Thursday, November 28, 2013

Bitcoin - true vs apparent value

There are plenty of opinions online about the present “value” of Bitcoin in terms of exchange rate to US dollar or to any other currency. What interests me is the “true intrinsic value” of Bitcoin, because I believe that this value will determine the future of Bitcoin in the long run. But what do I mean by that “intrinsic true value”?
Through history, human society have developed various tools to exchange goods and services. It all started with Barter exchange but later various mediums of exchange were developed. Chronology of these tools was: Commodity money, Representative money, Fiat money and now cryptocurrency.

Each of these types of money is a tool that has its own true intrinsic value. Barter trade has a value in the goods that are being exchanged. Commodity money have a value in that commodity itself.  Representative money have a value stored in the goods for which the representative money are issued. Fiat currency has a value reflected by the reputation of the country.

For instance, commodities like a hammer or knife have a value in itself. Paper note has a value in the guarantee that the pledged goods such as crops can be returned on demand. Gold coins have a value in gold because of everlasting demand by someone due to its applications in accessories and decorations to represent social status. Fiat money have a value in the government which issued it. Government provides guarantees, necessary centralized control, enforces law, facilitates economic growth.

That true value of money guarantees a demand even in situations when money would not act a medium of exchange for goods and services anymore. In other words, no matter what is market situation, that tool would still be needed by someone. Essentially, owning either of these tools would give a person the possession of a true value.

But what value the cryptocurrency provides? Presently a little, I believe: time-stamping, document certification; decentralized DNS, novel useful methods of contracting. Is that enough to create a significant true intrinsic value to make Bitcoin very successful or very valuable in terms of exchange rates in the future?

I truly would like to believe in the big future for cryptocurrencies. The proof-of-work concept is very powerful, but yet unexplored, it seems to me. Just as a gold coin's value is thought to be underpinned by the value of the raw gold needed to make it, the value of an cryptocoin could be guaranteed by the value of the real-world computer resources required by someone owning the cryptocoin. This would create a true intrinsic value of cryptocurrency and would ensure its successful future in the long run.

Unfortunately, presently I do not see such a demand arising for private people, but for research organizations this is a daily need. This somehow reminds me about the story how the internet has started :)


  1. Check out peercoin and primecoin and their developer Sunny King. He is all about developing coins that produce valuable work with the proof of work. Primecoin searches for prime numbers. Peercoin employs another method, not proof of work, to increase security and reduce eneegy usage. The coins are evolving fsst.

  2. Yep, there are plenty of alternatives to Bitcoin, but it seems that presently they all are based on doing useless work. Calculations which no one needs. I mean this work is useless for people and it is only useful for the currency itself. My idea is about making the cryptocurrency which does the work useful for people :) This would create a real or true value for it - computational time.

  3. Interesting talk:

  4. If you want to understand how Bitcoin works under-the-hood, here is the good resource:

  5. An interesting read here:

    My economically-uneducated opinion contradicts to what it is said in the article about the value of fiat money that it is more historic than based on trust in government. However, I totally agree with conclusions of this article: Bitcoin will die in a long run.

  6. Interesting article about the inability of Bitcoin to create loans and debts for business:

    However, I do not understand why crowdfunding platforms could not fully substitute banks in the future? Crowd lending could be based on Bitcoin, why not?

    In contradiction to the above article, crowdsourcing could generate debt and solve hoarding problem as well. I would gladly transfer (or invest) some Bitcoins into reliable and trustworthy business if it would pay me back my investment with interest.

  7. And my article about the lack bitcoin value is not convincing enough, here is the opinion of Nobel Prize winning (2008) economist: