Bitcoin is NOT “backed by nothing.” The value of Bitcoin is supported by the utility of the Bitcoin network. Here’s how:
What gives gold its value?
Let’s compare Bitcoin to gold as a form of money. Gold was (theoretically) redeemable 1:1 by metal. It became a medium of exchange because it has non-monetary value—it’s shiny and resistant to corrosion, making it useful in jewelry and industry. But is this the primary reason gold is valuable? No. Gold’s primary value lies in its monetary uses. Non-monetary demand (or the non-industrial demand premium) represents just a tiny fraction of gold’s overall value.
What about the monetary premium of gold? We can examine silver, once the world’s reserve currency in the 19th century but now almost entirely demonetized. The gold-to-silver ratio changed from 15:1 in 1915 to over 100:1 today. This indicates that approximately 85% of gold’s price is due to its monetary premium.
The choice of gold as money isn’t coincidental — its material properties made it suitable. However, the non-monetary demand for gold (often mistakenly referred to as its “inherent value”) is not the primary reason for its value. Rather, it’s these material properties that make gold an effective form of money. If a new element with even better properties (like a fixed supply) but no industrial demand were discovered, it could supplant gold.
In summary, gold is primarily valuable because of its material properties, not its non-monetary uses.
Now, consider fiat money:
Fiat money is backed by legal tender laws, including the obligation to pay taxes in fiat. This creates a demand for fiat, as taxpayers and debtors must acquire it from the central bank. The backing of fiat ultimately stems from the threat of violence against those who refuse to contribute a portion of their income to the State. This threat serves to link the currency’s value to the economy’s size. In the case of the dollar, its relative stability and the strength of the U.S. military tie it to the global economy.
In short, the value of fiat money is linked to the extent to which the State is willing and able to confiscate a portion of the economy for its purposes.
What about Bitcoin?
Bitcoin consists of the distributed ledger (blockchain) and “bitcoins,” the native asset of the Bitcoin ledger. The ledger is valuable due to its intrinsic properties, such as censorship resistance, speed, cost-effectiveness, divisibility, and immutability. Competition for space on the ledger gives bitcoins their value. More specifically, it’s the anticipation of future demand for ledger space, as most Bitcoin holdings are speculative based on this future demand. Therefore, Bitcoin is NOT just a digital collectible. While a collectible may hold value, it lacks the security guarantees of the Bitcoin protocol, which is what provides bitcoins with utility.
Evidence that Bitcoin’s utility backs its value is its initial popularity on black markets, where buyers and sellers used Bitcoin for transactions, often selling it shortly thereafter. It was only after being validated as a reliable medium of exchange that speculators began buying it as a store of value.
To summarize, bitcoins are valuable because they are required to utilize the Bitcoin network. It’s the intrinsic properties of the Bitcoin protocol, not the scarcity of bitcoins, that make the token valuable.
Let’s compare again: gold is valuable because the intrinsic properties of the material make it suitable as money. Fiat is valuable due to the threat of violence by nation-states. Bitcoin is valuable because the intrinsic properties of its protocol make it ideal as money.