Is Bitcoin Valuable?
After dinner the other day, a friend and I got to talking about Bitcoin. The question was whether Bitcoins can be a real substitute for gold, that is, have any real value given that no human labour is expended in the ‘mining’ process. Essentially, Bitcoin is an electronic gold substitute and so the answer hinges on whether the human labour expended to extract gold is a factor in its subsequent value. Is gold valuable because it is rare, because human labour is expended in its extraction, or a combination of these factors? I contend that is the rarity and not the human labour makes gold valuable. In fact, it could be argued that the labour of extraction actually decreases its value.
Gold comes from supernovas. When a star begins to die, it starts producing heavier elements. The production of iron triggers a time-bomb that will scatter the small amount of heavier elements that are produced across the cosmos. Gold, being very heavy, gets produced in very small quantities before the whole show goes kaboom. Planets like ours form from the debris of supernovas, including traces of this gold.
So gold is rare. In addition to being rare, gold is attractive, malleable, durable, and does not corrode. All of these qualities make it an excellent way of storing value, and gold has been a very popular form of currency dating all the way back to 700 BC when the Lydians made coins of electrum, a mix of gold and silver. The bank notes that we use today started out simply as promissory notes issued on the strength of gold ownership but global currencies gradually moved from their gold backing, becoming fully fiat in 1968.
This Christmas, the gold standard of parenting is the Hatchimal – a fluffy, hatching soft toy that is a must-have gift for vast hordes of children. The recommended retail price is around $60, but they are apparently selling on eBay for an order of magnitude higher. Why? Correct. They are rare. The fewer Hatchimals there are in circulation, the higher the asking price. Money works the same way. The more of a country’s currency there is in circulation, the less value it has, i.e. the more currency there is in circulation, the higher the cost of living becomes. This process is known as inflation. Central banks can create as much currency as they want, with next to no effort involved; one word from the chairman and bills fly off the press at a million dollars a minute. But the more is printed, the higher inflation becomes.
Gold, like Hatchimals and dollar bills, becomes less valuable the more there is; gold is valuable because it is rare. Were it to appear on our lawns every morning like dew, its value would drop sharply. It is for this reason that I say the work put into producing gold actually decreases its value. It is not the work per se, but raher the fact that this work is putting more gold into circulation and thus reducing its rarity. That said, this would be true whether the miner was breaking his back down a mine every day, or just slowly wishing it into existence.
Anyway, I contend that the lack of physical labour involved in mining Bitcoin has no bearing on the value of Bitcoins, and that Bitcoin constitutes a viable substitute for gold, at least in the absence of massive electromagnetic pulses.