The Value of Bitcoin’s Infrastructure
Debunking the myth of “intrinsic value”
We often hear from naysayers that Bitcoin has no intrinsic value because it’s simply software, a hodgepodge of digital bits and bytes that only exist in the ether of the Internet. Gold bugs seem to be quite keen on this argument, stating that gold has intrinsic value because it can be used for other purposes such as jewelry and circuit boards for electronics. However, I pose to you that there is no such thing as “intrinsic value.”
If there was such a thing as intrinsic value, assets would always retain at least some measurable value in the eyes of their owner. We can debunk this theory with a simple thought experiment. Imagine yourself stranded in a desert with an ounce of gold, the private key to an address holding 1 bitcoin, and no drinkable water. If, in those conditions, someone were to come along and offer you a gallon of water (~$0.01 from a municipal water supply) in exchange for the ounce of gold ($1,300) and the bitcoin ($600), chances are that eventually you would take it.
Why is this the case? Because of diminishing marginal utility. Normally, water is not valued highly because it is so plentiful. However, while the difference between having zero gallons of water and one gallon of water per day is that of life and death, the difference between fifty and fifty-one gallons of water per day is a slightly shorter shower. This is an extreme example, but the point is that value is in the eye of the beholder — it is always subjective and can be greatly affected by external conditions.
As you may be aware, Bitcoin is fundamentally a distributed public accounting ledger. It is meant to be used as a means of publicly proving ownership of a digital asset — the digital asset being an entry in the accounting ledger. The ledger is divided into units of ‘bitcoins’ which are further divisible to 8 decimal places. While Bitcoin does not have “intrinsic” value, it does have valuable resources backing it in the form of the network infrastructure. Recently I have transitioned to viewing bitcoins less as currency and more as resource tokens. If you want to leverage the features of Bitcoin for any reason whatsoever, you must use the tokens. This is also how use of the protocol is kept from being abused, by limiting the available tokens. This is one reason why bitcoins have value — the limited resources of the network are represented by a limited number of tokens. It just so happens that the value of the tokens is being used by most people as currency. Which makes sense, given the attributes of Bitcoin that make it easy to use as a medium of exchange.
When you publish a Bitcoin transaction it is broadcast to your peer nodes, which then perform validation checks and rebroadcast it to all of their peer nodes. Since there are currently ~10,000 nodes, that means that your transaction will be sent a minimum of 10,000 times throughout the Internet. At an average transaction size of 300 bytes, that’s 3 megabytes of total bandwidth. Then your transaction is verified by the mining infrastructure which is comprised of millions of dollars worth of hardware scattered throughout the world. Finally, the winning block is published and your transaction is broadcast once again (as part of the verified block) another 10,000 times. Now your transaction will be permanently stored in that block, on the blockchain, on the hard drives of 10,000 computers. By making a Bitcoin transaction, you have effectively purchased 6 megabytes of community-sourced bandwidth, 3 megabytes of community-sourced disk storage, and a fraction of a second of computational power from the most powerful computing cluster in the world. These are real, finite resources, that have certainly have value given that the owners of the resources spent money to purchase them.
Note that I am not claiming that Bitcoin derives its market value entirely from the resources at the disposal of its infrastructure. There are many, many factors that contribute to the market value of Bitcoin. But, when someone argues that Bitcoin is worthless because it has no “intrinsic value” and is “not backed by anything,” we can confidently assert otherwise.