Does Bitcoin Exist?
Or: “Hey ma, this Bitcoin thing isn't as ponzi as it sounds”
One misconception about bitcoin is that it cannot possibly exist or have value or quantity since nothing is backing it. Alternatively written, if bitcoin existed, you wouldn’t need an investor to give you this quantity in exchange for other currencies for it to have value. That value next to your address wouldn’t be worth anything.
And alternative alternatively, I am witnessing such a slew of Medium articles about these claims, such as:
And:
Articles like these have been published for years now and are conveying the wrong message, mainly because the Bitcoin network has been improving in the meantime. (I cannot speak for other cryptocurrencies, but hey, that’s getting conflated in “bitcoin” articles all the time. But generally, I am disappointed in the lack of innovation in most cryptos.) I want to demonstrate in this piece that the quantity of bitcoin inside addresses does have its own value and hence exists.
The reason I’m disclosing these privacy-breaches of information is to demonstrate that a) I’m not a charlatan on the subject, b) I’m not with the campers that view bitcoin as a store of value only, and c) I gain no financial benefit from the price markets from writing this article.
This is also not a bitcoin will go to the moon!!1 post, so if that’s what you were looking for, then sorry; you’ll have to find that melody on Reddit.
So, I’m publishing a slightly edited opinion piece that was originally supposed to be an exclusive for Bitcoin Magazine (yes, you were going to see this same story there instead of here). Apparently, they were not interested in such an article, since I didn’t get a reply. But whatever. The cat is out of the bag now.
Is quantity just a mathematical construct?
Some people could argue that we have, in fact, just invented quantity inside computer code, and hence the quantity is worthless in real life. It’s almost as if we have declared an address to have a certain quantity of bitcoins, and only then do they have value.
An example of something that doesn’t have real-life value is CS:GO skins, or Fortnite skins. if you do use the Fortnite skin analogy, replace “Valve” with “Epic Games” in the paragraphs below.
Skins are only valuable in the context of trading them for other skins. Not only can the game developer, Valve, can create skins at will, they can also cease the creation of a particular skin type, but there is still an unknown number of skins in circulation (we will see why this is important later). So the only value they have in terms of real-world currency is the vendor-set price of the skin. Even this is just purchasing value; not all items with purchasing value also have trading value.
The key thing here in this example is while you can buy the skin for cash, the reverse is not true. Except for refunds, in which case your copy of the skin is destroyed, you cannot sell the skin to someone else. That is not simply a legal limitation. Of course, if people tried to sell skins, they would be creating a virtual economy for skins, which can be manipulated by anyone and violate various financial regulations. But with this virtual economy, anyone has the power to adjust the price of skins, making them go up and down to the degree that they can’t represent a goods’ prices.
The above effects are what happens when there is no scarcity. Some people argue that the sometimes extreme volatility of bitcoin prevents it from being used as an item’s price. After all, if your currency is worth half its value the next day, then the item price needs to be doubled to retain its actual value, right?
However, consider that Bitcoin is scarce, and there will only ever be 21 million coins in circulation. This factor causes people to hoard as much Bitcoin as possible because they know it is limited. This situation is different from the CS:GO skin example above, where there is an unknown number of skins in circulation.
You can only achieve scarcity when you know the quantity of the total supply. Even financial currencies with unlimited generation power, such as Dogecoin or even the US dollar, have a total supply known at any given time (in the case of the dollar, it is known to the US government). So we come back to the previous issue about the quantity being invented, and thus the currency has no value. Having a fixed, known quantity of supply gives the currency value. But see the next paragraph for another essential condition.
The importance of demand
We have a fixed supply of many cryptocurrencies, but why don’t they have much value? That is because they do not have a lot of demand for them. The value of any currency falls when there is less demand for it.
Let’s go back in time to 1923 for a moment. The German Reichsmark had a value rapidly approaching $0 because there was no demand for it, but almost everyone was selling it for other currencies.
Back in the present, we see that whenever people sell bitcoin, as they did when Tesla stopped accepting BTC payments, the demand for it falls, and so does the Bitcoin price along with it. The reverse example is also true. So we see that demand is a catalyst for a currency price increase.
Before we continue, let’s answer a quick question first.
Why does bitcoin have such exponential growth?
Because the buying, the demand, is not controlled. You don’t see government currencies fluctuating as wild as bitcoin because their governments control how much currency people can purchase or sell to maximize stability. However, there is nobody to control the supply or demand of Bitcoin. Its consensus rules do not allow for this.
Do cryptocurrencies have claims and liabilities?
Most do. There should be a subject that a claimant should be liable to when a currency transfer is made. In financial speak, we call claimants “users,” and “subject” is just a fancy word for the entities who give you the currency and who ultimately receive the returned money.
For most fiat currencies, the subject is the central bank of the country. The government entrusts the central bank with its currency supply that people can take and are liable to give back to it. So, to have a functional economy where people buy and sell stuff, a subject must take many liabilities in the form of its claimants (“users”) borrowing currency.
But in a currency such as Bitcoin, there is no subject for people to “borrow” bitcoin from and give back from, right? That’s not correct. It is the computer code running the full nodes that supply the bitcoins in mining rewards. And ultimately, these coins can be destroyed or returned in finance-speak by sending them to the Genesis block address (according to bitcoin consensus rules, you cannot spend from the Genesis block address). So it becomes clear that users are borrowing from and returning bitcoins to the computer programs that run the full nodes. We can demonstrate that technically, they have a “liability” of bitcoins to the computer program.
Why aren’t the exchanges the subjects?
Because you don’t owe any bitcoins to the exchanges, exchanges are merely financial entities that let you exchange your bitcoin for a fiat currency or another cryptocurrency. You don’t “borrow” or “return” any money to them because you never had a liability to them in the first place. You can demonstrate this idea by closing your exchange account and still owning all of the currency you withdrew from them.
Are reserves required to run a cryptocurrency?
No. Reserves show that a currency is backed against another currency or value. Changes in the reserve currency’s supply or demand will also affect the currency’s price pinning it. It is entirely possible to run a currency with no reserve currency in place. It is not affected by the supply or demand of any other currency, except for its own. All this happens to be how Bitcoin works. The only factors that affect Bitcoin’s price are, surprisingly enough, are its own demand and (fixed) supply.
Appendix: Tesla, Tesla, Tesla
You gotta love it when people correlate crypto with Tesla and its billionaire founder Elon, don’t you?
(Actually, it makes me cringe. I hate it, and this is almost like watching Steve Ballmer do the “Developers” dance on repeat.)
Here’s the problem with Elon and Tesla’s association with bitcoin. He is now widely considered an authority on the subject, and people just take his financial advice without running a compiler’s semantical code check on them first. The result is, you see a wide range of silly trading errors comparable to those pages of syntax error before ‘;' tokenor Undefined symbol FOOBAR\nfirst referenced in file process.cerrors you see in your Makefile output. Fellow developers, does that ring a bell?
You shouldn’t be blindly accepting opinions about crypto from random people on the internet (including myself and this article), not even a billionaire’s opinion. Unfortunately, for the majority of casual Twitter and news surfers, this is not the case.
Ignore the raging about alleged pump & dump effects for a moment, and focus on the following: The end result is that critics now start giving off the wrong impression about Bitcoin, based on people like Elon’s view on the coin, which is read by hundreds of people. When you consider that there are dozens of articles like those published in a month (a guesstimate), the number of misinformed people rises to the tens of thousands mark.
Therefore, you should be careful of what information you believe when reading the news — always use your brain — and then register only the information that makes sense and sounds reasonable to you. And definitely don’t believe random information on the internet just because someone said so, without verifying it.
Conclusion
From a financial point of view, bitcoin exists because it has a liabilities system similar to other currencies. Any asset whose quantity is created can be valuable if it has a known supply and enough demand. Purchasing value alone does not give an item trading value; there must also be demand to use it as a trading value.
