Saturday, January 9, 2016

Why is Bitcoin a store of value?

Is Bitcoin the next Gold? As I tried to allude in my post about the Value of Nothing, nothing's ever worth it - philosophically, as well as in reality. We seeks stores of value. We need to agree on a common store of value to have the store be of any value at all. So, it's our agreement or perception about the store of value, that create value for that store - the store in itself does not have any value - be it gold, or paper/virtual money, or Bitcoin.

Why is Gold valuable? Perhaps, for the same reason for which Diamonds are valuable, or Tulips, or Dotcom stocks, or works of modern art. Why is paper money - printed by people who don't have it, and backed but nothing but words - valuable? Well, that's because we all agree to trust those words, and sweat our brows to earn that money.

What happens when we stop trusting those words (deservingly, but to our detriment)? Russia happens, Zimbabwe happens, and now Venezuela is happening. Currencies get devalued so much that people have to find some physical use of that paper to get some value out of it - like burn it to bear the winter cold... (and you get other ideas)

China crash happens, there is a rush towards Bitcoin. Greek Euro Crisis, there is a run towards Bitcoin... and Gold as well. Better not to trust the fiats behind those fiat currencies, because those fiats could change anytime. Gold has been a mighty store of value for centuries, and so the expectation is that it will continue to be so for a few centuries more...

But why Bitcoin? It's of recent origin, not much history behind it. It is a destabilizer of the current monetary environment that is controlled by Governments - so, Governments might clamp down on it. It is created by the mumbo jumbo of some geeks (OpenSource, I know), that common folk are just expected to believe (not unlike when they are told to trust fiat currencies). It is not a physical entity - it's value is in some string of binary bits. Arbitrary. So, then why is it in demand?

One part of the answer is clear. People move towards Bitcoin, when their faith in alternative value stores decreases. The move is away from the untrustworthy Dollars and Euros to Bitcoin. Now Bitcoins are not trustworthy either - but they are an alternative to the other untrustworthies. And given the limited supply - anything of value must necessarily have a limited supply - and speculation, the price rises.

But the question remains - why should we begin valuing something at all? Especially, something whose only purpose is to have value? If a group of people then come around with what they define as a similar or better store of value, should we not trust them? The only trick (or strategy?) is get people to perceive value, and then have that perception gain momentum as more people jump into the bandwagon. But again, why not Tulips? Or those sea shells that I found on the sea shore? Absurd queries, but blog I must.

Bitcoin Euro - Wikimedia - Image Source:

1 comment:

  1. Just saw this article stating that "There Never Was a Real Tulip Fever"