People just learning about digital currency often ask what is at the heart of bitcoin? What gives it value? The answer to that is really just “people.” There are many who question whether bitcoin is a currency or a commodity. Many things can serve as currency. If it can be a medium of exchange, is scarce, and everyone using it agrees, an item can be used as money. Whether comprised of cryptography, algorithms, printed paper promises, or shiny glass beads, at the heart it all comes down to people and the trust they have in a particular currency.
One reason digital currency gets so much more attention is that, unlike modern currency backed by a central authority, bitcoin is backed by a widely distributed network of users. The “network effect” is defined as the idea that a network, like Bitcoin’s, becomes more valuable to users as it grows. The network effect can grow as the result of several elements: speculation, merchant adoption, consumer adoption, security, developer mindshare, financialization, and worldwide adoption.
Bitcoin is showing strength as it continues to thrive on the Internet. It is deflationary, decentralized, can free its users from third parties, is open source, and core developers work tirelessly to improve it. Historically good, strong currencies drive out weak currencies and dominate the monetary scene. Consistency, high-quality, and stability of one currency over others beat out the competition for use as international money. However, at the heart, there were still just people.
As the bitcoin network grows over time, more people start using and making the best or most efficient use of the standards of the network, locking more and more people in as the benefits become clear. The longer bitcoin exists, the more its relative security is proven with real-world testing and the more people trust in those standards. The people at the heart of bitcoin make up the largest network, thus it grows in utility simply by having the most users. Accessories and applications keep getting easier to obtain because innovators recognizing the ecosystem’s needs keep rising to meet the demands.
AT THE HEART OF BITCOIN
Decentralization is a core value for people at the heart of bitcoin, and the lack of a single point of failure, choke hold, or controlling interest is valiantly protected. Every other cryptocurrency is centralized. Centralization for business is a good thing because it allows for quick changes in response to market demands. For a currency, it is a bad thing. In order to be a good store of value, currency should not change qualitatively – without regard to quality over quantity. Governments and central banks regularly interfere with the values of currencies, printing new money, raising and lowering rates, and planning economies. Bitcoin is designed to avoid central control and put control into the people that manage to own it.
Bitcoiners highly value the fact that no central authority can diminish the utility of their coins, making bitcoin actually scarce. Bitcoin continues to thrive because the market drives it, it cannot be changed over time, and it is unseizable. It cannot be confiscated, impounded, or possessed. Changes require a consensus of the entire network, the very people at the heart of bitcoin – which means all the users.
The U.S. dollar, since 1971, has no physical commodity behind its value. While some countries peg their currency to the U.S. dollar, hoping the stability of the United States will protect their rates, ultimately currencies seem to be mostly floating in the wind like cryptocurrencies.
In order to be a form of money, bitcoin will need to be readily exchanged for goods and services, and accepted around the world. As a commodity, a good must be used in commerce such as metals, foodstuffs, livestock, oil, gold – for example. People must be able to buy it to hold and resell without the intention of using it, and use it for bartering.
Bitcoin as a coin is a digital financial asset – but the underlying protocol itself is a payment system in which the transactions provide a market for the coin. This somewhat minimizes the risk of Bitcoin suddenly becoming illiquid, but being a non-regulation-compliant security makes it risky for investors. If Bitcoin becomes securitized, will its exponential rate of growth continue?
What if global crypto notes, or smart banknotes, that derive their value from cryptocurrency private keys held in a Swiss nuclear vault, emerge to secure digital assets and make Bitcoin legal, give it audible ownership so it could be cleared risk-free – would that become more appealing to institutional investors, banks, and others? It seems fairly obvious that a Bitcoin-based, exchange-traded derivative would interest investors to invest trillions in the blockchain if they could own a real security.
Some question remains whether bitcoin will ultimately be used as a currency or a commodity, will it be securitized or not. Currently, demand is driven by intrinsic value and the strength of code and the coding community. A case can be made for different scenarios, but perhaps at this point, Bitcoin would better be described as a crypto-asset. Longterm, the answer depends largely on the people at the heart of bitcoin.
For the first time in history, alternatives to the current fiat standard can be explored, discussed, and considered. In the 1800s reliance on gold to estimate the value of currencies meant every “dollar” was connected to a certain amount of gold. While this system helped to stabilize the value of a “dollar”, it was not without flaws.
Bitcoin was created specifically to address flaws with both the gold standard and fiat currency. There are to be only 21 million Bitcoins mined, and mining of bitcoin is not a simple process. If one considers the limited circulation, incredible usability, and feasibility potential, decentralization, security, anonymity, ease of use – it is clear that Bitcoin is an alternative to existing currencies like the world has never seen. People at the heart of bitcoin understand this can lead to a monumental shift in the way people interact with each other.
Early adopters of bitcoin and believers in the philosophy behind it are not average-joes, but rather those with technical savvy in the fields of programming and engineering. Certainly, there are also those looking to take advantage of greed exhibited by others looking to get rich quick – there always are. And certainly, this new technology must navigate a Cambrian explosion of growth before its best use cases and limitations become clear. After all, it is not a be-all-end-all tech/currency/commodity that can do everything for every industry and free society.
Ironically, the philosophy of “trustlessness” behind Bitcoin is being lost on the average owner today who must trust third party services, software or hardware to handle their coins. The dedicated, tenacious bitcoin ecosystem continues to seek solutions for the technology to evolve and become more efficient, while the mechanics of buying and storing bitcoins become more convenient. This process continues regardless of price, regulation, acceptance, or investment by financial institutions. The developers, miners, investors, evangelists, educators, and entrepreneurs…people at the heart of bitcoin are what will ultimately determine its future.