Where Bitcoin gets its value

Value is created when … in exchange for the “thing,” you receive something that’s more valuable to you than the “thing.” So if I give you a chicken, and you give me a sack of potatoes as an equal trade, I need to believe that the sack of potatoes is the correct value amount for the chicken I gave you.

The exchange rates will normalize over time, maybe you need to throw in a few more potatoes for a while, or chickens become abundant and I need to give you two for each potato sack, but eventually, prices will normalize, prices and costs will become somewhat set and everyone will generally agree on what items or services are equivalent within your barter system.

When you introduce a currency to the mix … you get a unit meant to imply universal value. The equivalency of your currency unit is accepted as equal in other places and the value is set by trust in our system of trading, taxation and reliability. Since it’s not backed by anything tangible, it’s considered a fiat currency.

A quick sidebar on gold … The U.S. dollar is no longer backed by gold. Former President Nixon severed our ties in 1971, stopping anyone from transacting USD directly for the precious metal. Instead, our currency is now backed by its expected exchange value and the trust in our economy. Unfortunately for us, government backing doesn’t actually guarantee value, as Venezuela found out in 2010 (Bitcoin acceptance skyrocketed during their economic decline).

The government benefit ... of no longer having a currency backed by gold, is that they can introduce new money into the system without any physical collateral. The government is meant to carefully balance the potential for inflation with our economic interests. At the time I’m sending this newsletter, the U.S. national debt was $28,030,652,901,345.00 (that’s over 28 trillion dollars) and growing by the second.

What’s different about crypto? A lot. To start there’s built-in scarcity. Only 21 million Bitcoin will ever be mined, so hyperinflation is incredibly unlikely without the ability to increase the supply. The no-single-point-of-shutdown-decentralized structure means that no central government is in charge — therefore no one individual can decide to add more coins or blocks to the system without consensus.

The seven laws of Bitcoin cover the general differences that set Bitcoin apart from fiat currencies like the U.S. dollar. The chart below from Investopedia is a great way to understand what sets Bitcoin apart from the US dollar and from our gold-backed system.

We value Bitcoin because we value work … Nothing is valuable without putting work into it, and Bitcoin is no exception. If we go back to the chicken and potatoes example, we value both the potatoes and the chickens for the work it takes to grow and harvest them.

We value things that take more work. You may value potatoes more one year if the winter was harsh and it took more work to cultivate the potatoes. It’s why we value a freshly baked pie over a bushel of apples and some flour, or why we value potatoes but don’t value rocks on the street or blades of grass.

Bitcoin takes a lot of work to mine, using as much energy in a year as Switzerland. A high amount of work leads to a high value. And the current dollar value of a single Bitcoin is $53,239.39 (as of 3/8/2021 at 6:47 p.m.), — pretty valuable.