20 Aug
As we know, ValueVerse is about blockchain, not just digital currency, but the question raised is a legitimate one, and one that is often left unanswered. Worse, when it remains unanswered, it leaves the door open to many economists, including reputable ones, who claim that bitcoin and crypto-currencies in general are purely speculative and have no fundamental value.
This sentiment stems from the fact that cryptocurrencies are for the most part “useless” bits of information, unlike the original money backed by the gold standard and, later, by central banks. But this argument can be counterbalanced by others. Here are three of them:
Empirical evidence
Question: is there a link between the price of bitcoins and the potential intrinsic value of the bitcoin economy?
Let’s start with a few points about how bitcoin works. Firstly, the supply of bitcoins is totally inelastic, determined by a protocol, with a fixed issuance schedule that is halved every four years, up to a final amount of 21 million bitcoins. Secondly, a new bitcoin is accompanied by a block that is only valid by virtue of a protocol such as proof of work that someone (the miner) has committed a certain amount of computing power. Agents on the Bitcoin network compete to have their transactions included in the first blocks. Computing power is measured in hashes per second.
These two characteristics of the bitcoin economy imply that :
A) the limited supply of bitcoin can be anti-inflationary, compared to the supply of money from central banks (just look at what happened post-covid after governments issued lots of money to finance economies, and how that created massive inflation afterwards, and that the bitcoin price should be positively correlated with the supply of money).
B) If the bitcoin price represents a rational representation of the monetary utility of a medium of exchange, store of value or unit of account, we should observe some relationship between the bitcoin price and the token velocity (which represents the exchange value) and the stake ratio (which represents the value of the store for long-term holders).
C) If bitcoin is a valuable network, its price should be linked to its users and the hash rate.
Socio-economic data
Question: Can BitCoin become a powerful social network, even if it’s backed by limited original value?
In fact, and contrary to popular belief, economic history shows many cases where money has been created, even in the absence of an intrinsic source of value. The vast majority of them were in fact born of the codification of pre-existing, shared interpretations of debt and credit relations within societies.
Logical proofs
Question — Can bitcoin prices be uniquely defined as an equilibrium resulting from the behavior of a rational agent?
Bitcoin has been the subject of numerous economic models. One strand of research has argued that the bitcoin community can effectively act as a rational force against discretionary government seigniorage. As a private currency, bitcoin acts strategically as a tool to prevent governments from abusing their citizens.
