US Treasury Dept

Bitcoin’s Intrinsic Value – Explained

Bitcoin’s intrinsic value is a long debated topic, and many Nocoiners argue that the digital asset doesn’t have any value, and it is only the speculation that is driving up the price. But that is not true since Bitcoin derives its value from the kinetic energy produced by mining and stores it as potential energy for the future. Let’s elaborate on how Bitcoin derives its value from mining activity and why it has enormous intrinsic value.

Natural vs. Artificial Money

One needs to understand  Natural vs. Artificial money before getting to know about Bitcoin’s intrinsic value.

Natural Money – The Money that is derived from energy and is very difficult to create.

Artificial Money – The Money that is derived by human beings and has future promise. It is easy to create and also loses its value faster.

Bitcoin and gold can be categorized under natural money since they need the energy to produce them. On the other hand, fiat currency falls under Artificial money as it can be printed out of thin air and only holds future promise. If we understand how gold is created, we can easily understand the concept of intrinsic value and why gold and Bitcoin falls under the category of Natural Money.

Gold’s Intrinsic Value

Gold is created out of humans mining it from the ground, but that is what is seems like on the surface. But if we dig deeper, we will understand that the gold atoms (AU) are created by a process called Nucleosynthesis and synthesizing AU atoms requires nuclear fusion over billions of years. So it is very clear that Gold (AU) formation requires an enormous amount of energy and this explains its scarcity. Humans cannot create gold out of thin air since it requires million tons of TNT to create 1 ounce of Gold and it is simply impossible to replicate the Nucleosynthesis process in the laboratory. It is also a complex process that is not economically viable. The above Gold creation process clearly explains the intrinsic value of an object

Proof of Work

The intrinsic value is nothing but the amount of energy stored in an object or in other words we can say it is an object’s Potential energy. Now let’s compare this with Bitcoin. Gold is created from nuclear fusion while Bitcoin is from hashing SHA-256. Both Gold and Bitcoin require an enormous amount of energy to be created. This process is called as “Proof of Work“. The “Proof of Work” gives both Gold and Bitcoin its intrinsic value. Proof of Work is the algorithm used in Bitcoin to produce blocks and is rewarded with Bitcoins for finding the blocks. This process requires a lot of electricity and the energy requirement (Hashrate) is increasing exponentially day by day.

Bitcoin > Gold

Bitcoin can be a better “Store of Value” than Gold or any other form of money since humans might find a way even to create Gold in future using sophisticated technology. If humans can create gold in future, then it will create inflation, and it can be printed out of thin air. Also, scientists have found out that there is an enormous amount of Gold in Universe. In fact, there were reports of cosmic collision creating 10,000 earth masses of precious metals including that of Gold. So in future, even Gold is not scarce and can be printed out of thin air or can be inflated.

Bitcoin, on the other hand, cannot be created out of thin air or manipulated. This is due to Bitcoin’s network property called “Difficulty.”The difficulty is adjusted to limit the rate at which new blocks can be generated by the network to one every 10 minutes. The Bitcoin protocol will readjust its difficulty according to the amount of energy (Hashpower) that is supplied to mine it. So, no matter how much energy is thrown at Bitcoin to mine it, it is going to be increasingly difficult to create new Bitcoins.

This gives the intrinsic value edge to Bitcoin. Also, the total supply of Bitcoin cannot be manipulated or inflated. Even Gold supply can be inflated but impossible to inflate Bitcoin’s total supply of 21 million. So we can conclude that Bitcoin is better natural money than Gold. We can go one step further and say that Bitcoin is the Perfect Natural Money humanity has ever created.