No Intrinsic Value

When gold was first used as a medium of exchange 5,000 years ago, it wasn't because of its value in the electronics industry.

Does anything back Bitcoin? Does anything back gold?

Bitcoin is backed by nothing. It provides no revenues. It has no industrial use. You can't even eat it. Its value is a $1.4 trillion mirage, backed only by the next greater fool.

Right?

What Gives An Asset Value?

Critics of Bitcoin frequently raise the objection that it's "backed by nothing". Most conventional assets, such as shares and bonds, have revenue streams, and so there are models for pricing them. Even fiat money is "backed" by the ability to pay taxes with it, and by demand from its national economy.

Gold is a notable outlier. Like bitcoin, it has little intrinsic value (you can't eat it, for example). It has some industrial value, though this represents only a small percentage of its total use, the major categories being bullion and jewelry.

Uses of Gold in Industry, Medicine, Computers, Electronics, Jewelry

Moreover, its industrial utility is manifestly not why we use gold as a store of value. All those central banks buying gold? They're not doing it because they're scared of a nationwide shortage if electrical connectors.

The idea of industrial utility doesn't stand up to more than a few seconds' scrutiny anyway. The earliest recorded use of gold as a store of value and unit of account dates back to the third millennium BCE. You can be sure that the ancient Mesopotamians didn't value it for its applications as an electrical conductor or its unique catalytic properties.

We value gold because it is scarce, resistant to corrosion (durable), attractive, divisible, malleable, and difficult (energy intensive) to extract and mine.

Bitcoin shares the same properties, or their digital equivalents. It's not shiny, like gold, though there's a certain beauty to its elegance as a solution to peer-to-peer online value transfer.

It's also far more portable and transferable than gold. It moves at the speed of bits and bytes, and is secured by strong cryptography. As digital gold, it is superior in every fundamental way to its physical counterpart.

It should be clear now that Bitcoin is here to stay. It's "backed" by the confidence of millions of users and a vast network of miners carrying out trillions of computational operations every second. It has huge network effect and enduring first-mover advantage.

Bitcoin has a long way to go before it dethrones gold as the world's go-to store of value, but on the other hand, it has already come a very long way. At this point, the last 10x in value doesn't seem so much of a stretch.


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