that Bitcoin has no real value. The idea that its value is derived strictly from speculation. Usually when I hear this, it’s from someone who hasn’t taken the time to truly understand Bitcoin or investment as a whole, because if you analyze the facts, you’ll see that in fact, Bitcoin’s value is more real than almost any other asset or store value except perhaps gold or crude oil.
Other mainstream assets are way more speculative than Bitcoin
Now, there are a lot of reasons for this. First let’s start with the obvious one, one that absolutely nothing to do with Bitcoin, and that’s that many more popular and accepted investments are based entirely on speculation. You see, when you sit at the dinner table and tell your family that you’re going to invest your entire retirement account into tech stocks, nobody bats an eye. But the fact of the matter is stocks are based primarily on speculation. This is something that I actually learned during business school when a professor flat out told us that most of the stock market is, to quote his words, “bullshit”. Of course, in theory, the stocks value should be based on its potential earnings and since publicly traded companies must report their earnings, you’d think that a stocks’ value would be based on earnings, dividends, hard facts, but the reality is it’s not.
The plain and simple fact is that stocks are priced based on market demand, and market demand is based on people’s perception of future potential earnings. This is why, for example, it’s common to see companies earning fantastic profits like right now, but still watching their stock price plummet. It’s all speculation. Now, you may think that Bitcoin is the same way, but as we’ll see later, nothing could be further from the truth. By the way, it’s worth noting here that companies can and do issue more stock at any time, diluting your ownership in the company and therefore how much you stand to gain from their future potential profits.
Now, this is all true of real estate as well, by the way. Well, real estate is loosely based on income multiples and cap rates and things like that. The fact that rent to purchase ratios vary all over the world just proves the fact that a large part of real estate’s value is not sound financial calculations or future incomes or NPVs, but speculation and market forces. People pay a certain amount for real estate because they believe that it is going to go up. Just like stocks. Consider these points the next time someone calls Bitcoin a speculative asset as if it’s a loan.
Our money itself has less “real value” than Bitcoin
Number two, our money itself, except for Bitcoin, actually has no real value. See, in the past I’ve talked a lot about fiat currencies or government-backed currencies and how they are given value simply by government decree. The US government tells you that $1 is worth something and they dictate that by law, any business has to accept it for $1 worth of goods. And once upon a time that $1 was backed by something real and scarce, in this case gold, which you could theoretically redeem in exchange for your dollars. But ever since 1973, the US dollar has not been based on anything at all and neither are most or all of the currencies used around the world today from the Euro, the Pound, the Swiss, Frank, the Renminbi, and even the Yen. In the case of the US Dollar, it is backed by and I quote, “the full faith and credit of the United States”. But what exactly does that mean?
Well, considering that the United States is now over $30 trillion in debt, an amount of debt that they will never be able to repay honestly, it doesn’t mean much of anything. And guess what? This is true for most nations today. In fact, the nations of the world cumulatively owe over $180 trillion. That’s an amount that they’re never going to pay. Nowhere is all of this more evident than during the COVID-19 pandemic. When governments all over the world printed trillions and trillions of dollars giving most of it to businesses and themselves and leaving everyday people with skyrocketing levels of inflation and very little in terms of actual wage increases. How much effort do you think that it took to print these trillions and trillions of dollars exactly? How much work actually went into it? Realistically, it took nothing more than a keystroke in a computer and the money appeared out of thin air.
Creating Bitcoin (BTC) takes tons of real work and investment
Number three, what it takes to create Bitcoin. Let’s compare that trillion dollar creation event now to Bitcoin. As you probably already know, Bitcoin has to be mined in order to create new Bitcoins, but what does that actually mean?
Well, it means that people all over the world are spending billions and billions of dollars on expensive mining equipment, tens of millions of dollars a year on electricity and investing their time, energy and skills into designing mining equipment, setting up and managing mining operations and negotiating things like electricity rates, rent and more, all in order to actually earn those Bitcoins. It means that, like gold, Bitcoin is hard to actually create more of. So in this way, it’s much more like gold or diamonds, than fiat money or stocks.
The Real Utility of Bitcoin is Storing & Transmitting Work, Energy, and Value Efficiently
Number four, and this is a big one, Bitcoin’s real utility. Okay fine, Jonathan, you might be saying, it takes time and effort and resources and real world money to create new Bitcoins. I get that, but I heard Warren Buffett say that Bitcoin has no real utility, no cash flows, and therefore, it must be worthless. People who say this simply don’t understand what Bitcoin’s value actually is, and I don’t blame them because it’s a really subtle one.
See, on a basic level and over time, Bitcoin will serve as a better store of value for billions of unbanked people, and a more efficient means of transacting that value across the world, cheaper and without middlemen or gatekeepers. It will do for money what the internet did for information, bringing down the barriers and connecting us all on one global network. But skeptics argue that this may never happen and that other technologies may do a better job than Bitcoin at democratizing and opensourcing money and finance the way that the internet did information. Fortunately, this rudimentary argument is only a very small part of the actual utility of Bitcoin, and most people even seasoned Bitcoiners don’t understand what I’m going to tell you next.
So what makes up the majority of the value of Bitcoin then? Well, at a very basic level, Bitcoin is kind of like a battery storing energy and successfully completed work. Hence the name, proof of work.
You see, one of the biggest problems facing our entire planet today, especially as we try to move to renewable energy, is that of energy storage. Sure, there is plenty of wind out in the middle of the Atlantic or plenty of sun in the middle of the Sahara, and plenty of geothermal energy up in places like the remote corners of Iceland, but very few people actually live in those places, and transporting energy is hard and expensive with major losses in energy efficiency along the way. Not to mention, we currently do not have very effective ways of actually storing unused energy. See things like lithium-ion batteries have a limited life and are very expensive to produce in terms of how much energy they can store. So if say there is a very windy or very sunny day, but people are not consuming that electricity, most of it will actually go to waste, as much as 12 to 13% in some situations. See, ultimately, this is why billions are being invested in improving batteries, or using alternative ways to store excess, renewable energy, such as pumping water up dams or stacking blocks and much, much more.
Enter Bitcoin. See, in addition to lots of hard work, planning and capital investment into equipment, Bitcoin miners consume tons of energy, and then convert that energy directly into money with extremely high efficiency, producing heat as a byproduct that can also be used to do things like heat homes or water tanks.
Now, I hope you’re paying attention still because this is the kicker. In this way, Bitcoin mining is really just an incredible way to capture excess energy, even excess energy from natural gas flare offs that is today completely wasted. See everywhere in the world, energy companies can use Bitcoin mining to store excess energy during periods of low demand, using that profit to drive and supplement their income, and thereby drive down energy during normal usage. Plus, since Bitcoin miners don’t care where they’re located, so long as there’s an internet access or satellite connection, Bitcoin mining can also be used to capture and store energy that is otherwise not profitable to harvest such as in the middle of the ocean, desert or tundra. Now, what good is that energy you asked so far away?
Well, because even billions of dollars worth of Bitcoin can be sent anywhere in the world for pennies, Bitcoin effectively acts as a way to store and transmit stored energy anywhere in the world in minutes for nearly nothing. See, once transmitted that stored energy can be traded for more expensive forms of energy, nearer to population centers. For example, investing in solar panels on buildings or building nuclear reactors closer to cities, or even purchasing fossil fuels to cover peaks in energy demand, and unlike lithium-ion batteries or Tesla powerwalls, this stored energy can be saved indefinitely on the blockchain for a time when it is needed.
Now, this is really confusing, so let me paint a picture for you. I want you to imagine a world where instead of running pipelines across continents or burning fossil fuels to send oil tankers across the ocean which inevitably cause accidents., Imagine if a company like shell or BP used Bitcoin mining in remote areas to capture energy on one side of the planet from sun, wind and geothermal, and then transmitted that energy to the other side of the planet in the form of money in seconds, where it was then used to invest and maintain their costly, renewable energy operations near population centers, bringing down the cost of electricity and making renewable energy more affordable than fossil fuels.
Now, as you’ve all know, Harari points out in his book, Sapiens, the entire development of human history can be traced through our ability to steal, harvest, grow, and direct the flows of energy. Whether it’s our discovery of fire, domestication of wheat, or animals as a labor force, the development of the steam engine and electricity, or the industrial revolution and fossil fuels. Human history is the history of harnessing, transporting and expanding greater and greater and greater amounts of energy. Bitcoin then is one of the most revolutionary inventions in human history solely for its ability to store energy. And that my friends, more than just the simple store of value, more than truly private money or a global currency, all of which are incredibly big deal, that though is the real value of Bitcoin, and very, very few people understand it. Sure, gold and diamonds have many industrial and consumer applications, but I think you agree that their utility doesn’t even come close to that of something that could help store and transmit trillions of dollars worth of renewable energy in the snap of a finger.
Bitcoin is the only truly scare resource in the universe
And yet there’s still one thing that most people don’t fully grasp, and that’s number five. Bitcoin is the only truly scarce resource on the planet, except maybe time.
So Bitcoin has the potential to become not just a store of value, not just a medium of exchange, but a store of trillions of dollars worth of energy harvested from all over the world and stored in the form of Bitcoin on the network for transmission. But here’s the thing, there will only ever be 21 million Bitcoin. This means that no matter how much value is stored in Bitcoin, whether it be renewable energy used to mine it, or gold bugs selling their gold for Bitcoin and contributing to the market cap, or just everyday people in the developing world who are unable to get access to banks, opting to store their money in Bitcoin, no matter how much that total value increases, there is no way to mine any more than 21 million Bitcoin. No matter how many forks they create, or how many other cryptocurrencies try to be the next Bitcoin, they will all just be copies of the original, competing amongst themselves, but never actually a threat to the real Bitcoin.
How does this add value you ask? Well, it asserts Bitcoin’s uniqueness as a revolutionary store of value. In fact, Bitcoin is the only investment that will never be inflated or diluted, at least once the last Bitcoin is mined in 2140. I know, I know you might think that there are other scarce investments out there such as real estate, gold and so on, but everyday new apartment buildings are being built. Everyday new gold is being found, and we haven’t even started mining asteroids or other planets for gold. In this way, Bitcoin is, without exaggeration, the only truly scarce resource in the universe, except for maybe time itself. And since we haven’t figured out how to manipulate, price or sell the concept of time, Bitcoin is really the only thing, the only one that you can actually store value in.
Now this alone makes Bitcoin an incredibly unique asset and explains why it is considered by many, myself included, to be the absolute best store of value ever created. It may go up and down, or drop 50% in a day, but that doesn’t matter. See, long term over the span of decades or even centuries, it can only go up as adoption increases, barring some catastrophic event that it would probably survive anyways.
Conclusion
- Stocks and other well respected assets are actually much more speculative than Bitcoin at the end of the day.
- Our money itself has less real value than Bitcoin. It’s actually based on nothing.
- Creating Bitcoin takes tons of real work and investment, unlike any other asset except maybe gold or real estate.
- The real utility of Bitcoin is storing and transmitting work, energy and value efficiently.
- Bitcoin is the only truly scarce resource in the universe. Pretty impressive for an asset that’s based on nothing but some numbers in a computer.
I hope you’ve enjoyed reading this blog and learned something.