I had a conversation recently about the value and substance of cryptocurrencies. "Is bitcoin worth investing in" was one of the questions. "Is bitcoin really worth almost $ 8,000? Is cryptocurrency in general worth investing in? Are cryptocurrencies based on anything substantial" were a few more. You probably recall that Bitcoin stood at almost $ 20,000 just a few days ago. Is something that was created from nothing worth as much as a car? If you take gold, a material that finds many uses in real life, it is only worth a fraction of Bitcoin. Different from Bitcoin, gold does indeed serve a real purpose. But maybe so does Bitcoin?
Thus, let me walk you through our conversation about bitcoins and other cryptocurrencies. Are cryptocurrencies really worth it, should you invest in cryptocurrencies?
I suppose it depends on where you stand. One of the arguments was that cryptocurrencies aren't based on anything. And it's true, they aren't backed by anything but trust.
Cryptocurrencies are based on the community's trust. Trust in terms of whether the blockchains will be validated and are not messed with. Trust whether the currency, whether it is bitcoins, litecoins, dogecoins, or any other alt-coin is worth its money, its value.
Then again, so are the global fiat currencies. While the world's foremost currencies were once attached the value of gold, this all ended with Nixon ending the long-standing relationship between the dollar and gold. Other countries either followed suit or had abandoned the backing of their currency by gold reserves prior to The Bretton Woods Agreement.
Government currencies, or so called fiat currencies, aren’t backed by anything either but the trust that the respective government will fulfill its promise to keep its value stable. Whether it is Euros, Dollars, Yen, or Pound, they are not worth what is printed on them, they are only worth what you get in exchange for a € 10 note. But as much as they are supposedly supported by the issuing government, the assumed stability and confidence that they will still carry purchasing power tomorrow, their dependencies on governments is also their weakness. Governments frequently decide that a particular currency is no longer valid. Only recently did the UK government render pound coins and notes worthless. You were given a timeframe during which you had to spend your money. After that period the pounds that once bought you food transformed into worthless pieces of metal and paper. If you were now to think that the UK government was forced to do so because of some sort of catastrophe or a war and that the above event had taken place many decades ago, you would be mistaken. It was only a few months ago that pound coins and notes were replaced by new issuances and the old ones became worthless.
Or take the introduction of the Euro. Before the introduction about two decades ago, you could buy your bread in Deutsche Mark, Francs, Lira, and Peseta, today this is impossible. In most Euro countries, the Euro is the only legal tender, in other countries, such as Germany, you can still exchange your Deutsche Mark for Euros. For a good reason, as it was Germany that experienced hyperinflation and currencies reforms leaving its people penniless and highly skeptical of any currency manipulations by governments and central banks.
Thus, are Bitcoin, litecoin, and their peers worth their money? From a trust perspective they are as trustworthy as any other currency. It really makes little difference in what currency you buy your bread, pay for your dinners, or buy your metro tickets in.
Are Bitcoins worth the money?
From an investor’s point of view, the picture is very different. Any investment is only worth as much as its intrinsic or future value. If you were to buy shares, the price you pay should reflect the value of the company, their products, creativity of its employees, future outlook and innovativeness. If you buy a property, the value of the property is due to its scarceness, the likelihood that people will move into the neighbor, the demand and the available land. It depends on the quality of the property’s finishings, its age, the structural stability. If you invest in bonds, the return on your investment can be measured in the trustworthiness and ability of the borrower to pay you the money you have lent back. With cryptocurrencies such as Bitcoins none of this applies. It is based purely on speculation – no different from currency trading. But let’s go through the individual points.
Do bitcoins have an intrinsic value?
No. Just as any other currency, bitcoins are essentially merely a means to pay for goods and services. Bitcoins enable easier transactions. They don’t have any intrinsic value, no property that can be valued, no use outside the transactional space such as, for instance, gold that is used in jewelry, electronics, fashion, and occasionally in haute cuisine.
Are bitcoins scarce?
Yes and No. As the recent forks Bitcoin Cash and Bitcoin Gold have shown, the amount can be increased infinitely. Of course, Bitcoin Cash and Gold are different from their parent Bitcoin Core (the new name given to Bitcoin), but are similar in their technology. If we only focus on Bitcoin Core, then the point of scarcity is given. Only 21 million bitcoins can ever be produced, thus, similar to gold and other precious resources, carry a certain value.
Can bitcoins be assessed?
Difficult. With other investments such as property and shares, the value of the asset can be assessed by looking at its intrinsic value, the future potential, drawing benchmarks with similar companies (shares), cities and adjunct neighborhoods (properties). Bitcoins, just as any currency, depend on other factors that are not intrinsic in its nature. With time, however, it will be easier to allocate a value to bitcoins and other cryptocurrencies by benchmarking them against each other (something that is already happening for other currencies whose value is generally benchmarked against bitcoins).
So are bitcoins worth investing in? I believe they are. Not an investment such as shares or property, but as speculative assets, similar to other currencies, such as trading dollars, yen, pound, or euro. As I have mentioned in other articles, I love the idea of cryptocurrencies, would I use them as my primary “investment”, certainly not, as I want to be able to evaluate my investments. As speculative assets and even more importantly, as alternatives to existing fiat currencies such as pound or dollar, bitcoins and friends are simply awesome.