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.
Elenchus
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!)
FAQ
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.