All That Glitters is not (Digital) Gold

A non-technical look at Bitcoin’s value.

If you are outside of the world of cryptocurrency, you probably hear the word “Bitcoin” and think “why are a bunch of lines of code making people so much damn money?” But Bitcoin isn’t just lines of code. Bitcoin is a symbol, a doorway, a narrative, a resource, and a damn catchy name.

For bitcoin to have had this much success, it must have been the first ever cryptocurrency, right? Well, not exactly.

Before Bitcoin

Bitcoin may have been the first successful cryptocurrency but it was not the first attempt or the first thought of a digital currency. Science fiction novels and films gave us the “credit” and we all accepted that in a futuristic world, money had to be digital. Thousands of video games have had their own digital currencies, some like World of Warcraft’s gold have even been sold for traditional currency.

Throughout the 80s, 90s, and early 2000s many a company rose and fell, hoping to create the digital currency of the future. With names like DigiCash, E-Gold, B-Money, Bitgold, the stage was set for the modern era of cryptocurrency.

Our Lord and Savior, Satoshi Nakomoto

So who is Satoshi Nakamoto? Well no-one knows for sure. In 2008 a paper was released to a mailing list for those interested in cryptography “Bitcoin — A Peer to Peer Electronic Cash System” by one “Satoshi Nakamoto.” But to this day no one knows who Satoshi is. Whoever he was, it was clear that he had been observing and learning from these other failed digital currencies. In January 2009 the bitcoin software was made available to the public as Nakamoto established the genesis block and so, people began mining bitcoin. Back then no one knew just how valuable bitcoin would become with a value of less than a tenth of a cent per coin.

Wait 2008? January 2009? That was right after the worst financial crisis in the US since the Great Depression. Where almost every major financial institution betrayed the American people. Was it a coincidence that Satoshi released the software at this key historical moment? I do not.

The Value of Belief

If you’ve taken any intro to Economics class, you have probably had a conversation about money. I remember my own high school Econ class with Mr. Anderson. He held up a 20 or maybe even a 50 dollar bill and explained that it was functionally worthless. The only reason that we could use that piece of paper was because people believed it had value. People have referred to money as a belief system, and some have even called it a “shared delusion.”

Take for example, a 50 ruble note and a 1 dollar bill. These are relatively close in value. But why? Why is it not 1 ruble to 1 dollar to 1 euro to 1 quai. The act of printing money does not earn money its value. These values are based on the belief associated with a history of complex geopolitical interactions, and in the governments that mint those currencies. Similarly, the blockchain and a network of miners does not earn Bitcoin its value. Bitcoin’s true value comes from the belief that Bitcoin has garnered around it since its inception.

Because a digital currency is not (usually) tied to the physical world, belief is the only way it has to build value. It is the only thing keeping it from simply being lines of code.

Once Upon a Bitcoin

One of the reasons behind the belief in Bitcoin is its narrative. Bitcoin has always held a positive narrative. To go back to another intro class, if you have ever sat in a freshman communications class, your professor likely said something to the tune of, “human beings need narrative.” Not only do we need narrative, we are addicted to narrative. Narrative is what makes you binge four seasons of Game of Thrones in one night, it’s what gets politicians elected, what rallies a country behind a war, and what makes us believe in true love.

In 2008 and 2009 the Financial Crisis created a narrative in which major financial institutions were the villain and there was seemingly no hero to save the day. For many, Satoshi Nakamoto completes this narrative by providing a hero that can defeat the evil that is traditional financial institutions. The Financial Crisis may be 10 years old but it is far from forgotten; for the cryptocurrency community this battle of Good v. Evil rages on.

Bitcoin’s narrative is powerful to those on the internet in the way the resurrection is powerful to billions of Christian followers. The mysterious character of Satoshi Nakamoto demands a christ-like reverence. Was he a team? A secret Genius? Where has he gone? Will he emerge one day to tell of the One True Token? In reality, Satoshi was likely a team of developers, but that doesn’t play as well. Bitcoin’s central pillar is its decentralization and “currency for the people controlled by the people.” When you attach a specific face to that, you lose the power of the Satoshi narrative.

When Bitcoin is the currency of a God, everyone else is simply a false-prophet.

Look Good, Feel Good

Bitcoin is also really smartly designed. The symbol, a B with two lines through it slightly rotated, challenges traditional symbols of currency. The orange is bright, eye-catching, and memorable. The overall design is very minimalist. It is a symbol that one could imagine diving into a pool of Scrooge-McDuck-style.

Let’s pause for a second and talk about the power of good design. If you look at the top 10 cryptocurrencies you will find 10 aesthetically pleasing logos and 10 catchy names that are easy to remember. This is by no means the entire story of their value, but it is an interesting correlation.

Bitcoin as a Doorway

New alt coins emerge almost everyday. This does not mean that they are all competing with bitcoin for the coveted title of “Digital Gold.” Most coins don’t want to compete with bitcoin. Other cryptocurrencies are not simply stores of value but utility tokens, asset tokens, equity tokens, and of course, shitcoins. Very few of these have enough power on their own to enter the marketplace without Bitcoin as an intermediary and this is what makes bitcoin the doorway to the cryptocurrency market.

Because the world of cryptocurrency has grown around Bitcoin’s journey to it’s now multi-thousand dollar value, you will be hard pressed to find a new coin that you don’t need to buy with Bitcoin.*

Digital Gold

Bitcoin is not only a powerful belief system, but in many ways it is a resource. This can be better understood if you think about it’s physical analogue, Gold.

Both are in limited supply and both are “mined.” Bitcoin has a max supply of 21,000,000 coins. There will never be more Bitcoin and there cannot be more Bitcoin. This separates Bitcoin from money because if you look at the history of money, there have been numerous cases of hyperinflation when governments printed money to “fix” the economy. This will never happen with Bitcoin. Satoshi is not going to emerge from the darkness with another 20 million Bitcoin. and he couldn’t because of the nature of Bitcoin’s protocol and blockchain.

Bitcoin, like gold is a store of value. If you have a vault of gold, that is counted in your overall wealth whether you sell it or not. Similarly, if you have a wallet with 300 Bitcoin in it, this is also part of your overall wealth.

Some have said: “But bitcoin can be forked so it’s not actually like gold at all.” Hold on a minute.

First, what is a fork? A hard fork is generated when a group of developers decide to change the protocol of a cryptocurrency, making it incompatible with the blockchain to that point.

By changing the Bitcoin blockchain and changing the underlying protocol, developers make new coins with different rules. Examples of this are Litecoin, Bitcoin Cash, Bitcoin Gold, etc. These forks do not affect Bitcoin’s value just as gold “forks” such as white gold and pink gold do not affect the value of pure gold. Gold and Bitcoin maintain their higher position as a store of value because of their status in their communities, and again, the belief in them.

Bitcoin and Gold are not only stores of value but symbols of status. Nowadays, rappers and popstars earn far more clout by posting something they bought with their #bitcoin.

The Bad News

This brings me to an important point about Bitcoin’s value. It is dangerous. Yes, dangerous. In the early days, people could get into bitcoin for very little money and yes, there were some miraculous stories of lucky normal people becoming millionaires. However, these are not the people who have benefited most from Bitcoin.

You’ve heard of the people who put 10 dollars into bitcoin and are now sitting pretty with huge returns. But imagine the wealthy people who were able to put 1000 dollars in at the same time.

Imagine a Science Fiction world where there is an elite upper class whose wealth goes so far beyond your imagination to the point that they can quite literally do whatever they want without consequence. Now stop imagining, because that is the reality we are headed for.

In a Forbes article it was estimated that 40% of the world’s bitcoin is owned by a mere thousand people. Let’s do some math. With a market cap of around 155 Billion right now, 40% of that would be around 62 Billion dollars. Banking the unbanked? Not so much.

Beyond that, if any of these majority holders had Bitcoin before its many forks, they would own equivalent amounts of each fork currency. With an estimated 50 million total crypto users, this is .002% of the overall community.

And if you think those thousand people are only invested in bitcoin, you’re nuts.

In overall wealth, a study found that the richest 1% of the world owns half of the worlds overall wealth. That is a painful fact to be made aware of. But with .002% of the cryptocurrency community owning 40% of the Bitcoin, we are on a path towards the same exact wealth inequality problem that fiat currency has created, and worse. Bitcoin billionaires, and maybe someday Bitcoin trillionaires, will hold money beyond your imagination and they’ll do it anonymously.

Is there Hope?

Bitcoin is still in its early days. It’s price is still highly volatile and may not jump to the astronomical values people hope. If it’s going to, we need to start talking about how we are going to prevent the same problems we have faced in fiat currency.

It is time that we are willing to step outside of our own wants for huge returns on our investment, and ask ourselves:

Should Bitcoin be this valuable?

ForkU Video on Bitcoin Value:

*Yes, also Ethereum but this isn’t about Ethereum

References for numbers:

https://coinmarketcap.com/currencies/bitcoin/

https://www.quora.com/How-many-people-are-currently-investing-in-cryptocurrencies

https://www.theguardian.com/inequality/2017/nov/14/worlds-richest-wealth-credit-suisse

All That Glitters is not (Digital) Gold was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.