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“What is Bitcoin’s value?” my peers will ask.
“Well today’s price is x,” I will respond, and continue, “but you know that is not the true value of Bitcoin, right?”
This is generally followed by a somewhat bewildered look, seeking further information.
“Price is what you pay, value is what you get.” - Warren Buffett
Allow me use a simple example of a prepared food delivery service to explain. I will take it one step further and assume you are following a healthy, clean-eating based diet.
While eating clean has enormous health benefits, often it can be a laborious regime of food preparation to keep you from grabbing at the first food you lay your eyes on after a long day at the office. And that is not likely to be a great big bowl of gorgeously seasoned steamed broccoli, now is it?
Meal delivery services will prepare a varied selection of healthy meals, using organic ingredients, perfectly portioned and packaged in eco-friendly, biodegradable containers to your doorstep for between £9 and £15 per meal, depending on your requirements. This is the price.
But the value of such a service?
The saying ‘happy wife, happy life’ comes to mind. Essentially, the value comes down to the convenience that saves me time. Could I produce the same meals for less of a price? Sure (more or less, anyway), but the time element is considerable. And instead of spending time on planning, shopping for and cooking these balanced, healthy meals, inevitably sitting down at the table exhausted, strung out and quite likely not even in the mood to eat, I am able to enjoy meal time with my family and children, relaxed and happy. For a busy Mum, working full time and trying to maintain some semblance of reasonable home-life balance, this is pretty invaluable! The fact that when we are done, I can simply rinse the packaging and pop it in the recycling, eliminating dishwashing and doing something good for the environment too is an added bonus.
My simplistic example of a meal delivery service highlights that while I am paying a price for the meals, the benefits I receive amount to considerable value in my life.
So, what does this have to do with Bitcoin investment?
The bitcoin price is simply a reflection of the willing buyer and willing seller scenario, not necessarily indicative of the true value of bitcoin (yet). And in our opinion, that inherent, mostly untapped value, far outweighs its current price.
So let us look at a number of bitcoin’s qualities that contribute to value.
Much like precious metals such as gold, bitcoin has a finite supply. This is hard coded into the founding algorithm ensuring no more than 21 million bitcoin will ever be created. Once this supply has been created, there is no way to produce more.
New bitcoins enter circulation via miners, who are incentivised to confirm and append transaction blocks to the blockchain in return for bitcoin. Currently, this is issued at a rate of 12.5BTC for each block, which occurs roughly every 10 minutes. Approximately every 4 years or 210,000 blocks, this rate of issuance is halved, ensuring a steady, predictable supply entering circulation. The next reward halving is estimated to occur on 18 June 2020, at which point the rate will drop to 6.25BTC per block.
This controlled, eventual finite supply is a crucial element in the value equation, as it is polar opposite to how fiat currencies are managed.
Governments are able to issue new currency into supply at a whim, through expansionary monetary policy or quantitative easing, but because there is nothing backing this new money other than the government’s word, it siphons its value from the existing supply. This is more commonly known to us as inflation. Over time, inflation erodes the buying power of our money, ultimately depleting the total value of our earnings, savings and wealth, generally beyond what we can earn in interest to counter this underhanded ‘tax’.
Because Bitcoin will not be subject to infinite supply, it preserves buying power and is considered a store of value, serving as a hedge when economic instability results in bloated inflation and draconian measures such as restrictions on cash supply or even seizures of account balances.
Unlike the traditional financial system that is fraught with centralised control, Bitcoin is a distributed network of trust. This means that there is no single body or entity holding ultimate power. This notion is often a difficult one for people to grasp; that there is ‘no-one at the top’.
The significance of Bitcoin’s decentralised nature is immense.
Without central control and associated corporations, bitcoin is mostly decoupled from the woes of economic uncertainty and politically driven persuasion. Without a government or bank dictating the value of your money, telling you what you may do with it, where you may spend it, or invest it, you become an independent sovereign of your finances.
Arguably one of the core reasons that Bitcoin’s value is yet to be realised is that its vast potential has only just began to be seen. Let us review a few of Bitcoin’s practical aspects.
Bitcoin is permissionless. Unlike access to modern banking, it does not discriminate against its users. You can be a multi-millionaire located in Monaco, or a farm dweller in the rural fields of Kenya, and as long as you have access to the Internet, you are able to use bitcoin. This broad access to financial inclusion translates into an expansive pool of economically active individuals the world over.
Which brings us to the second point.
Bitcoin is borderless. International transfers are just as simple as local ones, and without the need for intermediaries to pile on fees for foreign exchange and handling, the cost to do so is drastically reduced. In addition, settlement is not hampered by lengthy delays as confirmation and clearance happens within a matter of minutes. Not only does this hold significant value for those involved in either corporate or personal international business, but consider the incredible benefits for foreign nationals working abroad and sending remittance back to their home countries too.
Bitcoin is not currency, it is programmable money. In other words, it is a medium of exchange that is able to be coded with certain information, criteria or additional functionality embedded in transactions, or run applications on top of the blockchain.
This is, in particular, the aspect where we see much of bitcoin’s inherent value, and with ongoing advancement in terms of the technology, it is only a matter of time before the myriad of bitcoin-based companies aggressively developing everyday functionality for an array of use cases start are able to deploy and implement applications or interfaces that will make interaction with Bitcoin that much easier for a wider user base.
One such long-awaited functionality is smart contracts.
Smart contracts allow individuals to enter agreements using a bitcoin transaction as an escrow medium for payment based on specific conditions being met. These contracts have ample use cases from rental or sales agreements, short-term or long-term insurance servicing, supply chain management, protection of IP rights, or even governance over public voting such as during elections. The immutable nature of bitcoin ensures human intervention is eliminated; mitigating risk as trust can be placed in technology to verify the transaction only once the stipulated conditions are met and not a moment before.
If we consider that over the over the last 12 months the Bitcoin price has risen in excess of 640%, and is now 3 times as much as an ounce of gold, this is a solid indication that more and more people and institutions are starting to understand that bitcoin is not simply a global currency, and the de facto of cryptocurrencies, but rather a groundbreaking technology that has the makings of an improved financial system of the ‘not-too-distant’ future, free from the shackles of central control and rich in real-life application.