Many people like to claim that bitcoins are worthless and that they couldn’t possibly have any value because they aren’t backed up by anything tangible. The easiest way to dismiss this myth is to take a look at the state of fiat currency in the world today. There isn’t any gold or other commodity backing up the US dollar or euro, and people seem to value these currencies quite highly. In other words, it’s possible for bitcoins to have value if people decide that they want to use them. So do bitcoins have any actual value or is this just one big ponzi scheme?
The Censorship-Resistant Ledger
The main value proposition of bitcoin is the censorship-resistant ledger that is attached to the unit of account. Not many people seemed to understand the value of Bitcoin until it was used for censorship-resistant payments. For example, Silk Road and Wikileaks were two of the first organizations to accept Bitcoin payments. These case studies in Bitcoin showed that bitcoins have value because they can be used for financial activities that aren’t approved by a centralized bank, payment processor, or government. The fact that the Bitcoin blockchain is a secure, decentralized ledger means that it can be used to prove certain finalized transfers of value have taken place.
Use Cases for Bitcoin
Once you have a censorship-resistant ledger, you can then use the units of account on that ledger to create an endless number of applications. It is often said that currency is simply the first app of Bitcoin, and the full implications of this new technology are probably not understood by many individuals on the planet right now. Here are some of the main uses of bitcoins that provide their fundamental value:
As mentioned above, bitcoins can be used for censorship-resistant payments. It could be anything from donating to Wikileaks to entering a private contract with someone that will not be subject to any taxation. Although this point is a bit controversial due to the fact that some would classify the actors in this part of the Bitcoin economy as criminals, the reality is that they do increase for the bitcoins currently available on the open market.
- Bitcoin payments are also potentially anonymous. So the customer does not need to hand over any personal information to the merchant when they make a payment.
- Bitcoin can also be used to avoid capital controls. It is assumed that people in countries like Argentina and China are already using Bitcoin to get around the restrictions on the amount of money they are allowed to move out of the country.
- Colored coins are an idea that allow people to “color” a specific bitcoin with external value, such as stock, gold, or any other form of property. The bitcoins on the decentralized Bitcoin ledger can be used to represent anything in the physical world. The limited number of available bitcoins also means that they are basically a commodity that is required in order to use the Bitcoin blockchain.
Note: These are just a few examples, and there are many more use cases for bitcoins that provide fundamental value for the asset. We’ve posted a related article (Why the Bitcoin Price Won’t Go to Zero).
Bitcoin and Bitcoins are a Package Deal
One last point that needs to be made when it comes to the value proposition of bitcoin is that you cannot have Bitcoin without the bitcoins. Many Bitcoin skeptics, such as Paul Krugman, have claimed that the Bitcoin protocol is an important invention, but they are unsure if that means bitcoins should have any value. The problem with this conclusion is that people need to own bitcoins if they are going to be able to get any use out of the Bitcoin blockchain. In other words, it’s impossible for Bitcoin to be useful if no one owns any bitcoins.