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The title of this post is intentionally misleading. We frequently discuss the traits that lead to value here in the Lifeboat Blog. But today, I was asked a more nuanced question: “What things will hold their value?”

And there is a ulterior motive in being a columnist for Lifeboat. Analyzing the dynamics of durable value leads to some surprising conclusions about the money supply and what a society chooses to use as money. We’ll get to this at end of this post.

We know that value comes from supply and demand. There are no exceptions. But, we have not addressed the properties that make an asset hold value over the long haul. Let’s consider some examples…

Cars

In an affluent, mobile society, most people desire personal, point-to-point transportation — and so there is clearly a demand for automobiles.

But style & technology change rapidly and automobiles deteriorate with use and weather. After 8 to 10 years, their cost and maintenance rise dramatically, and owners lust for a new model. So cars don’t get our award for assets that hold value.*

Popular Toys

In the 1970s, the Cabbage Patch doll from Calico Industries, and later, Tickle Me Elmo in the 1990s created a buyer frenzy that rivaled a lemonade stand in the desert. Shoppers fought each other to grab a limited supply. Clearly, demand was very high. The one shown below is listed at Ebay this week with a starting bid of $5,000. Other, less popular styles can be found for $4.99.

At first, this demand was driven by clever marketing and crying children in the week before Christmas. Demand was driven by a parent’s love. But at the peak of frenzy, demand shifted to buyers without children who felt certain that they could profit from selling the dolls that they snatched up first.

But the demand was not durable. Fads driven by frenzy don’t hold value for the long haul—especially when a manufacturer can simply turn the spigot back on.

Stocks & Bonds

A share of stock represents ownership in a corporation. A municipal bond represents a lien against a city—or the fees generated by an infrastructure project.

In both cases—especially bonds, which are a limited promise—no one expects value to last forever. It is a time-sensitive bet with the intention of expiration, redemption or exchange. So, these things also fail our criteria for durable value.

Houses & Real Estate

Like cars, homes require ongoing maintenance. But, most people weigh the maintenance cost against the benefit of having shelter, rather than comparing it to their gain or loss in value.

On the other hand, real estate value fluctuates in the long run due to things that are difficult to predict — population density, demographics, and quality-of-life issues related to infrastructure: weather, seismic events, politics, and access to health care and education.

Some real estate rises enormously in value over 50 or 100 years. Yet, we have seen boom-and-bust cycles that wipe out substantial wealth. So, real estate does not cut it in our contest for durable value.

Gold

The allure of gold and other precious metals is that their supply is capped — or limited by slow and predictable growth. The asset is difficult to find. It is acquired only from natural phenomena.

So, if we can also make it fungible, divisible, portable and difficult to counterfeit, then it meets most of Aristotle’s requirements for a functional currency. Theoretically, this can lead to widespread demand.

Gold certainly has exhibited its ability to hold value throughout thousands of years. But it is not so easily tested and divided in the field, and the impression that it has intrinsic value is an illusion. That’s because the fraction of gold acquired by investors dwarfs the amount actually needed for dentistry, electronics and even jewelry. In this modern era, even gold is becoming a house of cards, because its value is built upon speculation and emotion.

Oil (aka “black gold”)

With the rise of the automobile and power plants that burn fossil fuel, oil became a reserve currency of the 19th and 20th centuries. But there are two problems with it holding value over the long haul.

First, unlike gold, oil is a consumable in every market. Therefore it is difficult to think of it as an asset. Also, we now live in a century in which energy and transportation is rapidly switching away from oil, while at the same time, new technology is making it cheap to acquire new oil. This (along with a history of violent political theater) dramatically deteriorates its potential as a store of value in coming years.

Money

The supply-demand dynamics of money is widely misunderstood. More than 2,300 years ago, Aristotle defined the properties of a functional currency.

Earlier, we stated that all value comes from supply and demand. But, it is fair to ask “What creates the demand?” or “What backs the expectation of future demand?” Surprisingly, even if we limit our scope to just one country (USA), the value of government-issued currency has been tied to different things over time:

  • Gold
  • Promise of redemption
  • Legal tender (public must accept it for all debts)
  • Settlement of taxes
  • The “good faith and credit” of workers

Ultimately, demand is influenced by oversupply and by public perception more than government promises or laws. The perception that the US dollar has no cap and that its supply can be inflated whenever a body of transient politicians decides to raise the debt ceiling may eventually cause its value to collapse. Although it has not happened yet, at some point consumers (or those holding our debt), will begin to question if Americans have the capacity and will to produce and export the goods & services necessary to balance their mass consumption of the past half-century.

And so, government-issued Fiat does not pass our smell test for durable value. Sooner or later, all national currencies collapse. On a personal level, the only question that matters is if you will be caught by surprise—with a fraction of wealth tied to your favored currency.

What has the potential to meet all requirements for holding value?

Wouldn’t it be fascinating if we could find an asset that is a product of pure mathematics? A perfect asset would be fair, fungible, immutable, and capped. It could never be inflated or manipulated by politicians. It would decouple governments from monetary policy. It would be politically agnostic.

If correctly designed, it would be capable of absorbing and incorporating improvements developed by any copycat or pretender nipping at its heels. Most important, it would be open source, peer-to-peer, massively distributed, redundant, and completely permissionless.

This perfect asset would derive trust from mathematics and crowd-sourced consensus. It would not require that anyone believe in a government, a bank, a land mass, or the uncertain supply of precious objects. Authenticity could tested easily and its value transmitted instantly. The history of each unit would be completely transparent. With free tools, anyone, anywhere could trace its history of moving from one owner to the next.

Ten years ago, such an asset was unleashed into the wild by a person or team of developers under the pseudonym, Satoshi Nakamoto. It not only meets all of these requirements, it has built-in immunity from competition. It even resolves a technical problem that troubled Aristotle more than two millennia ago.

I won’t name this radical yet natural evolutionary development in this answer—but, I can confidently state that it passes our test for an asset that will hold value over time. Despite a wildly fluctuating exchange rate with Fiat currency, its inherent value has never dropped. Ultimately, you will no longer asses value based on the exchange rate of an anachronistic currency that fails all of the other smell tests. Instead, you will assess value on how many heads of lettuce you can buy or how much that new sailboat costs.

* A classic car avoids the problems associated with use & maintenance—and it can hold value over a long period. But like a Picasso painting, the market for classic cars has a limited audience, especially for the florescent green ’63 Mustang that I found in in my great uncle’s garage. Additionally, it is subject to the whims of popular perception. Styles go in and out of vogue and so we cannot predict how long that car will hold value. (Please call me if you value my uncle’s Mustang at more than $150,000).

Philip Raymond co-chairs CRYPSA, hosts the Bitcoin Event and is keynote speaker at Cryptocurrency Conferences. He is a top writer at Quora.

Today, economist and Nobel laureate, Paul Krugman, wrote in the New York Times, that Bitcoin is taking us back 300 years in monetary evolution. As a result, he predicts all sorts of bad things.

A significant basis for Mr. Krugman’s argument is that the US dollar has value because men with guns say it does.

Is Bitcoin erasing 300 years of monetary evolution?

Running with the metaphor that fundamental change to an economic mechanism represents ‘evolution’, I think a more accurate statement is that Bitcoin is not erasing the lessons of history. Rather, it is the current step in the evolution of money. Of course, with living species, evolution is a gradual process based on natural selection and adaptation. With Bitcoin, change is coming up in the rear view mirror at lightning speed.

The Evolution of Money

When a medium of exchange is portable, fungible, divisible, unforgeable and widely accepted, it becomes money. For at least six millennia, barter was gradually replaced by various mediums of exchange.

  • Obsidian —» Cowry shells —» Gold —» Promissory notes (backed by a Bank, employer or wealthy industry) —» Fiat (national currency)

But what backs these forms of money? What gives them value?

The first 3 currencies above were accepted as money on 5 continents. They were backed by their scarcity and unique characteristic properties (Aristotle called this intrinsic value). But even gold cannot serve as a widely used currency today. Although it is portable and scarce, it is not easily tested or subdivided in the field; it is risky to transport and difficult to track; and it is not suited to instant electronic settlement. But what about Fiat money. What backs it?

What Backs National Currencies?

Fiat has been backed by various different things throughout history. They are all compromised attempts to establish confidence and trust. They are compromised, because the fall short of one or more facets of trust.

In the list below, monetary backings in Red are what Mr. Krugman calls “men with guns”. That is, he claims that government demands give value to the dollar:

  • Value tied to gold —» Promise of redemption —» Legal tender (public must accept it for all debts) —» settlement of taxes —» The “good faith and credit” of workers

Unfortunately, the transition away from a trustworthy basis and the constant temptation of kings, dictators and politicians to print money based on credit (or nothing at all—as in the case of our fractional reserve system), has created a house of cards that few people believe is sustainable.

Bitcoin changes all this.

Finally, a crowd-sourced trust basis was invented (or discovered). It is unhackable, un-inflatable, unforgeable and immutable. Most important, it allows a government to be decoupled from its own monetary policy and supply. This is a remarkably good thing for businesses, consumers, creditors, trading partners—and especially for governments.

And Bitcoin is backed by something better than guns, gold or promises. It is provably scarce, capped in supply, completely fair, and built on a massive, crowd-sourced network of bookkeepers and auditors. It is the first currency—and quite probably the last—built on genius math and indisputable trust.

Despite the gross misunderstandings and misconceptions of early pundits, it does not interfere with a government’s ability to tax, to spend or to enforce tax collection—and it does not facilitate crime.

Bitcoin is new, but the goal of distributing trust is not as radical as you might think. It addresses a problem that economists and mathematicians have pondered since Aristotle and the ancient Greeks…

Background

Ever since the transition from real gold to government notes, bank notes and bank ledgers—economists have wondered if value can arise from a public trust that is durable, distributed and stateless. Until 2009, the answer seemed to be that this was impossible because of the double-spend problem.

But 9 years ago, something changed; and the change is dramatic. It will take an additional decade for most people to understand and appreciate this change…

In the first paragraph, I cited Mr. Krugman’s statement that the US Dollar has value because of “men with guns” (a reference to the fact that its use is legally compelled for payment of any debt and for government taxes). But this is not what gives it value. The dollar, the Euro, a Picasso painting and a fresh serving of hot french fries all derive their value from supply and demand. Bitcoin is no different. The trick is to generate viral demand and a ubiquitous infrastructure needed to achieve a robust two-sided network.

In the white paper that introduced both blockchain and Bitcoin (the first blockchain application), Satoshi taught us that a widespread and easy to access communications network (the internet and universal access to smartphones) can give rise to value that is based on a different type of trust. Instead of trust in a government, a bank, or testing the chemistry of a precious metal, value can arise from trust in a formula that is ubiquitous, redundant and constantly monitored and vetted.

All of these things have a value based on demand and the available supply. But with Bitcoin, the medium of exchange (and additionally the store and transfer of value), can be achieved by math, distributed trust and a pure, two-sided network.

So, is Bitcoin taking us backward in time, utility, safety and governance? I have never been awarded a Nobel Prize—but it seems pretty clear to me that Bitcoin is taking us forward and not backward.

Philip Raymond co-chairs CRYPSA, hosts the New York Bitcoin Event and is keynote speaker at Cryptocurrency Conferences. He sits on the New Money Systems board of Lifeboat Foundation. Book a presentation or consulting engagement.

Oh, Cheez…We’re back to this question, again!

As a Bitcoin columnist, I get this question a lot. Today, an answer was requested at Quora.com, where I am the lead contributor on cryptocurrencies:

“Clearly, some people value Bitcoin. But How can
this be? There is nothing there to give it value!”

Many individuals, like the one who asked this question, suspect that Bitcoin was pulled out of thin air—and that it is not backed by gold, a government, or an authoritative redemption guaranty. After all, it is just open source code. What stops me from creating an ElleryCoin using the same code?!

Let’s start with the short answer:

  • Indeed, it was pulled out thin air
  • It isn’t backed by an asset, government or promise
  • You could easily clone Bitcoin (the entire mining ecosystem) and distribute it yourself. It would be exactly like Bitcoin. Yet, Bitcoin is clearly valued by everyone, and your new coin is unlikely to generate interest or adoption.

A More Complete Answer: What is value?

Bitcoin has more intrinsic value than a government printed paper bill. The value arises from a combiation of fundamental properties:

  • It has a capped supply
  • It is widely recognized, liquid, and resistant to legislation
  • It has attained the robust supply-demand of a growing, 2-sided network.
  • It is open and transparent. This elevates user trust
  • Unlike cash and credit, Bitcoin requires no back-end settlement. That’s because it is not a payment instrument. Rather it is money itself.
  • Finally, it’s value is likely to be durable, because it is not printed by a country that has racked up debt. In fact, it can never be inflated.

Downside and Risks

But wait! What about the long transaction delay and high cost? There are sharp disagreements anong miners, users and developers concerning block size, transaction malleability, and replay issues. Aren’t these a deal killers? And what about wild volatility in the exchange rate? Doesn’t this retard adoption as a functional currency?

These are transient issues associated with a new technology. Although Bitcoin is weathering growth pains that arise from a new and distributed governance technology (democracy can be messy!), all of these issues have sound solutions. We have already witnessed and tested the solyutions with various forked coins. Think of them as beta tests. Even if current problems delay the day when you can spend bitcoin at every retail establishment—it is already sucking liquidity from national currencies and becoming the world’s de facto reserve currency.

Many individuals find all of this hard to accept. That is because we have been conditioned to think that ‘value’ arises from assets with ‘intrinsic’ value, the promise of redemption, or by edict. This is not true. In all things, (including gold, a Picasso painting, or your labor) value arises from simple supply and demand.

Some individuals claim that all other factors are secondary. But, even this statement is false. All other factors are irrelevant. They may be related, but they are not the source of value.

I recognize that this answer may seem smug or definitive. So, allow me to suggest related questions with answers that are a bit more interesting, because they are subtle. Unlike the question of value, these two questions are open to analysis and opinion: (1) “Will people continue to value bitcoin in the future?” — And (2) “When will Bitcoin stop swinging wildly in value?” (measured by its exchange rate with other currencies).

This is fun! Let’s explore…

Philip Raymond co-chairs CRYPSA, publishes A Wild Duck and hosts the New York Bitcoin Event. Last month, he kicked off the Cryptocurrency Expo in Dubai. Click Here to inquire about a live presentation or consulting engagement.

I use to hate it when my dad insisted that I read something longer than 2 paragraphs. (Something related to his interests, but not to my school work, his career or our family). That’s because it shouldn’t require a 30 minute read to determine if it piques my interest, as it does his.

But I am asking Lifeboat readers to invest 37 minutes in the video linked below. Even if you give it just 5 minutes, it will provide sufficient motive for you to stick around until the end. [continue below video]

I want you view it because we are on the threshold of something bigger than many people realize. Bitcoin and the blockchain is not just a new currency or a way of distributing books among network users. We are becoming involved with a radical experiment in applied game theory that is shockingly simple, but nascent. Opportunities abound, and the individuals who recognize those opportunities or learn to exploit them will benefit themselves as they benefit the global community. Because it is so radical (and because it clashes with deeply ingrained beliefs about authority, control mechanisms, democracy and money), it seems complex and risky—but it’s really not.

I am a Bitcoin educator and columnist. I have taught college seminars in Bitcoin and I will be keynote speaker at the 2017 Digital Currency Summit in Johannesburg. I design online courses for the most popular cryptocurrency self-learning groups. But Antonopolous runs circles around me. He is a Bitcoin evangelist extraordinaire. All of his presentations are superb, but this one provides context. It conveys an understanding that Bitcoin novices and professionals equally appreciate. It answers questions the viewer hadn’t asked, but would have.

There are hundreds of videos and PowerPoint presentations that explain how Bitcoin works. But they rarely provide context. Few of them convey why it is such an important development and why it has overtaken biotech & pharmaceuticals as the focus of VCs . Few can explain why an ethereal Bitcoin (a unit that you cannot hold) has just surpassed the value of a unit of gold. And few people realize that volatility has been abating as the increase in value and adoption is surging.

As you watch Antonopolous, you are certain to think about things that you did not previously know—or at least, that you did not reflect upon. My purpose in asking you to view it, is not to sell you on Bitcoin or the blockchain, but to provide the context that may help you to code, consult, write articles, teach, begin trading, start saving, and more.

Philip Raymond co-chairs Crypsa & Bitcoin Event, columnist & board member at Lifeboat, editor
at WildDuck and will deliver the keynote address at Digital Currency Summit in Johannesburg.