A Discussion On The Underlying Value Of Bitcoin

The Position Of Bitcoin

According to a report published in Business Insider by Joe Wiesenthal, the interesting piece on Bitcoin is about partially responding to Paul Krugman’s somewhat inscrutable blog post that called the cryptocurrency evil as well as partially answering the question of why Bitcoin has value with the topic being discussed for months making Wiesenthal’s argument worth digging into. Breaking the Bitcoin into three interrelated characteristics supports one another where it’s a currency, equity, and a social network. 

Just as the Bitcoin acts as a currency whereby you can use it as a generic exchange medium instead of dollars as well as traditional currencies in a growing number of places as it also at least behaves like equity because the more people are using it and accepting it the more the value of each coin as generally rising. In this case, it is interesting the bitcoin’s ability to act as a currency and equity are both predicated on its network effects as Wiesenthal puts it succinctly, the strong robust network effects are being crucial for making the whole thing work. Additionally, the links to Antonia Polemitis makes the same argument that in case people stop using Bitcoin, its intrinsic value is zero, and its value is 100% derived by the fact that it is a network. 

Where Is The Bitcoin Playing Its True Value?

While we view Bitcoin’s value as a currency and equity are supremely predicated on the strength as a network as also we can state that its value rises and falls with the strength of that network. In this situation, it means that bitcoin’s value is something that we can, therefore, better understand. The gist of all of these is that it has been hard to explain to anyone why Bitcoin makes more sense at $700 than $800 or even $300. Whereas if we can consistently point out to an expanding network presuming that Bitcoin’s value should, therefore, be rising.

However, this does not allow us to say that Bitcoin and the current price and its requisite swings match its inherent value. This is in fact that we can presume that they do not whereas according to Coinbase Bitcoin spiked from$208 at the start to $1049 later on. Assuming that bitcoin’s network effects gave its exchange rate (currency) or asset value (equity) with proper valuation at the start and it is arguable that its network became roughly five times as valuable in the month as investors overbid Bitcoin ensuing price slump pointing towards the latter. As the price of Bitcoin has correlated to the current news volume a few times, it’s a connection that is thought to be quite plain. Whereas it is not a bad thing, but of course as Bitcoin needs the public to become better informed about its existence so that it can grow its buying class as well as bolster the cohort of sellers willing to accept it.

In case the growth of the network is the growth in Bitcoin’s value it does it not have a risk of negative reinforcement. To specify that is to say that a strong negative correction in Bitcoin’s price would surely harm both sides of the table thereby skewering the positive impact of network effects by flipping them around. 

Bitcoin As A Network

Is it then that Bitcoin’s reliance on its network makes it less stable than a traditional currency? Whereas it is not necessarily fatal as Krugman notes Brad Delong on the things you can’t do with Bitcoin are as follows

As the value of gold after underpinning is that if all else fails you can use it to make pretty things, whereas the value of the dollar is a combination of (a) the unique fact that you can use them to pay the taxes to the US government and (b) where the Federal Reserve is a potential dollar sink which has been promised thereby to buy them back as well as extinguishing them in case their real value starts to sink which is at much more than 2%/ year.

It can be argued that whereby paying your taxes with dollars is a form of the network effect, but that feels like a stretch meaning that Bitcoin’s value is less moored to things that we can jokingly call offline. It is important to take from the above that bitcoin’s ability to expand its network is thereby critically important as the supply of coins continues to grow. This kind of hard cap of bitcoins will be released but we are not yet there, as Bitcoin fans want expanding utility to grow at a higher rate than new coins are introduced. 

Yet another issue involved with the long term utility of Bitcoin is that it is worth discussing whereas it is that its price volatility makes it hard to sell tangible goods with the stuff. As an example in case, a Tesla is sold with Bitcoin and the next day the Bitcoin falls 25 percent even before it is cashed out with coins, it is a pretty big deal as Bitcoin needs a more stable price which can only come to fruition after the network becomes large enough to have validated the price of Bitcoin at a certain level. 

The Final Words

Essentially it needs to attract more retailers which are kept out by its price swings. In a simple summary, the utility of Bitcoin as a currency and its value as equity depends on its network providing the market opportunities for Bitcoin to behave like either.