“You have to really stretch your imagination to infer what the intrinsic value of bitcoin is. I haven’t been able to do it.” Alan Greenspan, former chairman of the Federal Reserve.
Last year , I had a long conversation with a friend who wanted to invest in Bitcoin. The outcome of the discussion was uncomplicated. Since we did not understand the concept, we simply tagged it as stupid while appreciating the good old equity market which worked on some underlying logic. We were obviously wrong about the immediate future of Bitcoin. We could have made 8x on the capital by the end of 2017 or 4x as I write this article.
I still do not understand the concept or the mania.But during my quest to understand Bitcoin, I have arrived at the following realization : Bitcoin is a beautiful concept when studied in isolation from the block chain technology it employs to function.Nevertheless, here is my one sentence attempt to describe a block chain ; Group of computers across the world using enormous power (think global warming) to solve some puzzles to maintain the integrity of a ledger.
I thus stripped down Bitcoin from the technology it used and the prefix “crypto” it was known by. Now Bitcoin was simply a currency of some planet , let’s name that planet as Bitland. The citizens of Bitland used Bitcoins to buy groceries, arms , drugs ,massage services, space travel tickets etc. There were only a limited number of Bitcoins, 21 million to be exact. But since it was a digital currency, a single Bitcoin could be broken down to 8 decimal places. Unlike other planets where currencies were printed and demonetized at the whim of the governments and regulatory bodies, Bitcoins were mined by the citizens of Bitland as per their own demand. As a result Bitcoin was self regulated.
In Bitland, Bitcoin was only a commodity . It had no intrinsic value of its own unlike gold or platinum. It was an utility which provided a seamless way for trade to happen in a cashless economy. Meanwhile the citizens of other planets in the galaxy were fascinated by Bitcoin when they learnt about how they were mined and the tremendous potential they had in terms of utility.
It was not long before wise people from planet Earth realized that if there are only a finite number of Bitcoins to be mined , then as a commodity, its value should always increase. It is simply the supply demand rule. Earthlings were known for trading in gold, salt and even currencies. Unlike bitcoins, there was a value for every currency used on planet Earth. A currency of a particular nation appreciated or depreciated depending on various economic factors and supply-demand parameters. Earthlings approached the Bitlanders to setup an exchange where Bitcoins could be bought and sold. A deal was struck and Bitcoin was assigned a value in the open market. Factually nobody knew how the value was determined. But everyone agreed that value of Bitcoin has to go nowhere but up.
As years passed, Bitlanders went on with their routine of doing their business while Earthlings were only euphoric about the prices. Trading intensified, more people on earth began to invest in Bitcoins.Soon there were Bitcoin millionaires. But little did the Earthlings know about the fact that there were millions of likes of Bitcoin in the making .There was Ethereum from planet Ether and then Zcash and Monero from used by the beings of planet Nobo. A camera company on planet Earth went on to form its own currency for photographers.(read Kodakcoin) Suddenly Bitcoin was not the only alien currency to be traded on the planet. For several years Earthlings remained confused about the real value of Bitcoin. But the currency continued to make news because of its irrational appreciation and depreciation.
In 2022 , Bitcoin ceased to exist. That’s because Bitland was obliterated by a neutron beam from planet X. The intent was not clear but was assumed that Bitland was destroyed to generate demand for other currencies. The value of Bitcoin remained undetermined. It was deduced that value of Bitcoin superseded its utility.