Is Bitcoin a store of value?

Bitcoin has many characteristics of a currency. It is portable, fungible, divisible, resistant to forgery, and it clearly has value. Today, that value came close to $20,000 per coin. Whether it has ‘intrinsic value’ is somewhat of a moot question, because the US dollar hasn’t exhibited this trait since 1972. Today, economists don’t even recognize the intrinsic value of gold—beyond a robust, international, supply-demand network.

Lately, Bitcoin is failing as a viable currency, at least for everyday consumer transactions. The settlement of each transaction is bogged down with long delays and a very high cost. The situation has become critical because of squabbling between miners, users and developers over how to offer speed transactions or lower the cost of settlement. Bitcoin forks and altcoins such as Dash and Bitcoin Cash demonstrate that these technical issues have solutions. Since Bitcoin is adaptable, I believe that these issues are temporary.

But an interesting question is not whether Bitcoin will eventually become a consumer currency. It is whether Bitcoin can distinguish itself as a store of value, rather than just an instrument for payment or debt settlement. After all, a Visa credit card, a traveler’s check and an Amazon gift card can all be used in retail payments, but none of them have value unless backed by someone or something. US Dollars on the other hand are perceived as inherently valuable. They carry the clout and gravitas of institutions and populations, without users questioning from where value arises. (This is changing, but bear with me)…

What about Bitcoin? Does owning some bitcoin represent a store of value? Yes: It absolutely does!

Bitcoin is a rapidly maturing two-sided network. Despite a meteoric rise in exchange value and wild fluctuations during the ride, it is the epitome of a stored value commodity. Regardless of government regulation, adoption as a consumer payment instrument, or the cost and speed of transactions, it has demonstrated stored value ever since May 22 2010, when Laszlo, a Bitcoin code developer, persuaded a restaurant to accept 10,000 BTC for 2 pizzas.

The “currency” accepted by the pizza parlor wasn’t a gift card. It was not backed by a government, a prior deposit, dollars, gold, the promise of redemption, or by threat of force or blackmail. When a large community of individuals value, exchange, and can easily authenticate something that has none of those underpinnings, that thing clearly has stored value.

In this case, value arises from its scarcity and a robust supply-demand-network. Because its value is not tied to a government or to other commodities, its exchange rate with other things will be bumpy, at first. But as it is recognized, traded and adopted as a stored value token, the wild spikes will smooth out.

A tipping point will precipitate rapid adoption when…

  • when some vendors begin to quote prices in Bitcoin (rather than national currency)
  • when some of these vendors retain a fraction of their bitcoin-revenue for future purchases, payments or debt settlements—rather than converting revenue to fiat/national currency with each sale

Bitcoin is clearly a store of value, and it is beginning to displace gold and the US dollar as the recognized reserve currency (it is gradually becoming the new gold standard). But before Bitcoin can serve as a widely adopted everyday currency (i.e. as a payment instrument—with or without the stored value of a currency unto itself), it must first incorporate technical improvements that speed transactions and lower cost.

This is taking longer than many enthusiasts would have liked. But, that’s OK with anyone who keeps their eye on the big picture. Democracy is sometimes very sloppy.


Ellery Davies 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.

Spell it Out: What, exactly, backs Bitcoin?

On August 1 2017, the value of a Bitcoin was at $2,750 US dollars. Today, just over one month later, it is poised to leap past $5,000 per unit. With this gain, many people are asking if Bitcoin has any genuine, inherent value. Is it a pyramid scheme? —Or is it simply a house of cards ready to collapse when the wind picks up?

In a past article, I explained that Bitcoin fundamentals ought to place its value in the vicinity of $10,000.* (At the time, it was less than $450, and had even fallen to $220 in the following year).

For many consumers viewing the rising interest in Bitcoin from the stands, there is great mystery surrounding the underlying value. What, if anything, stands behind it? This is a question with a clear and concise answer. In fact, it has a very definitive and believable answer—but it is easiest to understand with just a little bit of historical perspective.

At one time, G7 fiat currencies were backed by a reserve of physical Gold or the pooling or cross-ownership of other currencies that are backed by gold. That ended in 1971 when the Bretton Woods agreement was dissolved by president Richard Nixon in Ithaca NY.

Today, US currency is backed by “The good faith and credit of the American worker” (This is the government explanation of intrinsic value). But in truth its future value is loosely tied to one simple question: Does the typical vendor or consumer (for example, someone accepting a $20 bill in exchange for a movie ticket or 2 large pizzas) expect it to buy these same things in the next few months?

A considerable number of speculative components contribute to the answer. For example:

  • What About the Big Picture? DEBT! Everyone knows that a house built on debt cannot thrive forever without a continuous stream of productivity and income. Is the money being printed without a commensurate added value to the nation’s capacity to repay debts?
  • Public Trust: Good faith goes beyond debt. Can consumers and creditors be certain that a change of government won’t cause rampant inflation or a willful failure to retire future debt? Can they be assured that their fellow workers will continue to produce and export manufactured goods in ever increasing quantity?
  • Guns & Tanks: Citizens are compelled by law to pay their taxes in official state currency. Even for those who attempt to fly under the wire or use alternate currencies during the tax year, this ultimately forces fiat currency to be recognized and honored.
  • Geopolitical Stability: We have been a debtor nation for decades and we have significant political and economic disputes with our largest creditors (China and nations of oil-rich gulf states). What would be the effect of them (a) moving away from the dollar as their reserve currency, or (b) investing the trillions of dollars they have earned in some other country?

This list is not exhaustive, but all constituents boil down to two fundamental concepts: Supply-and-demand and How long will demand last?

The dollar is an invention of a transient government. Even with a long history and complex banking framework, it is no more real than Bitcoin. Supply and demand for any commodity is based on popular recognition, anti-counterfeit features, innate desire and public goodwill. The real question is what contributes to the desire to own or spend Bitcoin?

The answer is that Bitcoin is backed by something far more reliable and trustworthy than the transient whim of elected legislators. It is backed by something that carries more weight than the US government. What could possibly guaranty the value of a Bitcoin? After all, it does not convey ownership in gold, and it has no redemption guarantee. There is no picture of Caesar on the coin. (In fact, there is no coin at all!)…

Answer: Bitcoin is backed by math, a firm cap, a completely transparent set of books, and the critical mass of a two-sided network. Although it can be taxed (like any asset), it can be owned and transferred with impunity and without recourse. These may not seem like critical components of intrinsic value, but they are. In fact, they define intrinsic value in the modern era.

Related:


Ellery Davies co-chairs CRYPSA, produces The Bitcoin Event, edits A Wild Duck
and is keynote at this year’s Digital Currency Summit in Johannesburg.

Wallet Security: Cloud/Exchange Services

3½ years ago, I wrote a Bitcoin wallet safety primer for Naked Security, a newsletter by Sophos, the European antivirus lab. Articles are limited to just 500 hundred words, and so my primer barely conveyed a mindset—It outlined broad steps for protecting a Bitcoin wallet.

In retrospect, that article may have been a disservice to digital currency novices. For example, did you know that a mobile text message is not a good form of two-factor authentication? Relying on SMS can get your life savings wiped out. Who knew?!

With a tip of the hat to Cody Brown, here is an online wallet security narrative that beats my article by a mile. Actually, it is more of a warning than a tutorial. But, read it closely. Learn from Cody’s misfortune. Practice safe storage. If you glean anything from the article, at least do this:

  • Install Google Authenticator. Require it for any online account with stored value. If someone hijacks your phone account, they cannot authenticate an exchange or wallet transaction—even with Authenticator.
  • Many exchanges (like Coinbase) offer a “vault”. Sweep most of your savings into the vault instead of the daily-use wallet. This gives you time to detect a scam or intrusion and to halt withdrawals. What is a vault? In my opinion, it is better than a paper wallet! Like a bank account, it is a wallet administered by a trusted vendor, but with no internet connection and forced access delay.

Exchange and cloud users want instant response. They want to purchase things without delay and they want quick settlement of currency exchange. But online wallets come with great risk. They can be emptied in an instant. It is not as difficult to spoof your identity as you may think (Again: Read Cody’s article below!)

Some privacy and security advocates insist on taking possession and control of their wallet. They want wealth printed out and tucked under the mattress. Personally, I think this ‘total-control’ methodology yields greater risk than a trusted, audited custodial relationship with constant updates and best practice reviews.

In case you want just the basics, here is my original wallet security primer. It won’t give you everything that you need, but it sets a tone for discipline, safety and a healthy dollop of fear.


Ellery Davies 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.

Bitcoin closes in on (US) $2000; Why it matters

At the beginning of 2016, Bitcoin was fairly steady at $430. Richelle Ross predicted that it would finish the year at $650. She would have been right, if the year had ended in November. During 2016, Bitcoin’s US dollar exchange rose from $433 to $1000. In the past 2 months (March 24~May 20, 2017), Bitcoin has tacked on 114%, rising from $936 to $2000.  [continue below image]…

If this were stock in a corporation, I would recommend liquidating or cutting back on holdings. But the value of Bitcoin is not tied to the future earnings or property value of an organization. In this case, supply demand is fueled—in part—by speculation. Yes, of course. But, it is also fueled by a two-sided network built on the growing base of utilitarian adoption. And not just an adoption fad, but adoption that mirrors the shift in our very understanding of bookkeeping, trust and transparency.

Despite problems of growth, governance and regulation, Bitcoin is more clearly taking its place as the future of money. Even if it never becomes “legal tender” in any country—and is used only as a mechanism of payments and settlement, it is still woefully undervalued. $2000 is not an end-game. It is a beginning.

Ellery Davies co-chairs Crypsa & The Bitcoin Event. He is a columnist & board member at Lifeboat Foundation,
editor at WildDuck and is delivering the keynote address at the 2017 Digital Currency Summit in Johannesburg.

Distributed Consensus: Beyond POW or POS

At the heart of Bitcoin or any Blockchain ledger is a distributed consensus mechanism. It’s a lot like voting. A large, diverse deliberative community validates each, individual user transaction, ownership stake or vote.

But a distributed consensus mechanism is only effective and faithful if the community is impartial. To be impartial, voters must be fairly separated. That is, there must be no collusion enabled by concentration or hidden collaboration. They must be separated from the buyer and seller; they must be separated from the big stakeholders; and they must be separated from each other. Without believable and measurable separation, all sorts of problems ensue. One problem that has made news in the Bitcoin word is the geographical concentration of miners and mining pools.

A distributed or decentralized transaction validation is typically achieved based on Proof-of-Work (POW) or Proof-of-Stake (POS). [explain]. But in practice, these methodologies exhibit subtle problems…

The problem is that Proof-of-Work can waste an enormous amount of energy and both techniques result in a concentration of power (either by geography or by special interest) — rather than a fair, distributed consensus.

In a quasi-formal paper, C.V. Alkan describes a fresh approach to Blockchain consensus. that he calls Distributed Objective Consensus. As you try to absorb his mechanism, you encounter concepts of Sybil attacks, minting inequality, the “nothing-at-stake” problem, punishment schemes and heartbeat transactions. Could Alkan’s distributed consensus mechanism be too complex for the public to understand or use?…

While I have a concern that time stamps and parent-child schemes may degrade user anonymity, the complexity doesn’t concern me. Alkan’s paper is a technical proposal for magic under the covers. Properly implemented, a buyer and seller (and even a miner) needn’t fully understand the science. The user interface to their wallet or financial statement would certainly be shielded from the underlying mechanics.

Put another way: You would not expect a user to understand the mechanism any more than an airline passenger understands the combustion process inside a jet engine. They only want to know:

• Does it work?  •  Is it safe?  •  Is it cost effective?  •  Will I get there on time?

So will Alkan’s Decentralized Objective Consensus solve the resource and concentration problems that creep into POW and POS? Perhaps. At first glance, his technical presentation appears promising. I will return to explore the impact on privacy and anonymity, which is my personal hot button. It is a critical component for long term success of any coin transaction system built on distributed consensus. That is, forensic access and analysis of a wallet or transaction audit trail must be impossible without the consent and participation of at least one party to a transaction.


Ellery Davies co-chairs Cryptocurrency Standards Association and The Bitcoin Event. He is columnist & board member at
Lifeboat Foundation, editor of AWildDuck and will deliver the keynote address at Digital Currency Summit in Johannesburg.

Can Bitcoin Flourish with a Capped Supply?

The answer may be counter-intuitive: Not only can Bitcoin be widely adopted under a supply cap, its trust and integrity are a direct result of a provably limited supply. As a result, it will flourish because it is capped.

Everyone Can Own and Trade a Limited Commodity, IF…

…if it is both measurable and divisible. Bitcoin has a capped supply just as gold has a capped supply. Although both assets will be mined for some time into the future, there is only so much that will ever be uncovered. Thereafter, the total pie cannot grow.

But the transaction units will continue to grow as needed, because the pie is divisible into very, very tiny units:

There will eventually be 21 million BTC and each coin is divisible into 108 units. This yields (21 million * 100 million), or 21 trillion exchangeable units. And, it can be divided further by consensus.

As Bitcoin is adopted—whether as a simple payment instrument, an investment asset or even as national currencies around the world—each unit of the limited supply simply rises in value. If thought of as a currency, with a value established by supply & demand, it leads to a deflationary economy.

But, Isn’t Deflation Bad for the Economy?

It’s common to associate deflation with economic ills. One need only glance back at the the last century to conclude that deflation coincides with wars, joblessness, recession and a crippling concentration of wealth. Perhaps, just as bad, the tools used to pull a nation out of deflation often force governments to cherry pick beneficiaries of stimulus spending.

But it is important to note that deflation plays no role in causing these things. On the contrary, it is an effect rather than a cause… In fact, when a supply cap is introduced as a designed control input for monetary policy, all sorts of good things follow. I address these in various answers at Quora. Dig in:

Ellery Davies co-chairs Cryptocurrency Standards Association. He was host and producer of The Bitcoin Event in New York.

Can Bitcoin be defeated by legislation?

The question breaks down into two parts:

  1. For what public benefit?     —and—
  2. No, it cannot be achieved in this way

Governments are in the business of regulating certain activities—hopefully in an effort to serve the public good. In the case of business methods and activities, their goal is to maintain an orderly marketplace; one that is fair, safe and conducive to economic growth.

But regulation that lacks a clear purpose or a reasonable detection and enforcement mechanism is folly. Such regulation risks making government seem arbitrary, punitive or ineffective.

QR Code_CRYPSA-001«—  This is money. It is not a promissory note, a metaphor, an analogy or an abstract representation of money in some account. It is the money itself. Unlike your national currency, it does not require an underlying asset or redemption guarantee.

Bitcoin is remarkably resistant to effective regulation because it is a fully distributed, peer-to-peer mechanism. There is no central set of books, no bank to subpoena, and no central committee to pressure (at least not anyone who can put the genie back into the bottle). In essence, there is no choke point or accountable administrative party.

Sure—it is possible to trace some transactions and legislate against ‘mixers’ and other anonymization methods—but there is no way to prevent a transaction before it occurs or to know the current distribution of assets. Bitcoin can exist as a printed QR code and it can be transmitted from a jail cell with a blinking flashlight. Sending bitcoin from Alice to Bob has no intermediary. Settlement requires only that one of the parties eventually has access to the Internet. But, there is no credit authority or central asset verification.              [continue below image]…

feral_cat_mating-02-ts

If you are thinking of legislating against the use of Bitcoin, you might as well pass laws to ban the mating of feral cats or forbid water from seeping into underground basements. These things are beyond the domain of human geopolitics. You can try to shape the environment (e.g. offer incentives to cats and water levels), but you cannot stop sex or seepage.

Fortunately, Bitcoin is not a threat to governments—not even to spending or taxation. A gross misunderstanding of economics and sociology has led some nations to be suspicious of Bitcoin, but this improper perception is abating. Governments are gradually recognizing that Bitcoin presents more of an opportunity than a threat.

I have written more extensively on this issue:

Ellery Davies is co-chair of The Cryptocurrency Standards Association, MC for The Bitcoin Event in NY and monetary systems board member for Lifeboat Foundation. This fall, he will teach Cryptocurrency and The Blockchain in Massachusetts.