December 1, 2013
In 2009, Bitcoin made its debut online, a virtual currency initially priced at $.30 in US dollars. Apparently the time was ripe for an internationally available, anonymous, non-governmentally regulated or manipulated currency, because on November 27, 2013, the value of one Bitcoin crossed $1000 in US dollars! Pretty amazing – a virtual currency, something that cannot be touched or felt or smelled, or even widely used to buy anything, soars 1000% in value in just a few short years!
The Bitcoin system was created by an anonymous source with the pseudonym, Satoshi Nakamoto. Bitcoins are “found” online when a “miner” solves complex mathematical algorithms with 64-digit solutions, causing Bitcoins to be deposited into the miner’s account. Every Bitcoin account is an anonymous internet address with 27-34 letters and numbers. However, the Bitcoin world is not restricted to mathematical geniuses. Ordinary investors can purchase Bitcoin through various websites and currency exchange sites.
The supply of Bitcoins is finite. The system is designed so that the maximum number of Bitcoins that can be mathematically found is 21 million. At this time, well over 11 million Bitcoins have been mined and put into circulation. In this regard, the Bitcoin monetary system has addressed the supply side of the centuries-old principle of “supply and demand.” On the demand side, however, it’s a puzzle.
Uses for Bitcoin are quite limited. Bitcoins are not widely accepted for purchases, not yet anyway. A few online services accept Bitcoin. The University of Nicosia in Cyprus accepts Bitcoin for tuition. Richard Branson, founder of Virgin Galactic, recently announced that his $250,000 space flight offering can be purchased with Bitcoin. Unlike fees charged in credit card transactions, Bitcoin transactions have minimal fees. Bitcoin also functions as a financial service and can be used to transfer large sums of money internationally at low cost. In August of 2013 Germany’s government recognized virtual money as real currency. And in November 2013, a US Senate committee concluded that Bitcoin is a legitimate financial instrument.
Everyone wants to possess valuable assets. Yet what value really is can be a philosophical question. Limited supply is not enough to create value. The rare jewel is only of value because people have agreed to assess value to it. That it is a rare jewel in limited supply is only one side of the equation. The other side is that people want to possess it – demand.
On the demand side, value has both intrinsic value and extrinsic value. Intrinsic value, or “true value” is the inherent value, the usability of the asset. Oil has intrinsic value – it can be used to run machines and produce energy and facilitate travel and mobility. Land has intrinsic value – it provides a home-site, and can yield food and water, and support livestock. Even gold has some intrinsic value in that it can be used in manufacturing.
On the other hand, extrinsic value, simply put, is just whatever people will pay for an asset over and above its intrinsic value. Extrinsic value is “value that is not in and of itself but as a means to something else.” Currencies only have extrinsic value; they have no intrinsic value in and of themselves. They have usefulness in that they can be exchanged for goods and services but only because governments or large groups of people assign this exchange value to them. One key difference between intrinsic and extrinsic value: intrinsic value cannot go to zero but extrinsic value can go to zero - theoretically.
Extrinsic value plays a significant role in determining price for most assets. If assets were priced on intrinsic value alone, land would be worth only whatever crops it could generate or whatever livestock it could support. Gold would be worth less than copper. Oil would be priced at present energy needs and not some future value. Dollars, and other currencies – including Bitcoins – would be worth – nothing.
If a Bitcoin is priced at $1000 today and there are 21 million Bitcoins in the system, then the entire Bitcoin monetary system is only priced at 21 billion dollars. The US government has been “printing” 85 billion dollars a month! For Bitcoin to become a widely distributed, widely used currency competitive with other currencies, price will have to appreciate significantly beyond $1000.
In short, the value of Bitcoin could go tremendously higher. Or the whims of public support could shift and its value could go to zero. Not that it will. In fact Bitcoin may represent the future of world- wide monetary practice and financial exchange. If nothing else, it is a fascinating experiment. But right now at this stage of the game, if I were given the choice between Bitcoin or land, I’d take the land.