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!)


What is the thing I get back with regards to a dollar? (5/24/18)

You can redeem a dollar for the right to not get arrested for not paying your taxes. You can redeem it for the right to transport a shipping container of steel over the US boarder.

In the Case where the US government dissolves, you could theoretically use your dollar to assert your claim on your pro-rata portion of the the remainder assets.

You politics might tempt you to get mad and say you already have the right to not pay taxes, and the government stole all the land and assets that would supposedly be subject to an insolvency claim, and all this is silly anyway. I don’t necessarily disagree with you, but that misses the point. The point is that there is at least some counter party to you can evaluate the value of the claim – even if you think that claim has little or no value.

With Bitcoin, there is no counter party. Not a good one, not a bad one. None.

The vast majority of dollars are created when banks give out loans. (5/24/18)

When a bank gives a loan, it does not create dollars. Banks can only make double-sided journal entries. The net number of dollars on all the ledgers on earth is the same before the bank issues the loan as after, although there are a lot more (balanced) +’s and -‘s.

Again, I completely understand the frustration and concern you feel towards the US reserve banking system, and I completely agree with it – but do not confuse the creation of credit with the creation of dollars.


    • 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.

    • bigjosh2

      Unrelatedly, since everyone is foolishly doing all these hard math problems, wouldn’t it be nice if they were at least useful hard math problems? There are lots of people trying to think of ways to do this well, but to work the math problem people solve needs to be special in a few ways that might not be compatible with useful problems. Normally with, say, protein folding you ask “How does this protein fold?” But with a proof-off-work function you need to be able to say “Here is some really long random number that I generated, now I need to find a math problem that has this data as the output.” There may be a way to fit those together, but I don’t think anyone has come up with it yet.

  2. digartner

    Let me ask a stupid question. To be clear – I’m not trolling, I’m seriously hoping you can provide an answer:

    Quote: 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.”

    Question: Is that actually true of US currency? What thing of value is the US government going to give me? AFAIK, the only thing of “value” I can get from the government is that they will cancel my IRS debt in exchange for dollars.

    • bigjosh2

      I think you you nailed it.

      In theory, you could try to trade those dollars for a few acres of public land, or some army boots, or any other government asset- but this is unlikely to happen in practice. Most of the return flow of dollars comes in via the IRS or some other fee or tax.

      It might be more satisfying to frame it as “You are receiving all the goods and services that those tax dollars support”, but the “canceling IRS debt” framing is equally valid. Depending on your politics, you could even frame it as “you are buying the right to not get put in jail for non-payment of taxes” – which certainly is a thing that has value.

      • Protein Shake

        Interesting post. I found it because I was looking to show a friend your post about the WS2812B sharpie test :-)

        I’m not sure whether or not I agree with you here.

        Cryptocurrencies have value because they facilitate less-traceable shady dealings. They are a store of value accepted by internet drug dealers, and in that sense they are optimally a very temporary store of value.

        Just like in a casino with their chips, people who wish to buy drugs online must first purchase these drug tokens. Drug dealers are confident that people will purchase the tokens in exchange for US Dollars because there is a guaranteed supply of people who want to buy drugs and who will in turn pay US Dollars in exchange for these numerical proxies for individual bills. (Through this whole process there are a TON of rent payments being made in crypto-land.)

        Everyone gets to print the tokens, but it would be pointless if anyone could just print however-many they wanted so it is made very difficult. And how hard it is happens to vary in such a way that it is designed to encourage people to do the useless but hard work while supposedly self-guaranteeing that no one will ever be able to print more “money” than they are allowed to.

        Fluctuation in the spot value of bitcoin is almost certainly just noise, but it reflects overall confidence in the system, with something a little bit convincing about guaranteed scarcity and then a significant amount of hand waving, PR firms, and seemingly all of India.

        Your point about their being no counterparty at creation is good, but I don’t know about your claim that “With BitCoin, there is no underlying counter party.” The counterparties are all of the other participants in shady dealings on the Darknet, and everyone has a strong incentive to buy into this cryptocurrency thing because it facilitates their business.

        What I found (and continue to find) remarkable is that the proliferation of “valuable” alt-coins wasn’t a wake-up call to crypto-enthusiasts, and that they didn’t tank the market in e-tulips. Currencies don’t hire internet marketing firms so they can gain traction, and you shouldn’t be able to create actually-valuable stores-of-value by replicating a computer program.

        (Which makes me wonder if it’s more difficult to convert “alt-coins” to US Dollars. Anyone know?)

        What do you think are the best arguments against the case you made in your post?

        • bigjosh2

          I think your casino chip analogy is a good one – because it highlights the issue. A casino chip is issued by a casino. You trade something of value for a chip (token) because the casino represents that it will later redeem that chip for something of value. The only value in that chip (besides being a physical collectible) is your trust in the casino. Would you accept a chip as payment if the chip was issued by a casino that went out of business (again, ignoring the collectible value since bitcoins are not collectible)? You could argue that the chip still have value since, if you are willing to accept it then likely someone else will. I’d argue that is not a prudent belief.

          • Protein Shake

            The casino chip analogy is imperfect. Casinos issue their own chips, and as you point out those chips are instantly worthless if the casino goes out of business.

            As far as I have read, no darknet marketplace has tried issuing its own cryptocurrency and then only accepting that currency.

            Ignoring the massive security risks that could pose, the reality that no marketplace has done such a thing makes perfect sense in light of your point. No one would trust that such a “casino” is going to be in business at any point in the future.

            My point is that an entire economy of illegal trade is facilitated by cryptocurrency, not any specific store. Illegal trade would need to permanently end for cryptocurrency to lose its value, and that value comes from its helpfulness in transacting for real money while attempting to evade authorities.

            My point that people will always be engaged in buying drugs was meant to argue that it’s reasonable to assume that:

            a. Illegal trade will always exist, and
            b. There will always be demand for token-facilitated pseudoanonymity in those markets.

            My characterization of Bitcoin as a short-term store of value is important here. People shouldn’t care about the long-term value of Bitcoin or any cryptocurrency. Because I don’t think they are currency. They are a tool whose job is to make it safer for Person A to buy illegal things from Person B for real money. Person B – who wants that real money – is going to cash out the proceeds of their transactions very regularly. Because they know that Bitcoin has no value other than in facilitating those transactions.

            And that’s why I think that the price of Bitcoin represents confidence and stability in the system of illegal trade, and how well Bitcoin itself is doing in facilitating that trade. Because that’s all it does.

            i. That I have never heard of a street (read: in-person) drug dealer transacting with their customers in Bitcoin bolsters my argument. The need for enhanced anonymity, and for scrubbing of one’s financial tracks is greatly reduced relative to web transacting so the tool for that isn’t used.

            ii. Another big win for Bitcoin in the world of shady dealings and shady people: there are no counterfeit Bitcoins. If they are in your wallet with a few confirmations you can hand over the house you just sold, being reasonably certain that you haven’t been defrauded in any way relating to the money.

            iii. I’m not sure if I buy my argument.

        • bigjosh2

          What do you think are the best arguments against the case you made in your post?

          I think the only real point of contention is that some people believe that if every one believes something has value, then it does. I understand this point of view, but it is incorrect. Parable post to follow…

      • Alex

        One issue I see with deriving the value of a dollar as an IOU (which I accept as a sound argument), is that in absence of collateral there are no plausible situations in which all people lose faith in the dollar but the government can still uphold its end of the IOU agreement. In fact I would say these are directly proportional to the point of being indistinguishable.

        People have faith in the value of dollar if and only if they have faith in the government upholding the IOU agreement. We agree that there is value in an IOU, so we must also agree that there is value in ‘things’ that people believe to have value. There is some faith in the value of bitcoin, so there must be some value as well. The non-existence of a bitcoin counterparty does not imply the non-existence of value in the bitcoin, only that its value cannot be derived from the counterparty IOU but only from the faith the public bestows upon it.

        I think the worst thing that can be truly said about bitcoin is that it is a non-productive as an investment. If you invest in a company, that company can use that investment to do productive things, whereas bitcoin is non-productive at best and at worst creates it artificial demand.

        • bigjosh2

          that in absence of collateral there are no plausible situations in which all people lose faith in the dollar but the government can still uphold its end of the IOU agreement.

          I am not sure I understand. The US gov’t has lots of collateral. And there are plenty of cases where a currency has completely lots its value because issuing govt’s ability to back it become non-credible. It would take a lot for this to happen to the dollar, but I do not think it is impossible.

          There is some faith in the value of bitcoin, so there must be some value as well.

          Faith does not necessarily imply intrinsic value. People can be wrong. In an IOU, it is not my faith that has value- it is the actuarial calculation of likelihood of repayment.

          • Alex

            The US gov’t has lots of collateral.
            The government has assets, but that is not real collateral as the government is not obliged to sell you those assets and there is no higher court that you could go to to seize those assets if the government (with its courts) chose to not honor its IOU. If you were a big owner of Greek bonds you might have been able to negotiate a deal for some assets under threat of future punishment, but –as a sort of sovereign country– Greece can ignore the debtors if it wants.

            Faith does not necessarily imply intrinsic value.

            I agree that bitcoin has no intrinsic value, faith is entirely extrinsic, but yields value nonetheless. Most assets have both intrinsic and extrinsic value, the value of gold or diamonds is far beyond their intrinsic industrial value. So most assets have a floor for how little value they can have, whereas the floor for bitcoin is bottomless, but so is the floor for IOUs (if the debter decides to default)

            In an IOU, it is not my faith that has value- it is the actuarial calculation of likelihood of repayment.

            I believe this is entirely semantic distinction, I believe the dollar has value if and only if I predict I will be able to exchange it for goods in a day, week, year, decade from now with high probability. This probability is much lower for bitcoin, but you can’t deny that, at some time scale, it does satisfy that criteria.

  3. Steve

    There is value in the existence of a reliable distributed ledger. Whether Bitcoin can succeed in establishing that remains to be seen. But right now the market value of BC is tethered to that possibility. Eventually it will – if successful – settle around the rate of return generated by fees paid to nodes that maintain the distributed ledger

    • bigjosh2

      There is value in a service like a distributed ledger. A system like this might have a model where you pay a fee to commit a record to the ledger. This fee covers the cost of appending the record and publishing the result in a permanent and hard to alter way. The maintainers of the ledger derive their income from these fees. BTW this is not something new – The New York Times classified ads has been providing this service for hundreds of years!

      This is not at all like BitCoin. In Bitcoin, can can (optionally) pay a fee to commit a record to the ledger, but that fee is paid in… well… fees.

      You pay with the same stuff that is created each time a new block of records is added to the ledger. So the thing that uses resources (adding a block of records) actually creates more of the stuff that you use to pay for the creation of new records. This does not make any sense at all! It is like you pay for a newspaper ad using, well, newspaper ads!

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  5. Joop Kiefte

    The value of gold doesn’t come from its intrinsic value. Intrinsic value is a fairy tale. An IOU-based system scares me, because IOUs depend on trusting someone who cannot be trusted.

    • bigjosh2

      You should be scared! You should always consider the credit worthiness of the issuer of an IOU before accepting one. The thing with Bitcoin is that there is no one to trust – it is an IOU against no one for nothing.

      I do respectfully disagree about intrinsic value. I’d argue that gold does have intrinsic value. It is a very useful metal if you are stranded on an island.

      So maybe that is a good working test if something has intrinsic value: would you want it if you were permanently stuck on a deserted isle?

      • Joop Kiefte

        But bitcoin is not an IOU. An IOU to no one means nothing is owed. Bitcoin is like a scoreboard, just like Reddit upvotes. Reddit karma is worth nothing, yet we want it. Similarly gold is worth nothing, the only value it has comes from being limited and being a good thing to trade with, because you can check easily that it is true gold. Bitcoin doesn’t copy any properties from dollars, but it DOES copy all the properties that make gold have value. Hence you are right about everything, but it doesn’t matter, because that’s not what gives bitcoin its value.

        • bigjosh2

          Bitcoin is like a scoreboard, just like Reddit upvotes. Reddit karma is worth nothing, yet we want it.

          I think Reddit karma is a great example of a currency to think about. Karma points are issued by Reddit, not by users. Reddit is the casino, and the points are the coins. If Reddit went out of business and started returning 404’s, and then you saw an ebay listing where someone offered to sell you all their karma for a reasonable price, would you buy them?

      • Joop Kiefte

        I don’t accept any IOUs, ever. When I lend money I don’t expect it back, because I invent in the betterment of the world. I only work with euros, which I only accept because people around me are so stupid to accept it, and because I trust european institutions a bit more than american ones, and several forms of cryptocurrency, like STEEM, which is a DPOS system and gets its value because you get exposure to your ideas for it in return, guaranteed by the system.

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