With bitcoin prices surging, it’s time to revisit my shorthand thesis for its valuation

In the summer of 2020, with bitcoin prices around $11,700, I hosted an online conference about the history of money, and the future of digital currencies.

It was a fantastic learning experience for me, and hopefully many of you too.

With bitcoin prices having performed very well indeed since then, now sitting at nearly $40,000, I think it’s time to reflect on the core thesis back then.

I’ll let you decide if things have played out right…

And as I’ve outlined so far this week, here and here, I’ve developed a neat little way of understanding bitcoin’s rise.

The Holy Duality I call it – in reference to the way in which something can be greater than the sum of its parts, and also in a nod to the (occasionally) religious fanaticism that the leading cryptocurrency has inspired.

The Holy Duality comprises of two parts: an idea, and a technology.

Neither one can work without the other – it’s the combination which makes bitcoin so special.

And the religious comparisons don’t stop there.

Its founder, who operated under the pseudonym Satoshi Nakamoto, is shrouded in mystery.

He/she/they inscribed a founding document – a “white paper”, which established the founding principles of this new monetary creed.

And rather promptly, Satoshi then disappeared, giving bitcoin something of an “immaculate conception”.

As if to ram the point home, guess what they called the first ever block in the bitcoin blockchain…

“The Genesis Block”.

You almost couldn’t write it.

But there’s more than just religious terminology which is inspiring such devotion amongst bitcoin’s “acolytes”.

So today I want to look at the second part of the Holy Duality – the idea behind bitcoin.

Just in case you missed it, I delved into the technology behind bitcoin before.

As I mentioned on Monday, there many different reasons why people think bitcoin is so brilliant.

It has a limited supply, so it can’t be devalued like fiat currency.

It is decentralised, so it can’t be controlled by an organisation or a government.

Trust is given not by a trusted third party, but by the very nature of the thing itself. Users verifying the transactions are what gives the network its trustworthiness. Peer review, over autocracy.

Finally, it carries no fees.

So instead of paying 20% to send remittances home, and it taking days or weeks, bitcoin can be held, sent and received wherever there is internet. Instantly, and free of charge.

Need to get your money out of the country as a military coup takes hold? What about swerving a new autocratic banking regulation, or a wild currency devaluation?

A government can stop you moving your lira or renminbi, but it’s damn near impossible to stop someone with free access to the internet transferring bitcoin.

But to really understand the idea that drives bitcoin forward, I think it’s important to go back to the very beginning…

Because we are all so used to “QE” now, but back in 2008 it was a novelty, and to many people, a scary one.

Since the very beginning of time, debasement of currency and inflation has been a part of our lives.

Tudor monarchs would melt down and adjust the levels of gold and silver in coinage to pay for a new war in France, for example. Or when Spain discovered the New World, it brought home so much gold and silver that it ruined the European economy, which became flooded with too much money, lowering its purchasing power.

Back then, the people closest to the source of money benefitted as they got to use the new bullion first, before it had done its wicked damage.

And so it has proved again, with modern day QE. Asset prices have risen while wages have stagnated.

And now we have seen a greater expansion of fiscal and monetary stimulus than ever before, perhaps even since Henry VIII in the 1530s according to some estimates.

Objections to this took various forms, one of which was to look for a return to sound money principles, which are cleverly named to sound common-sensey and unobjectionable.

Sound-money advocates of the gold standard need only point out the extremes of inflation, boom and bust that have beset global markets since 1971, when the US gold standard was abandoned.

And some still advocate sound money principles – such as Judy Shelton. Her nomination to the Federal Reserve board in the US drew some of the most panicked, sad and rude reactions from mainstream economists, who can’t even bear the thought of an outside view in the inner sanctum.

Debate and compromise are not welcome, it would seem, in the most important monetary body in the world.

Their reaction highlights everything that is wrong with central banking and the profession of economics in my view – whether you agree with Shelton or not.

Anyway, a certain group of individuals who called themselves the “cypherpunks” felt that the answer lay not in gold, but in the newly emerging digital sphere.

Even gold, they said, fell under the control of central banks and governments which could hoard it.

The problems they saw in the global monetary system were these.

It was centralised – groups like the Fed or the Bank of England were unelected, but had as much power as any politician.

Money was distortable – ie, it could be debased or devalued.

It was also unlimited (at that point only in theory – though now this is becoming reality with the onset of Modern Monetary Theory).

Finally, it was chock full of intermediaries that were getting in the way and ripping people off.

They looked to new solutions, specifically to “open source” (blockchain-based, peer-reviewed) digital currencies.

But for a long time, no one could quite manage. A few came and went – e-Gold and DigiCash, amongst others… – so don’t be fooled. Bitcoin wasn’t the first, and it didn’t come out of nowhere.

In fact, it’s the culminated of decades of effort, and centuries of thought.

It’s not this crazy new thing. It’s the first in a long series of cryptocurrency attempts.

What makes it special is that… it works. It solves the problems of the current monetary system.

And the final problem which Satoshi solved, which had stumped so many other attempts, was called “double-spend”.

This was the problem that money which had its basis in digital technology could be used multiple times by simply copy and pasting it.

This was obviously unacceptable. You can’t use ten-pound notes twice – once you’ve spent it, it belongs to someone else.

So Satoshi incorporated certain features into the code which underpins the bitcoin blockchain, which made it impossible to spend bitcoin twice.

Firstly, like a completed Rubik’s cube, if someone copied and pasted a sticker, it would ruin one of the sides. It is a perfect whole, harmoniously put together, in perfect balance.

In fact – a Rubik’s cube is quite a good way of thinking of “mining” – a block is a really complicated Rubik’s cube, but if you solve it first, you get bitcoin as a reward.

Anyway, the hash code for each block was so specifically created to describe both the block before and the transactions it contained, that it couldn’t be altered.

If the code is abcdefgh, you’d notice if it became abcdeffgh, right?

So the hash code system meant that double-spend (along with any other errors, thefts, frauds and the rest) would show up in the code.

But who would police it? If no one’s chhecking you can get away with anything.

Again, Satoshi solved the problem – this time with bitcoin.

But giving these bitcoin tokens as rewards, for verifying that the hash code of a block was correct (matched the transactions and referred to its predecessor), Satoshi incentivised the community of users to police the network itself.

So instead of a central bank or government being the arbiter of trust in the system, it was the very system itself which created trust.

The cryptocurrency would be the reward for verifying the blockchain network on which was based – a truly brilliant solution.

And the more people use it, the more trustworthy it becomes, while the more trustworthy it becomes, the more people will be happy to use it.

It’s ingenious. This is what the Holy Duality brings – an idea delivered by a new technology.

The idea was there – to create money outside of the current banking system.

But it was the clever use of blockchain technology, and the system of “mining” (code-breaking) for a bitcoin reward that breathed life into the idea.

The final pieces of the puzzle

Now, the main thing people focus on is bitcoin’s similarity to gold, especially if you’re thinking of it more as an asset rather than a currency.

Because Satoshi coded bitcoin rewards to end once 21 million had been “mined”, the problem the current system has of unlimited supply in the hands of politicians and central bankers is gone.

No one can change, adjust or extend the number of bitcoins which come into existence. All that can change is a value of a single bitcoin. The 21 millionth coin is expected to be “mined” (earned) by around 2040.

At that point, there will be a completely fixed supply of these things, and so in that way, savers or holders of bitcoin can be absolutely confident that no central authority will create a whole bunch of new bitcoins, thus reducing the value of their holdings.

Like gold, the hope is that it can act as a hedge against fiat currency debasement.

Some even go as far as saying that bitcoin could replace gold as a digital reserve asset, to which fiat currencies are pegged, thus reducing their volatility and limiting the worst excesses of the current monetary overlords.

But the final idea, the one which I find most compelling is this.

Whatever theoretical reasons there may be to love or fear, support or oppose this “new new thing”, the fact of the matter is this. Whatever you think of the current monetary system, whether you think bitcoin is trustworthy or not, and whether you think it can go mainstream or not, enough people in the world see enough problems with the current monetary system to turn to this brilliant, ingenious new alternative.

In just ten years, it has come far enough that some experts are estimating that one trillion dollars of bitcoin will change hands this year, based on H1 estimates.

The price of a single coin is now up at £9,000 (felt pricey back in August, now looks like a bargain), for something that can’t be seen or touched, and that you or I still don’t truly understand. I couldn’t mine for it myself – at best I can download a mainstream app that does the buying and holding for me.

But that’s enough.

Because let’s be honest, I don’t understand how interbank payments currently work either. I couldn’t build a toaster, a telly or a toilet. And I couldn’t locate, dig and refine gold and silver either – but it doesn’t make them irrelevant or worthless.

Because I don’t have to.

As with anything else, bitcoin has a value chain. A founder, miners, and users.

We are end users of a new technology, a new money.

It has developed its own value, its own trust, based on market principles rather than the diktat of presidents and populists.

People, like you or I, have seen fit to prescribe value to bitcoin, and that is more powerful than any idea or technology I can think of – just as the argument that gold isn’t useful and produces no yield is irrelevant, because investors give it value anyway.

It’s not yet clear what bitcoin is or will be – a reserve asset, a safe haven, a risk asset, a hedge, a currency or a curiosity.

But for now, it is an emerging new investment asset, and at the very least we owe it to ourselves to find out more, to understand it, and to be ahead of it.

I really enjoyed going back and looking at what I wrote about bitcoin. I might have held a few quids’ worth since the heady days of 2017, but it wasn’t until 2020 that I spent any time getting my head around it.

I’m really glad I did, and I hope a few of you at least joined me over the last six months – it’s been exciting to say the least.

Anyway, I’ll be back on Wednesday,

All the best for now,

Kit Winder
Editor, UK Uncensored

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