How a Bitcoin is not a Dollar

There is no intrinsic value to a BitCoin because it is an anonymous IOU written by no one.

I want you to give me half of your doughnut.

I can offer to give you a signed IOU that says “Josh will give the holder of this IOU 1/2 doughnut”. The more you trust that I will actually honor the IOU, the more it is worth to you. You might even be able to trade that IOU to someone else for something that they have and you want… assuming they also think there is some chance that I will honor it.

Instead of writing the IOU, now imagine that I write a program that generates random sequences of letters on my computer. I let that program run for a very, very long time until it happens to generate something like “IOU 1/2 doughnut”. I print this out and I offer to trade it to you for 1/2 your doughnut.

YOU: So if I take this note, someday I can give it back to you and you'll give me something yummy?
ME : Nope. This is not an IOU from me. It was randomly generated by a computer.
YOU: So who owes me the 1/2 a doughnut?
ME : No one! But it took the computer a really long time to generate this note at random!
YOU: If there is no one who will pay me back, then why would I ever accept this note?
ME : You can try to trade it to someone else for something they have and you want!

A dollar is an IOU from the government, a BitCoin is an IOU from no one…

Every dollar starts its life when the US Government spends it or gives it away in a two-sided transaction. The government implicitly says “If you accept this dollar from me now, you can give it back to me at some later time in exchange for something of value.” The dollar represents a claim against the government. This claim is transferable, which is what makes the dollar into currency. But the currency value in the dollar depends on the expectation that the government will honor the claim. No matter how many times a dollar is transferred, it still maintains its claim against the government who created it, and the value of that claim is dependent on expectation that the government will be willing and able to honor that claim.

Every Bitcoin begins life when a lucky miner gets to add a one-sided transaction to the ledger. This is literally how it happens. When that miner spends his new BitCoin, there is no debt created. When you get that new BitCoin, you are not getting a claim against the miner who created it- you are not getting a claim against anyone or anything. Every single BitCoin in existence started as a single-sided book entry, so there is no counter party at all. See the difference? No matter how many times the BitCoin is transferred, it is still a single-sided book entry without intrinsic value.

Mining a BitCoin is quite literally doing busy work. The only thing you get as a result of doing the busy work is the ability to prove that you did it, and did it faster than all the other people who were doing exactly the same busy work. Really.


The government creates dollars out of thin air. There is nothing backing them either. 

Yes, the government can (and does) create as many dollars as it wants without limit, and each new dollar created does dilute the value of all existing dollars – but each new dollar does still have a claim. There is a difference between a diluted claim against someone and a claim against nothing & no one.

There is nothing stopping me from writing another IOU to Joe for 1/2 of his doughnut tomorrow, and that potentially decreases the value of the IOU I wrote to you today – but you still have the IOU that I gave you, and you can still at least try to get me to pay up someday.

A BitCoin is not an IOU, it is a store of value.

There is nothing that you actually own when you own a BitCoin.

The best you can say is that you know a secret number (that you made up) that gives you the ability to request that an update be made to a long list of numbers that are kept on other peoples’ computers. There is nothing that compels those people to update their copy of the list when you request it, and they are even free to simply turn off their computers anytime they want to. You have no claim against the people who run those computers.

But a dollar is also just a number on a ledger, there is no guarantee that I will be able to collect on the claim it represents.

This is absolutely true. There is no guarantee that the government will honor the claims that the outstanding dollars represent, and the value of a dollar is dependent on the expected likelihood that the government can and will honor those claims.  Don’t get me wrong, I am no dollar apologist – and I am not arguing that the government is credit worthy. But a dollar is fundamentally different than a BitCoin in that there is at least a counter party whose credit worthiness you are subject to. With BitCoin, there is no underlying counter party, no credit, no value.

The whole point of BitCoin is that there is no central issuer and that is what makes it so great.

The mechanics of issuance are not relevant.

I could envision a distributed block chain ledger where any issuer could create a new unit of value and then transfer it to someone else. Each unit of value would specify the issuer and the terms of redemption. Any person who accepted that unit would be able to evaluate the credit worthiness of the issuer to determine the worth of the unit to them. The government could be one of many issuers on this decentralized ledger, but the dollars it issued will still potentially have value like they do in today’s centralized system.

A BitCoin is ultimately a unit of value that is anonymous and comes without any redemption terms, so will is intrinsically worthless regardless of the topology of the of ledger used to track its ownership.

Just like gold, BitCoin has intrinsic value in the effort it takes to mine.

There are some numbers that potentially have intrinsic value because they are hard to compute, but a BitCoin is not like that. The number that you use to be able to transfer your BitCoins (your private key) is a random number that effectively you make up. It is not interesting beyond the fact that you made it up and it is secret- it does not have any intrinsic value.

But to mine a BitCoin I must solve a very difficult math problem, so value of the solution to that problem is captured in the BitCoin created.

This is a widely believed misunderstanding of what a BitCoin is and how the system works.

To mine a BitCoin, you must solve a hard problem. But the BitCoin is not the solution to that problem. The solution is a number that, according to the rules of BitCoin, lets you ask other people to update their copies of the ledger with a single sided transaction that transfers a BitCoin into an account that you control.

But there is value in solving that hard problem that lets me request that other people update their ledgers.

The BitCoin mining problem is a (very hard) formula with one number as the input and one number as the output.  You do not get to pick the input number. No one gets to pick the input number. The input number is determined by a combination of every BitCoin transaction that has ever happened, plus some new BitCoin transactions that may happen soon (if you are able to find the solution fast enough). It is essentially a random input. To mine a BitCoin, you must solve an essentially a random math problem.

There is no (intentional) intrinsic value to the problem you are solving when you mine a new BitCoin. If you were looking for interesting and valuable solutions to compute, you would almost certainly not pick any of the ones have been found as a result of BitCoin mining.

BitCoin nonces are the garbage left over from an infinitely inefficient construction project that creates nothing but waste.

(It would be nice if someone could find a way to retroactively use BitCoin nonces considering the monumental effort that goes into computing them.  They might end up having some residual (and unintentional) value to someone, but not in any way captured by BitCoin users!)


    • bigjosh2

      I was really looking to buy a PUT rather than opening a short.

      I had an opinion that Bitcoin would go down, but I did not have an opinion on the maximum price it would reach before doing so. Since you must be able to continuously carry the open liability of a short on the upside, a short would not have been the right fit for the outcome I was predicting.

      A PUT would have exactly expressed my outlook. Unfortunately I could not find anyone to sell me one in a way that did not have systematic credit risk. A PUT as a smart contract on the block chain doesn’t get me what I want because one of the scenarios when the PUT would go in the money is if the block chain would blow up, in which case my PUT would be noncollectable. To work, the seller would have had to escrow the delivery price on on the PUT – but would have been well compensated for the time value cost of this outlay.

      I seriously asked around, and was willing to make a big enough move to make it worth it for anyone who was honestly a long-term Bitcoin bull. I think it is telling that no one was interested writing these PUTs at any price.

    • bigjosh2

      There are three reasonable ways to spell it…. and I picked the only clearly wrong one based on looking at Satoshi’s original paper. :)

      My only defense is that google does not support semantic searching when looking up “bitcoin capitalization“.

      Thanks for the correction, I will not make this mistake again!

  1. DirkW

    Thank you for the interesting article Josh!

    Wouldn’t it be possible to marry the mining for coins with protein folding or similar (SETI etc)?

    • bigjosh2

      There are certainly people thinking about making the proof-of-work function at least be more useful than just finding the nonce to make the hash of a random number end in zeros, and I personally think there are likely better ones.

      But it misses the point. Remember that hash is not the thing of value. It is not like “I discovered this thing of value, so I get some of that value.” The hash is only a way of saying “I found a thing that no one wants and is very hard to find) faster than any one else, so everyone owes me money”. Once you find the hash, everyone can publicly see what it is (even people with no Bitcoin), but really no one wants it or cares. All that matters is that you found it first.

      This is totally different than a system where someone says “I am willing to pay X for a number that satisfies the condition Y”. In this case, the resulting number does have value to the person asking for it. This is not what a coin nonce is like.

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