What’s A Bitcoin Worth?
Any sufficiently advanced technology is indistinguishable from magic. (Arthur C. Clarke’s Third Law)
Imagine a bunch of magic tokens. You can send one token, or a fractional part of a token (but let’s stick with one for now) anywhere you want, quickly and verifiably, and the recipient can sell it for local currency worth what you paid for the token. How much is the token worth?
The question sounds like one of those brain teasers without enough information to solve, yet there is a solution. Why would the token have any value at all? Answer: Because any amount of them can go anywhere you send them, quickly, directly and verifiably. Nothing else can do that, except another magic token. Surely, that’s worth something, right? But how much?
Our token shares many of the key characteristics of a currency. It is portable, sub-dividable, fungible, and verifiably genuine. The only attribute it does not share with traditional currency is stability. Because the quantity available does not respond to demand, the price is going to vary with demand. But every price is “stable” over a short enough period of time. Therefore, if our token holds its value just long enough to be bought, sent, and sold, it will be useful as a way to transfer value, whether or not it can remain stable long enough to be a currency, i.e., until the recipient wants to spend it. So, transferring value is what our token can do and why it has value to those who have value to transfer.
But how much is it worth?
In the late 1890’s, the US Dollar was undergoing deflation. Back then, dollars were backed by gold, and gold was relatively scarce. So not enough dollars could be created to keep up with the burgeoning supply of goods that dollars could buy. Deflation is not a good thing for a currency. So, if our magic token were a currency, a rising value would be a bad thing. If, however, the token is merely a way to move currency, a rising value would be a good thing.
A token doesn’t get to choose how it will be used. Currency is as currency does, and a modern currency must expand its supply to meet demand for its use. Eventually, the US figured out how to make the dollar do that — it’s called fiat currency, money backed by the…