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Why is Bitcoin Worth so Damn Much?

Bitcoin is worth a ton. You can probably remember a time when BitCoin was only $120 (May 2013). As I write this, it’s sitting at about $2500, or 20x that much.

Any sensible person would be scrambling to buy up as much BitCoin as they can, hoping that the price will go up. Should you?

Well, no. See, when you buy something just because you think the price is going to go up, it’s speculation. Speculation is rarely a good investment, because only people who get in on the speculation early make money. Then, the price of the commodity in question goes up because everyone’s buying it, before eventually crashing back down to its true price.

So, is Bitcoin going up in value only because speculators are driving up the price?

Well, no.

As more and more people put money into the Bitcoin system, its “market cap”, or market capitalization, increases. That basically means that since people have spent X amount of real world dollars on Bitcoin, all Bitcoins put together must be worth at least that much.

Imagine you have a company that makes blenders. You decide that you’re going to open up the market to outside investors. A bunch of investors come and invest $1,000,000 in your company.

Now, outside people don’t really know or understand what’s going on in your company, but they do know at least 1 million dollars, something they do understand, went in. They are probably hoping at least that much is going to come back out. If their hopes are justified, your company is worth at least $1,000,000. That’s your market cap.

So one explanation for the rising value of Bitcoin is the fact that people keep pouring more real world dollars into Bitcoin. They do so by buying Bitcoins, typically from a “miner”, who has invested in the computer, internet and electricity infrastructure necessary to mine the Bitcoin.

As you may know, the cost to mine a Bitcoin goes up a bit with each coin mined. This doesn’t explain why Bitcoin is worth so much, but it does fuel the speculators’ hopes of a huge return.

In this way, a Bitcoin is like a special pair of Kanye West Yeezy Adidas shoes. There’s nothing special about them, but since there’s a limited amount, the price is high and time keeps driving it up. That’s why a pair goes for $1,000 on Ebay. Hell, even the box costs more than a normal pair of shoes.

But wait a minute, Daniel. Blenders, Adidas shoes, these are all things I can use. Of course they have some value, because they can alternately keep your feet dry and stylish or turn fruits into smoothies. What does Bitcoin do? In fact, Bitcoin does something so useful, it’s worth way more than blenders or shoes!

This is where things get complicated. Bitcoin is innately valuable because of what it does. The technical reasons are complicated, but basically –

  1. Bitcoins, once transferred, cannot be taken back. This is not because of laws or a charter, it is mathematically impossible (the exception being when you have as much processing power as half of the world put together, in which case the world has bigger problems.)
  2. Bitcoins cannot be seized by an outside authority unless they physically seize you or whatever device you’re using as your “key”. It is mathematically impossible otherwise. You can of course simply be mugged for your key, but since Bitcoin lets you have thousands of keys, a smart bitcoin user can make it so authorities don’t even know they have very much money. This is like opening thousands of bank accounts to hide your wealth, which is of course illegal when dealing with FIAT currency, because governments like to suppress anything that might restrict their ability to rob you. Don’t take my word for it – the value of Bitcoin is itself tied to a lack of faith in governments.
    Imagine a perfect country – I’ll call it Perfectia. Perfectia is run by a government with no flaws of character, who tell the whole truth 100% of the time, and whose country is so well run, there’s no risk of it ever going bankrupt. If such a country existed, we wouldn’t need Bitcoin, because we could just buy Perfectia Dollars and know with certainty that the backing authority won’t fail or otherwise betray us. Of course, there is no Perfectia, but Bitcoin functions just like a Perfectia Dollar.
  3. Bitcoin has no central authority. It is a decentralized There is no government that can print more of them at will, and they’re not backed by any country. If you have a currency and the sovereign who backs it collapses, the currency loses a lot of value. Bitcoin is resistant to this, and every time the above happens with a real world currency, the actual value of Bitcoin will probably go up.

So the three key qualities of Bitcoin is that there are no takesies-backsies, it can’t be stolen (except by using force to make you hand over the password) and no one knows you have it. In other words these are all qualities people want in their money.

In fact, Bitcoin solves so many problems relating to traditional currency, that, when you think about it, there’s no reason to use paper dollars or gold at all. It’s actually absurd to exchange a slip of paper for a new car. The only reason that paper currency, coins, silver dollars and the like exist, is because they were the best solution for thousands of years before Bitcoin. This is after Bitcoin.

I don’t trust the government won’t devalue my currency. Governments do this all the time, have for thousands of years. French monetary authorities used to recall all the silver pennies in circulation, so they could recast them with less silver and keep the profits. This sort of shameless robbery happens all the time.

In countries like the United States and Canada, where strong media generally keeps governmental japery to a minimum, this happens a bit more rarely, and the government needs to be a bit smarter when it robs its country blind. (See: 2008 financial crisis.)

But in other countries, like Brazil, Venezuela, Nigeria, Angola and China, the government, just, totally does what it wants. For the citizens of these countries, government devaluation of currency is a certainty. Is it any wonder why Bitcoin is so heavily regulated in countries like China? The government knows that controlling the central currency is the best way to become rich at the expense of the people. Beijing recognizes the threat Bitcoin poses to its authoritarian profit machine.

The residents of these countries desperately want to put as much wealth as they can in Bitcoin. All of it, if possible, because it provides the best guarantee that the currency won’t be devalued. That the coins themselves continue to increase in value is just a nice bonus.

My hypothesis is this: Bitcoin and other cryptocurrencies will completely replace money, sooner than you might think. It’s hard to predict exactly when, but as each major world power experiences its own USA-style bank collapse (think UK, France and, yes, Canada,) the value of Bitcoin will skyrocket. It’s hard to tell exactly when these events will occur, but the next one will probably be within 20 years.

Here’s the problem right now with Bitcoin: If I have a million dollars in Bitcoin, and I live in almost any country, it’s hard for me to turn my money into cash. Governments use the word “money laundering” a lot to justify the measures they take to prevent you from turning your Bitcoin into cash, but I think it’s an act more akin to “money protecting”.

Here is an extremely important question: Why does one want to turn their Bitcoins into real dollars?

The answer is that more goods and services can be had for real dollars. Most stores don’t accept Bitcoin, not yet at least.

But WHY? Generally, people, old people, are stupid. They put their faith in a crooked government that they understand, instead of with a mathematically-sound cryptocurrency they don’t. They think that, when push comes to shove, this piece of paper printed by an authority that lives in a fancy house is a safer bet than a tool designed simply to be good money. Of course, the opposite is true.

As old people die out, and young people start to run businesses, Bitcoin will become ubiquitous as a means of exchange. It will cut this real world, “fiat” currency out completely. You will start to be able to buy more services with Bitcoin than you can with your own sovereign currency.

In other words, it is a certainty that Bitcoin and other cryptocurrencies will absorb all the market cap in the world currently in other currencies. Bitcoin will displace all fiat currencies, and the true value of a Bitcoin will be the entire market cap of the world, divided by the number of Bitcoins.

And that’s why Bitcoin continues to go up. Its fate has been decided, it is certain to displace fiat currency. The only threat to it is a different, better cryptocurrency, but that’s beyond the scope of this talk.

So, to conclude, Bitcoin is worth so damn much because it works much better as a currency than dollars or cents. The only reason it’s not worth literally a billion times more than it is right now, is not because of any flaw in the currency, it’s a flaw in people – a slowness to adopt new ideas. Will this be your fatal flaw?

In my opinion, cryptocurrency can’t be stopped. Attempts like Beijing’s to stamp it out is just a boy sticking his finger in the dam, trying to keep the water from pouring it out. The dam will break and Bitcoin will absorb the market cap in all the currencies of the world. The only question is, when?

This blog is based on a YouTube video – check it out here!

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