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What is the underlying value of Bitcoin? Different arguments from supporters and critics

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What is the underlying value of Bitcoin? Different arguments from supporters and critics

In recent times, the cryptocurrency market has experienced a significant price crash, but some in the industry believe that Bitcoin will eventually reach $100,000 or even higher. Have you ever considered what the value proposition of Bitcoin is? Will it become the digital gold of the future, or will it serve as a peer-to-peer payment tool?

Former Google engineer Shiv Sakhuja, who has shifted focus to the DeFi space, has been exploring this age-old question without a definitive answer. He has been gathering various perspectives on the different value propositions of Bitcoin, including arguments from both proponents and critics.

Multiple Aspects of Bitcoin

Sakhuja stated that most people in the cryptocurrency community believe that in the long run, Bitcoin will "only go up," and it is an absolute certainty. Almost everyone thinks that we will see the price of Bitcoin reach over $100,000 within five years. However, it is important to question the assumptions that people take for granted. This article will attempt to explore all the possible value propositions of BTC.

The value of Bitcoin may come from...

  • Store of value asset
  • Inflation hedge tool
  • P2P payment network
  • National reserve currency
  • Internet-native currency
  • Haven for personal assets
  • Bitcoin becoming the underlying blockchain infrastructure
  • Asymmetric risk investment

Store of Value Asset

This argument asserts that Bitcoin is designed to have all the attributes of sound money, making it a better form of asset than gold. Features that a sound money should have include: divisibility, transferability, high fungibility, scarcity, durability, and portability.

Bitcoin can be said to possess all of the above attributes and excels in these aspects over traditional forms of money like fiat or gold, making it a better store of value asset. For example, Bitcoin is more portable and divisible than gold.

  • Opponents: Litecoin, Dogecoin, and other currencies can also have the same qualities, creating value storage assets requires more than just scarcity constituted by code. Also, Bitcoin's volatility is too high, and since most transactions in the real world are carried out in fiat currencies (USD, EUR, GBP, etc.), the scenario of Bitcoin as a store of value asset only makes sense when its price volatility relative to the USD decreases.
  • Supporters: As the market matures and becomes more efficient, Bitcoin's price volatility will decrease over time, eventually significantly reducing its volatility, making it a good store of value asset. Some supporters even argue that Bitcoin's volatility is a feature, not a flaw.

Inflation Hedge Tool

This argument asserts that currency inflation is usually caused by governments printing money excessively, leading to a rapid increase in the money supply. However, Bitcoin is not affected by these problems because theoretically it has a fixed supply and a pre-set token economy.

  • Supporters: Central banks are crazy money printers, causing inflation and devaluing fiat currencies. Due to its scarcity, gold is considered an inflation hedge tool. For the same reasons, Bitcoin should also be a good inflation hedge tool. Although in the short term, Bitcoin may not be a good inflation hedge tool, supporters believe that the focus should be on the long-term verification of Bitcoin's value as an inflation hedge tool, rather than judging based on short-term data.
  • Opponents: Bitcoin has not proven itself as an inflation hedge tool. @nntaleb has strong opposition to BTC on Twitter in a discussion, stating that scarcity does not equate to anti-inflation ability, and most items with scarcity also lack value, making it difficult to determine if Bitcoin can effectively hedge against inflation.

P2P Payment Network

Bitcoin is the best payment method for transferring funds because it is fast, secure, cheap, censorship-resistant, and does not require any intermediaries.

  • Supporters: Transferring funds, especially internationally or in large amounts, can be very difficult: wire transfers take days and are almost impossible on weekends or holidays. Some countries may even have restrictions on the amount users can transfer, who they can send to, and from which countries they can send. With Bitcoin, users can send billions of dollars within minutes at a low cost, and no one can stop it.
  • Opponents:
  1. For most domestic payments and small transactions, web2 applications like PayPal, Venmo, Zelle, Square have solved the issues for users mentioned above.
  2. Due to volatility, the value received in USD may differ from the value sent, making it impractical for certain use cases.
  3. In some countries, sending BTC may require additional taxation. Users are still subject to the laws of their own country, regardless of how Bitcoin technology evolves. Note: If a country prohibits the cryptocurrency industry, it will prevent the exchange of fiat and cryptocurrencies.
  4. Many other cryptocurrencies solve the same problems, although they may not have the same security as Bitcoin, they have advantages in terms of fees and speed.

The author believes that Bitcoin is limited in its use case as a transfer due to volatility, legal, and tax implications.

National Reserve Currency

Bitcoin as a form of currency, coupled with the failure of fiat currencies, will lead to Bitcoin being adopted by institutions and countries. Eventually, Bitcoin will replace the USD as the global reserve currency.

  • Supporters:

Which countries are most motivated to adopt Bitcoin? Countries that minimize losses in monetary sovereignty are more open to adopting Bitcoin. Countries like El Salvador and the Central African Republic have already declared Bitcoin as legal tender. For countries with weak currencies, Bitcoin is seen as providing an easily adoptable "alternative sovereign currency." However, for countries using fiat currencies like the USD, it is relatively less attractive.

Bitcoin is a decentralized currency with a fixed monetary policy, and countries that adopt Bitcoin as legal tender do not need to rely on other countries' currencies or economic policies. Supporters of this argument suggest that even if other countries do not believe in Bitcoin-related investment arguments or adopt Bitcoin, those countries will still be forced to buy some Bitcoin as insurance against falling behind. @ChrisJKuiper and @j_neureuter

For the support argument that more central banks will buy Bitcoin due to game theory, you can check out this article here.

  • Opponents:

If Bitcoin fails as a store of value use case, it cannot effectively serve as a reserve currency. Unless the world starts pricing in Bitcoin instead of USD, volatility remains a problem. Additionally, if Bitcoin threatens the global reserve status of the USD, the US has a strong incentive to ban it, as do other superpowers. Adopting Bitcoin is a completely different game for mainstream countries with fiat currencies than for small nations with weak currencies.

The author believes that it is a bit far-fetched to say that superpowers like the US will be "forced" to adopt Bitcoin. There is still a long way to go before the impact of game theory is so strong.

Internet-Native Currency

Bitcoin will become the native currency of the internet because it is more decentralized and secure than any other cryptocurrency.

  • Supporters:

Cryptocurrencies are the native currency of the internet. The internet will inevitably evolve from simple information transmission to transmitting information with value. The native currency of the internet will open up new application areas.

Additional: @jack on "Why Bitcoin can be the native currency of the internet" argument.

  • Opponents:

The challenges of using Bitcoin for internet payments are similar to using Bitcoin for peer-to-peer transfers:

  1. There may still be tax issues in some countries
  2. Volatility relative to the pricing currency
  3. Fees are relatively higher compared to other blockchains

The author believes that in the future, cryptocurrencies will be used as the native currency of the internet, but Bitcoin has a lot of work to do to take that position. Bitcoin is currently not accepted for payments in most places, which makes its adoption as a currency less likely.

If the denominations remain stable, for example, stablecoins, it will be much easier for cryptocurrencies to become the default payment layer of the internet. People care more about convenience than decentralization.

Haven for Personal Assets

Individuals should have the ability to own and control their wealth to protect themselves from government corruption, severe inflation, and the terrible consequences they cause. This argument is similar to the discussion of "Bitcoin becoming the world's reserve currency," but here it is from the perspective of individuals rather than countries.

  • Supporters: People in many parts of the world are severely affected by poor economic policies of governments. In countries like Argentina, Venezuela, Turkey, the local currencies are rapidly devaluing, and citizens are forced to seek other currencies to protect their wealth.

  • Opponents: Similar to the argument of Bitcoin becoming a national reserve, Bitcoin must successfully act as a store of value asset to become a hedge asset. And of course... if Bitcoin threatens governments, those in power will do everything they can to stop it.

Bitcoin Becoming the Underlying Blockchain Infrastructure

The innovation and solutions promised by blockchain should be built on top of the Bitcoin blockchain because it is the most, and possibly the only, decentralized blockchain. This argument is largely based on the assumption that Bitcoin is the only truly decentralized blockchain, with some people believing that Ethereum is too centralized.

  • Supporters: Not seeing the assumption as a problem because the web3 space is still young, believing that most dapps seen today are unlikely to be protocols that people will continue to use in five years.
  • Opponents: Most blockchain developers have not focused on the Bitcoin blockchain, but have been building projects on Ethereum or other EVM chains. To make Bitcoin the native currency of internet payments, developers must be based on Bitcoin.

The author also agrees with this opposing view in this aspect. But why is Bitcoin still worth holding? Because the author believes that the value brought by asymmetric risk investments to Bitcoin...

Asymmetric Risk Investment

If some of the above arguments come true, the price of Bitcoin could be very good.

  • Upward return on investment is 500%+.
  • Downward return on investment is -100%.

Mathematically speaking: if there is over a 20% chance of a 5x increase, even if there is a chance of losing all money in the remaining probability, the investment still has a positive expected value, where the expected value is greater than zero.

This is the logic the author believes is worth investing in Bitcoin. Although it is unknown which of the arguments above, if any, will play out, and the author is skeptical of many supporting arguments, there will eventually be one that is viable, leading to significant returns on investment.

As long as I can accept the downside risk and there is a fairly high success rate, I am willing to HODL.