How Does Bitcoin have Value?

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The price of Bitcoin is always swinging high and low. In December 2017, we witnessed an all-time high of close to US$20,000 per Bitcoin, and a market capitalization of slightly over US$300 billion.   

Then the market went bearish in the following months as the crypto winter set in. The price rolled down, and it reached slightly above US$3,000 in December 2018. The market capitalization bled to under US$100 billion.

Right now we seem to be on the edge of another rally that could take us to new all-time highs in price and market capitalization.

The cycle of low and high has become part of Bitcoin. However, the general trend is the increase in its value.

But even with this volatility, how exactly does Bitcoin have value?

Is it the energy it consumes?

An argument those who don’t think Bitcoin is a good idea often make against it is that it lacks intrinsic or inherent value. Ironically, many in this school of thought hold the view that fiat currencies like the dollar have some intrinsic value. And that it comes from the backing by the state through central banking.

An argument those who don’t think Bitcoin is a good idea often make against it is that it lacks intrinsic or inherent value.

In response, Bitcoin enthusiasts have explained that the value of a bitcoin comes from the amount of energy the Bitcoin network consumes to mine it. According to a study by Crescent Electric Supply Company, a US-based electric hardware supplier, it costs US$4,675 to mine a bitcoin in the US. In China, the cost is US$3,172, South Korea $26,170 and Venezuela$531. The variation is brought about by how much electricity costs in different countries.

This explanation of how Bitcoin gets its value has its shortcomings. First, it is hard to reconcile the different costs of mining in different countries. Secondly, it means any amount on the price of Bitcoin above the cost of mining can never be justified.  

The question of what constitutes value is one that economists have sought to answer for decades.

Renowned economist has a better theory

Carl Menger was a professor of political economy at the University of Vienna in the late 19th century and he is regarded as the founder of the Austrian School of economics. In his book Principles of Economics, he explains that what constitutes the value of an item is its utility.

He states that ‘value is…nothing inherent in goods, no property of them, but merely the importance that we first attribute to the satisfaction of our needs, that is, to our lives and well-being.’

‘Value is…nothing inherent in goods, no property of them, but merely the importance that we first attribute to the satisfaction of our needs, that is, to our lives and well-being.’

In other words, value is the usefulness of something in satisfying our needs. This way of looking at value can be a great foundation in understanding the value of Bitcoin. The value of Bitcoin comes from its usefulness as a digital ledger that is immutable, tamperproof and decentralized.

Bitcoins also have value because of its usefulness as money that is durable, portable, fungible, scarce, divisible, and recognizable. Most importantly, Bitcoin is valuable because it is a less costly, fast and reliable mode of payment across international borders.

This usefulness of Bitcoin in meeting our needs translates to the demand of its units at the marketplace and corresponding prices. If there are more people finding it useful its price will keep going up. The value is further increased by the fact that Bitcoin is a deflationary currency; there will only be 21 million bitcoins.

The Bitcoin protocol is set in such a way that about every ten minutes new bitcoins come into circulation. However, the rate halves every four years so that around the year 2140 the release of new bitcoins will stop. By then all bitcoins ever mined will total 21 million.

Why North Dakota Has to Embrace the Blockchain

blockChain
blockChain

Blockchain is a buzzword. In time, it will fizzle out just like others have.

If that is what you think, I bet you are wrong.

It is seven years since Satoshi Nakamoto published the Bitcoin whitepaper. Investors have so far put a little over $1 billion into blockchain related startups. And the graph is upward looking. About $200 million of that investment has flowed in during the first half of 2016.

What’s more, every sector you focus on, there is a startup working on a blockchain solution. That ranges from finance, health, asset management, agriculture to public administration.

What exactly is special about blockchain?

Blockchain renders trust unnecessary in human interactions.

That is a new reality. It is because of trust that merchants have always shipped from one corner of the globe to the other. It is because of trust that we’ve achieved law and order in our societies. And indeed it is because of trust that civilizations have flourished.

For the most part, however, we’ve exercised that trust through intermediaries. Thus, financial institutions have been the intermediaries between lenders and creditors. Insurance companies are the intermediaries amongst those seeking to pull risks together.

And the government is the intermediary amongst the citizenry of a country.

In turn, the selling of trust has been a very lucrative enterprise. A glimpse at the books of account of financial institutions, for example, will attest to this fact.

But the intermediaries have also often betrayed this trust they hold on behalf of others. For example, the collapse of the banking industry in 2008 was a result of bad investment decisions that bank executives made.

And that led to close to 9.3 million families losing their homes and investments. Unfortunately, in the past, societies haven’t had options to replace the centralized management of the trust.

But that is changing now.

The blockchain is heralding an age when, for example, a small trader in Africa can borrow credit directly from a fellow entrepreneur in the US. And you can purchase a property from a stranger without notaries and lawyers. And all that is possible with little scam risk.

What is the impact of that?

The cost of doing business will go down significantly. That is because the cut that the middle person has been taking isn’t on the budget.

What is the blockchain?

Blockchain is the technology beneath bitcoin. That is the first ever successful decentralized digital currency. But the easiest way to make sense of it is to think of it as a ledger. A continuous record of transactions.

Just like what the commercial banks keep.

Every time you withdraw from your account, the bank makes a debit entry on a ledger. Every time you deposit, the bank makes a credit entry on the ledger. It does the same every time you use your card or take a loan.

And part of this ledger is what you receive as a bank statement. The blockchain is the same in many aspects.

Just like with the bank’s ledger, when you send bitcoins, an entry is made on the blockchain against your public address (a string of alphanumeric). When you receive bitcoins, an entry is also rendered on the blockchain. Thus the blockchain is a ledger that shows who owns what at what time.

But there are major differences between the bank’s ledger and the blockchain.

First, the bank’s ledger is centralized. It is only the bank that creates, maintains and stores it. On the other hand, the blockchain is decentralized. No one entity owns it. It is a property of a network of nodes.

Every node in the network keeps a copy of this ledger. What’s more, all the copies are synchronized in real time.

Secondly, it is accessible for anyone to read and write on the blockchain (especially the public blockchain). But far from what you might think, this doesn’t affect the credibility of the records.

And how does that work?

That is possible because for you to write on the blockchain, you must follow rules entrenched in its core software. You must also do energy intensive work with your computer, which makes it costly to write bad data. Lastly, the entire network must approve your entries.  

Bitcoin is on a public blockchain. Another public blockchain that has grabbed the attention of many is Ethereum.

Satoshi Nakamoto designed the bitcoin blockchain with currency in mind as the primary application. On its part, Ethereum aims to support a broad range of applications.

In May 2016, a Decentralized Anonymous Organization (DAO) on the Ethereum blockchain raised close to $160 million from investors. The DAO is a company with no offices, CEO nor a board of directors. A code guides all its processes, and all shareholders get to vote on every decision.

The other type of blockchains that showed up in the recent past is private blockchains. As the name suggests, you can only read or write on the private blockchain with permission from the owner. It is the opposite of the public blockchain.  

The third type is the consortium blockchain. This is where different players come together and build a blockchain to which each of them becomes an equal node. One of the consortium blockchains is R3Cev, which is a project by over 40 major financial institutions.

Some of the commercial banks behind R3Cev include JP Morgan, Barclays Bank, and Goldman Sachs.

Another blockchain consortium is the Hyperledger. This is a project that Linux Foundation is leading with the support of close to 50 financial institutions and major technology companies. Some of the names supporting that project include IBM, Intel, and Hitachi.

Why should North Dakota care?

Already several states are embracing the blockchain technology. For instance, on 6th July 2016, North Carolina Governor Pat McCrory signed House Bill 289 into law. The new law gives clarity to bitcoin and blockchain businesses.

On 2nd May 2016 Delaware Governor, Jack Markell unveiled a plan to embrace the blockchain. By providing an enabling regulatory and legal environment, the state seeks to attract blockchain companies.

It is the right time to get involved. The world is waking up to the realization that the blockchain should fuel our social, economic and political relationships.

@SummerBTM is available by appointment!

DOSHOST.net – DigitalKioskSystems.com is excited to share that our Project SkyHook Bitcoin ATM Kiosk is open for business in Grand Forks, North Dakota! Monday through Friday 8am to 5pm ~ by appointment. Please fill out the form below or call 701.203.2002 to request an appointment. Appointments are required and drop-in customers will be asked to visit this website form or call 701.203.2002 to request an appointment.

Bitcoin ATM Kiosk Location:
DOSHOST.net – Daniel Schott
4200 James Ray Dr
Grand Forks, ND 58202

 

Important information for customers:

  • The purpose of this Bitcoin ATM Kiosk is educational and we hope to provide a safe learning environment for those interested in Bitcoin.
  • Customers that are approved for an appointment will be required to provide; government issued ID, address information, and a phone number.
  • Customers will be required to sign a waiver that they do not intend to use the bitcoin for unlawful activity.
  • Customers should have a Bitcoin wallet on their phone or a paper wallet. In the future we will have  offline Crypto Cards available for purchase.
  • Please provide several Dates and Times in the following form so that we can best service your request to purchase bitcoin.
  • Max transaction amount is US $100
  • The cost for bitcoin is Bitstamp quote + 1%

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