currency gears

Wait, Why Is This Worth Anything?

A few minutes into explaining Bitcoin to the uninitiated, the discussion invariably starts leaning in a particular direction and then “the question” gets asked: “Obviously some people think they’re valuable, I mean they’re buying them at those exchanges you told me about but I just don’t see it – how are bitcoins actually worth anything?” At this point, most Bitcoiners (myself included) make the mistake of replying with a knee-jerk reaction. “What makes the money in your wallet worth anything? It’s just some ink on fancy paper and as a means of exchange it’s not even good at its only job!” We think we’re enlightening them, opening their eyes to deep economic truths – we’re not. What we’re doing is dodging the question.

The really sad part is, it’s not even because we haven’t got an answer – we dodge the question because it’s a hard one to answer without a lot of economic pretext and de-programming. Most folks have been using government-issued fiat currency their whole lives. It has value to them because of practice, not theory. The vast majority of people simply accept that the money they’ve used to pay for things their whole life has value. There’s nothing wrong with that assumption, either. Fiat currency has value, there are lots of good reasons why and that’s important because they share a lot of those reasons with Bitcoin. If the goal is to incite adoption, then the methodology should be education. Lacking education, those incited to join the Bitcoin cause are likely to jump ship to another cause just as easily – they’re not the ones we want.

Really, there’s not that much wrong with the retort in the first paragraph, except that it ended far too soon and involved the other person far too little. Let’s try something different.


 

“Okay then, let’s talk value. Value is a complicated subject, but let’s start with something we both already agree has value – a U.S. Dollar. What makes this little green piece of paper valuable and how could that also apply to Bitcoin?”

“Well, I can buy things with it just about everywhere, can I do that with Bitcoin?”

“Well no, not yet. What you’re talking about is its level of adoption – pretty much the entire country uses the Dollar, whereas Bitcoin is still a pretty young project. We’re a pretty small community, but we’re growing fast so it might not be too long before you could say ‘I can buy things with Bitcoin just about everywhere’ too. What else?”

At this point it’s pretty normal for people to stumble a bit. Most of them have never thought about why the paper in their pocket has any value whatsoever. It can be hard to put into words something that you never had much of a reason to believe. Help them along…

“Tough, isn’t it? We all just assume money is valuable because everyone seems to treat it that way. If you really stop and think about it, the actual value of that dollar shouldn’t be much more than the cost of paper and ink, but there are a lot of things that do make it genuinely valuable and they’re the same sorts of things that make Bitcoin valuable – it’s not the paper, but what you can do with it that’s valuable, you could use almost anything as money – and historically, humans have – but things with certain properties make better money than others. Those are the things that give Bitcoin value.”

If they’re still not getting it, here’s a thought experiment that has resulted in countless “light bulb moments” for me:

“We didn’t always have money, you know. Once upon a time we bartered for everything – try to imagine what a tremendous pain that was! Say you’re a shepherd and I’m a farmer. I’ve got some apples that you want and you’ve got some sheep – how are you going to buy them from me?”

“I’d trade you for sheep I guess?”

“Okay, how many apples equals a sheep?”

“Um, I dunno?”

“Okay, let’s say 1 sheep is worth 20 apples. Do you want 20 apples?”

“Well, no, I just wanted the one.”

“Okay so you decide to trade me some wool instead, there should be an amount of wool that’s worth just 1 apple, right?”

“Sure.”

“Except I don’t want wool, I already have more than enough wool. How are you going to buy my apples?”

“Well what do you want?”

“There’s the question! I want berries, so you’ve got to go negotiate a trade of your wool for some berries then you can trade me those berries for my apples. Of course that’s all assuming the berry-seller wants your wool and you don’t have to make a 3rd trade to get whatever he wants. It’s a pain isn’t it?”

“Yeah, I guess those old traders had to know a lot of exchange rates and do a lot of work.”

“Yep, so now introduce some kind of money to that market, something everyone agrees has value like gold or silver. How many problems does that solve?”

“I guess it would solve a lot of problems wouldn’t it. I could sell my wool for some silver and use that silver to buy your apples.”

“And I’d take that silver and use it to buy the berries that I want. That’s the purpose of money, to act as a means of exchange. Some things do this better than others and some things work better under certain circumstances. If I want to go get a candy bar from the corner store, a physical dollar works pretty well for that, right?”

“Of course.”

“But what if I want to send $50 to a friend in France and he needs it right this second – it’s an emergency.”

“It should work for that too.”

“Sure, but not as well as Bitcoin. If I want to send $50 to my French buddy instantly we only have a few options – let’s say we’re doing a wire transfer. Have you ever done a wire transfer? They’re kind of expensive, your buddy has to give you a dangerous amount of bank account information and it’s STILL not instantaneous. You could send him money with PayPal, but unless he’s got a PayPal debit/credit card he’d have to withdraw that money to a bank account which would take just as long. Every method of sending $50 to France is slow, riddled with fees and reliant on middlemen – you might as well mail your $50… Except that he’s in France so no matter how you send that $50 he needs to convert it to Euro before he can spend it, which is yet another set of fees and middlemen.”

“I don’t know anyone in France though.”

“Okay, then. What makes things valuable to one person don’t always apply to another, that’s fair enough. Let’s look at something else – Why did I choose gold and silver as the money of our imaginary market? Why not sand?”

“Sand would make terrible money, you could just reach down and scoop up a handful any time you were broke.”

“So you’re saying gold and silver worked better because they’re uncommon?”

“Yeah.”

“Okay so how about paper money, why use fancy printed bills instead of just writing ‘I.O.U. 5 Dollars’ on a slip of paper?”

“Same reason, anyone could just write up fake money.”

“So scarce things that are hard to counterfeit make good money?”

“Yeah.”

“Well on the counterfeiting side, Bitcoin has the Dollar beat – it’s literally impossible to counterfeit Bitcoins – but how about scarcity? How many dollars do you think there are?”

“Tons, trillions probably.”

“And how were those dollars created?”

“I would assume the government printed them.”

“Close enough, yeah. That’s a whole other conversation that we should really have some time, but I digress… So if things are less scarce they’re less valuable, right? I mean, it’s just as hard to fake a lump of quartz as to fake a diamond, but the diamond is worth more because it’s rarer, right?”

“Right.”

“So what happens to the value of a dollar if the government prints more of them.”

“This one I know, you’re talking inflation. The more money there is, the less each bit of it is worth.”

“Right, so do you know what decides how many Bitcoins get ‘printed’ each year? Math. There’s a set of rules that the whole system follows and those rules are just as secure as the rest of Bitcoin. At any given moment anyone can know exactly how many Bitcoins exist, the rate at which they’re being created and exactly how that rate is going to change moving forward. It’s all decided by math, not governments, central banks or anyone that can be manipulated or have ulterior motives.”

“So no inflation.”

“Again, that’s a whole other conversation that we should really have some time, but over the long-term and in a nutshell, yes. There is one thing the dollar has going for it that Bitcoin doesn’t, though.”

“What’s that?”

“Government backing – Bitcoin doesn’t have billions of dollars worth of gun-toting law enforcement or hundreds of pages of legalese forcing you to accept it as payment – the dollar does. Of course in my book, that’s more of an argument for why you should take Bitcoin than why you shouldn’t.”


 

The above represents a more-or-less accurate transcript of an actual conversation I recently had with a co-worker. While I can’t say he’s turned into any kind of revolutionary, he does dabble in Bitcoin now and on occasion, I find him staring at a dollar bill and shaking his head in disbelief.

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Comments

  1. Guest says

    For us Russians who cannot just go to shop and pay by USD this talk would has been much shorter.

    So for you, if you will talk about Russian Ruble as fiat currency. Or euro. Or whatever currency you want, but which you don't use normally.

      • Mqrius says

        Haha if we're going that road, then in Europe, sending a European transfer is free :P

        But seriously, this is good stuff. I'll try to work this into my explanations.

        One thing though, I expect "What makes this little green piece of paper valuable" to get an answer like "there's gold backing", which of course there isn't. The discussion is probably still salvageable though, by saying something like
        "Indeed! That would clearly make it valuable, and was indeed the case until 1971! But nowadays that's not true anymore. What else might make it valuable?"

      • Guest says

        Nope. I've said exactly what I meant: Bitcoin is just another currency, just like US dollar (for Russians) or Euro, or Chinese Yuan. Those currencies can be easily exchanged on Real Money (russian ruble, I mean :) ), and BTC can be also easily exchanged.

        And NOW follows a list of things by which BTC is better than any other currencies.

  2. Guest says

    For us Russians who cannot just go to shop and pay by USD this talk would has been much shorter.

    So for you, if you will talk about Russian Ruble as fiat currency. Or euro. Or whatever currency you want, but which you don't use normally.

      • Mqrius says

        Haha if we're going that road, then in Europe, sending a European transfer is free :P

        But seriously, this is good stuff. I'll try to work this into my explanations.

        One thing though, I expect "What makes this little green piece of paper valuable" to get an answer like "there's gold backing", which of course there isn't. The discussion is probably still salvageable though, by saying something like
        "Indeed! That would clearly make it valuable, and was indeed the case until 1971! But nowadays that's not true anymore. What else might make it valuable?"

      • Guest says

        Nope. I've said exactly what I meant: Bitcoin is just another currency, just like US dollar (for Russians) or Euro, or Chinese Yuan. Those currencies can be easily exchanged on Real Money (russian ruble, I mean :) ), and BTC can be also easily exchanged.

        And NOW follows a list of things by which BTC is better than any other currencies.

  3. says

    Of course, the more honest conversation would be about how money is ultimately imaginary and increasingly irrelevant in the information rich technological society that we are becoming.

    Check out http://www.zeitgeistmovie.com to learn more about how we can have a reality based society if we implemented a resource based economy.

  4. says

    Of course, the more honest conversation would be about how money is ultimately imaginary and increasingly irrelevant in the information rich technological society that we are becoming.

    Check out http://www.zeitgeistmovie.com to learn more about how we can have a reality based society if we implemented a resource based economy.

  5. says

    aren't you ignoring the most dangerous part about bitcoin or any new currency? it's instability as a favored form of payment, and therefore its instability in value? What the dollar really has going for it is its stability. We can say with almost certainty that 100 years from now, the dollar will still be alive and accepted as form of payment all around the world. Bitcoin could easily be a fad, leaving many kicking themselves and even desperately broke due to their investments. Or if not, and bitcoin takes off, then I see no difference between a bitcoin economy and a dollar economy save a few conveniences. It certainly solves nothing like the gap between the upper and lower class; the rich are the ones who will end up with the greatest number of bitcoins, and the poor will have the least. Also I'd like to see the problem addressed of people not hacking in order to produce new bitcoins…but hacking to steal bitcoins which we already own. This whole thing is an interesting experiment, but in the end it just sounds like a scheme to me.

  6. says

    aren't you ignoring the most dangerous part about bitcoin or any new currency? it's instability as a favored form of payment, and therefore its instability in value? What the dollar really has going for it is its stability. We can say with almost certainty that 100 years from now, the dollar will still be alive and accepted as form of payment all around the world. Bitcoin could easily be a fad, leaving many kicking themselves and even desperately broke due to their investments. Or if not, and bitcoin takes off, then I see no difference between a bitcoin economy and a dollar economy save a few conveniences. It certainly solves nothing like the gap between the upper and lower class; the rich are the ones who will end up with the greatest number of bitcoins, and the poor will have the least. Also I'd like to see the problem addressed of people not hacking in order to produce new bitcoins…but hacking to steal bitcoins which we already own. This whole thing is an interesting experiment, but in the end it just sounds like a scheme to me.

  7. Dalton says

    The dollar or any other national currency is based off of gold. They don't have value simply because we say that do. They represent a certain amount of gold per bill. That's why legal tender is owned by the government and loaned to us to use as form of payment. We own the gold in the vaults owned by the government.

    • Johnny says

      This is a common misconception. When the U.S. dollar first entered circulation, it was indeed backed by gold. In the 1960’s, however, that changed. Today, the USD has value only because the government says it does (fiat currency). The U.S. government doesn’t have nearly enough gold to cover the number of dollars they’ve printed. If you’re skeptical, read about it here: https://en.wikipedia.org/wiki/History_of_the_United_States_dollar

  8. Dalton says

    The dollar or any other national currency is based off of gold. They don't have value simply because we say that do. They represent a certain amount of gold per bill. That's why legal tender is owned by the government and loaned to us to use as form of payment. We own the gold in the vaults owned by the government.

    • Johnny says

      This is a common misconception. When the U.S. dollar first entered circulation, it was indeed backed by gold. In the 1960’s, however, that changed. Today, the USD has value only because the government says it does (fiat currency). The U.S. government doesn’t have nearly enough gold to cover the number of dollars they’ve printed. If you’re skeptical, read about it here: https://en.wikipedia.org/wiki/History_of_the_United_States_dollar

  9. Person says

    I didn't read the entire thing, but this article seems to be missing something important. The US dollar is backed by the US. Bitcoin isn't backed by anything. You NEED to use US money to pay your taxes in the US and any other fines, fees, etc. Since every citizen as NO OTHER CHOICE than to use the USD, it gives it value. You need it to survive.

    On the other hand, NO ONE HAS TO USE btc. They can use dollars or yuan or any other number of currencies. The fact that you can exchange other currencies for USD or the other way around means that currencies share legitimacy/value. This is all bitcoin's have: value borrowed from the fact that it can be exchanged for other currencies. The fact that individuals are willing to exchange their money for unstable virtual coins is just an anomaly.

    Also, just important to remember that money did have actual value until they abolished the gold standard.

    • says

      You should have read the whole thing. Directly from the end of the article:

      There is one thing the dollar has going for it that Bitcoin doesn’t, though.”

      “What’s that?”

      “Government backing – Bitcoin doesn’t have billions of dollars worth of gun-toting law enforcement or hundreds of pages of legalese forcing you to accept it as payment – the dollar does. Of course in my book, that’s more of an argument for why you should take Bitcoin than why you shouldn’t.”

  10. Person says

    I didn't read the entire thing, but this article seems to be missing something important. The US dollar is backed by the US. Bitcoin isn't backed by anything. You NEED to use US money to pay your taxes in the US and any other fines, fees, etc. Since every citizen as NO OTHER CHOICE than to use the USD, it gives it value. You need it to survive.

    On the other hand, NO ONE HAS TO USE btc. They can use dollars or yuan or any other number of currencies. The fact that you can exchange other currencies for USD or the other way around means that currencies share legitimacy/value. This is all bitcoin's have: value borrowed from the fact that it can be exchanged for other currencies. The fact that individuals are willing to exchange their money for unstable virtual coins is just an anomaly.

    Also, just important to remember that money did have actual value until they abolished the gold standard.

    • says

      You should have read the whole thing. Directly from the end of the article:

      There is one thing the dollar has going for it that Bitcoin doesn’t, though.”

      “What’s that?”

      “Government backing – Bitcoin doesn’t have billions of dollars worth of gun-toting law enforcement or hundreds of pages of legalese forcing you to accept it as payment – the dollar does. Of course in my book, that’s more of an argument for why you should take Bitcoin than why you shouldn’t.”

  11. Ash says

    Personally I think the main thing missing from the argument is the question of minting and watering the currency. People GENERATE bit coin. This infers that what they are doing to generate that currency has value to somebody. If it does not, then the act of generating bit coin is tantamount to forgery.

    What I want to know is: who is reaping the benefit from bit coin generators, and what do these generators actually do? I've heard mention that they are basically performing hashing routines – and as a coder, that thought worries me immensely as there are a number of very questionable ways that could be misused.

    • says

      If you'd really like to understand mining, I suggest you read my "Bitcoin Mining in Plain English" article: http://codinginmysleep.com/bitcoin-mining-in-plai

      That said, the brief explanation is that the miners are validating blocks of transactions and doing a proof-of-work to show that validation. The hash function used is sha256(sha256(txinfo)) so unless that's what you're using to store passwords you won't be able to use miners as a distributed rainbow table generator or anything.

  12. Ash says

    Personally I think the main thing missing from the argument is the question of minting and watering the currency. People GENERATE bit coin. This infers that what they are doing to generate that currency has value to somebody. If it does not, then the act of generating bit coin is tantamount to forgery.

    What I want to know is: who is reaping the benefit from bit coin generators, and what do these generators actually do? I've heard mention that they are basically performing hashing routines – and as a coder, that thought worries me immensely as there are a number of very questionable ways that could be misused.

    • says

      If you'd really like to understand mining, I suggest you read my "Bitcoin Mining in Plain English" article: http://codinginmysleep.com/bitcoin-mining-in-plai

      That said, the brief explanation is that the miners are validating blocks of transactions and doing a proof-of-work to show that validation. The hash function used is sha256(sha256(txinfo)) so unless that's what you're using to store passwords you won't be able to use miners as a distributed rainbow table generator or anything.

  13. Guest says

    So what about the "generating/mining" process involved in making a BTC gives it actual value?

    Is this analogous to "baseball cards" or "comic books" or "Magic Cards" etc, where the scarcity combined with the demand dictates the value?

  14. Guest says

    So what about the "generating/mining" process involved in making a BTC gives it actual value?

    Is this analogous to "baseball cards" or "comic books" or "Magic Cards" etc, where the scarcity combined with the demand dictates the value?

  15. Kent says

    good discussion, but I just dont quite yet get the economics behind "why pay "miners" *any* amount for running cryptographic/mathematical equations?" Back to the apples and sheep discussion … is someone getting value from those equations being solved and therefore willing to pay in bitcoins for them to be solved? Like the apples & sheep, its kinda hard to buy an apple if no one wants the wool or sheep. Therefore, why does someone want me to solve their crypto/math equations?

  16. Kent says

    good discussion, but I just dont quite yet get the economics behind "why pay "miners" *any* amount for running cryptographic/mathematical equations?" Back to the apples and sheep discussion … is someone getting value from those equations being solved and therefore willing to pay in bitcoins for them to be solved? Like the apples & sheep, its kinda hard to buy an apple if no one wants the wool or sheep. Therefore, why does someone want me to solve their crypto/math equations?

  17. Jonas Lihnell says

    How can you be so sure that the dollar will still be here in 100 years? The US dollar was created in in 1792, that's just 221 years ago. And it's that's if you ignore the fact that the dollar back then is a completely different dollar, politically speaking.

  18. Jonas Lihnell says

    How can you be so sure that the dollar will still be here in 100 years? The US dollar was created in in 1792, that's just 221 years ago. And it's that's if you ignore the fact that the dollar back then is a completely different dollar, politically speaking.

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