Wednesday, December 4, 2013

Bitcoin is Provably Valuable

TLDR (too long didn't read) - bitcoin is valuable. The easiest way to buy them is Coinbase.

Bitcoin is two things:
  1. A payment network (think PayPal, Visa, MasterCard, Western Union)
  2. Money - a medium of exchange, a unit of account, and a store of value.
Why are payment networks valuable?
It is more efficient to exchange money for goods and services instead of barter. For example if I wanted a pound of rice and had a cow it would be hard to fairly divide the cow for my rice, especially if I don't have a way to store the remainder of the cow. Using money it is easy to sell the cow and then purchase the pound of rice. Payment networks make it more convenient to pay for goods and services than physical money. Visa, MasterCard, Discover, and Western Union have shown that payment networks are valued by society. Today their combined market cap is over $250 billion dollars.

Why is money valuable?
Money is valuable because other people will give goods and services for it. If a government states money is valuable but people will not accept it for goods and services. Think that can't happen? It has happened many times before.  Gold is not money, but it is a store of value and gives an idea of how much something can be worth that is not backed by a government. Today the gold in the world is estimated at a value of $8 trillion. For comparison the market capitalization is 14 billion. That means bitcoin would have to go up another 571 times to be equivalent to gold. I don't think there is a question of if that can happen, but a question of if it will happen.

How does this make bitcoin provably valuable?
Bitcoin is a great payment network. Unlike PayPal, Visa, MasterCard, etc. bitcoin cannot go out of business, cannot steal from you, cannot cheat you, etc. It has no marketing budget, no CEO to compensate, no board of directors, etc. 

Bitcoin is great money. Bitcoin is the best way for people to accept money because it is the most efficient, it is nearly impossible to counterfeit, and there is no way for a third party to cancel or modify the payment. It does not use any countries currency making it immune to mistakes made by politicians and rulers of fiat currencies. Like gold there are a fixed number of bitcoins meaning after the volatility settles down it will be a great store of value.

Should I invest hundreds or thousands in bitcoin?
No and here are 9 reasons why.
If you have some money you can lose without issue I recommend considering buying some bitcoins. I believe this is a special time in history, like the 1889 land run it is possible to get very wealthy very quickly with bitcoin, like the gentleman whose $27 investment turned into just under a million dollars in 4 years.

How do I get bitcoins?
The easiest way if you live in the US is through Coinbase.

2 comments:

Jordan Skole said...

Hey Dave!

Great post! I think you did a great job of discussing the Bitcoin in an easily digestible way.

One of my concerns however, is the fact that bitcoin must be in a bubble (like gold) and only has value if we believe it does.

When comparing BC to alternatives such as paypal or gold, it is easy to see the benefits as a payment network, however what is stopping another new payment network/money from springing up?

What is preventing litecoin from surpassing bitcoin in value and adoption, and rendering bitcoin valueless?

David Smith said...

Jordan, thanks for the thoughtful comments. About only having value because we believe it does that goes for everything - dollars, houses, diamonds, etc. If no one believes they have value and won't take them in trade they have no value.

On your second point. I have only thought about that a little. I've been wondering more the flip - why are some existing currencies gaining market cap relative to bitocoin? Bitcoin has more users, more infrastructure, more brand, and more stability. It's something I'll think more about. If something does kill bitcoin it will probably be a better cryptocurrency, but bitcoin can also adapt to take new features from other currencies. It will be interesting for sure!