One of the most commonly heard criticisms of bitcoin is that it is not backed by anything nor is it intrinsically valuable. The pundits who make this claim, also state that the USD has no intrinsic value, gold has no intrinsic value, and now, likewise, bitcoin has no intrinsic value. It seems as though a concept economists have been debating for centuries has suddenly gone out the window as we have collectively realized that there is simply no such thing as intrinsic value.

The utter misconception of this economic principle as it relates to bitcoin is too large, and too important to ignore. Everything from Dutch tulips in the 17th century to stacks of paper USD notes have had some degree of intrinsic value. What we need to debate is the quality of intrinsic value attributed to each.

What bitcoin investors and enthusiasts must understand, is that it is not only a financial asset with considerable intrinsically valuable, but it is regulated by a universal constant unlike any man-made money system which has come before it – time itself. This universal construct allows us to plot the supply schedule of bitcoin in a manner where it is highly predictable while simultaneously being uncheatable through manipulation found in traditional monetary policies.

Algorithmic Regulation

If the USD is backed by the authority of its government and the largest force of military might on the planet – then what is backing bitcoin? Even if programmable, digital money brings intrinsically valuable capabilities, how can we have faith in it if there is no core party which oversees its acceptance and adoption?

At the very root of what makes the bitcoin network tick, is a regulatory algorithm which determines that new blocks of bitcoin will be mined on average every 10 minutes. These ‘uncheatable’ maths which are intelligently constructed by system design, ensure that nothing can alter the predetermined issuance rate, nor the block size halving rate, of bitcoin.

Every 10 minutes, more bitcoin become available at a disinflationary rate. That mathematical guarantee formulated by a crude form of artificial intelligence is the backing of a system which boasts remarkable intrinsic value.

Friedman’s k-percent Rule

American economist, statistician and writer Milton Friedman once posed the idea of replacing central banking institutions with a computer capable of mechanically managing the supply of money. He proposed a fixed monetary rule, called Friedman’s k-percent rule, where the money supply would be calculated by known macroeconomic and financial factors, targeting a specific level or range of inflation. Under this rule, there would be no leeway for the central reserve bank as money supply increases could be determined “by a computer” and the market & its citizens could then anticipate all monetary policy decisions.

Will we ever see Friedman’s computerized banking institution put into action? Considering the mining network of cryptocurrencies are the closest thing to an authority, and mining will only get more specialized and thus centralized in the future, we may well already be on the path towards it.

Bitcoin boasts the economic backing of a force magnitudes more intelligent and pervasive than the promise of men & military might: an uncheatable, highly predictable, chronological supply schedule enabled by Friedman’s k-percent rule. Friedman predicted the rise of a computer capable of automatically adjusting the inflation rate of money, and this is precisely what we see in the case of bitcoin, as a regulatory algorithm intelligently adjusts the mining difficulty to make the issuance of blocks more or less easy depending on the demand for network hashing power. The computerized function of the bitcoin system boasts intrinsic value which will continue to grow as more users join the fold and the network becomes more valuable for every participant. No money system we have seen to date can claim it is chronologically regulated. The universal construct of time is the backing of the bitcoin digital economy.

Author

Travis Patron

Travis Patron is the author of The Bitcoin Revolution: An Internet of Money, a seminal publication in the digital money space which outlines the basics of the bitcoin payment system. As a public speaking authority, he regularly speaks to audiences on the economics & industry trends of bitcoin.

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  • Reply

    Che Gravos

    04 06 2015

    This is new territory for me. A money system that “is backed by time itself”.

    Time is an illusory construct much in the same way as money is. Can we truly say that either money or time really even exist?!

  • Reply

    Tom Mornini

    04 06 2015

    > Can we truly say that either money or time really even exist?!

    Perhaps not; but I’m willing to bet that you have at least one clock, use it at least once a day, and have a wallet with some form of payment inside.

    • Reply

      Travis Patron

      23 06 2015

      Most people in developed society use a tool to track time. However, what this tool is actually measuring is an abstract concept – it does not exist.

      A minute is no more real than a meter or milligram, yet these systems of measurement are crucial to the function of society because they allow us to relate information to real-world, tangible form.

  • Reply

    supermari0

    05 06 2015

    > The intrinsic value of gold is that it is useful as an industrial metal in various applications ranging from machinery to electronics. It is an incredibly durable metal and it is also a visually attractive metal. These things are all intrinsically valuable, but the current market price of gold does not exclusively represent this intrinsic usefulness.

    If you read “valuable” as “able to be valued” it becomes clear that “intrinsically valuable” is an oxymoron: someone must value something for it “to be of value”. Value is never intrinsic, you always need context. For gold this would be an industry that needs corrosion-free electrical connectors or an economy with the need for a durable, hard to forge, physical value token. And gold isn’t valueable because it’s pretty, it’s seen as pretty because it suggests wealth.

    • Reply

      Travis Patron

      23 06 2015

      Absolutely true, value is established by the socio-cultural environment which it is found in.

      Some cultures value the aesthetics of something, while another culture would value only the functionality of that same thing.

      Value therefore, is a highly subjective concept and one which should deviate between individuals.

  • Reply

    Jon Underwood

    04 05 2016

    Travis,

    Another thoughtful post full of meaningful ideas worthy of further discussion. And although I applaud you exercising creative thought, I think some of your conclusions miss the mark.

    Bitcoin is not backed by time, but a time dollar at the time bank is. And while it is a true that the structural predictable supply is a strength, it is also a weakness (aren’t they all!).

    The real economy is filled with both micro and macro expansion and contraction, and these forces will find their expression in every currency one way or another. If you fix supply, then you will have constant volatility in price. It’s structural, no way around that. If you fix price or value, you have to expand and contract supply to do it, no way around that either.

    If people focused not on the supply of dollars, but the effective supply, which is supply times velocity, then it would become clearer when money is actually expanding vs. contracting. What’s really interesting to me is not a static supply algorithm like Bitcoin, but a dynamic one based on need and demand. Our current monetary system creates booms and busts, but a better solution would do the exact opposite, contracting supply as the economy heats up and accelerates velocity, and expanding it when fear grips the market and slows velocity. MakerDao is trying to provide incentives to have digital currencies (backed by other digital assets) tend toward a target. I’d like to work on an algorithm that used economic indicators to determine needed money supply dynamically and just compare the results to actual policy for a few years. The real value behind any currency is productivity achieved through division of labor and economies of scale vs. the same of other regions. To be truly effective at maximizing economic development, the supply should exactly meet the need for productive uses. If too little currency, then we lose real productivity of individuals and businesses that are under-utilized by being undercapitalized. This is lost real income permanently, and lowers the standard of living that’s possible. If we overcapitalize, then we accelerate inflation and run the risk of creating bubbles. If we thread the needle, the effective money supply would grow long run at a rate close to real productivity gains. However, as the real economy is the engine of value creation, we really should target bioregional economies, and have an algorithm that tries to optimize currency supply to meet actual need in each bioregional. If we can do that, we can maximize the potential standard of living while also delivering a stable value. That’s not Bitcoin, that’s like the first derivative of Bitcoin, a dynamic supply that results in k percent growth where k is the value of real productivity gains.

    • Reply

      Travis Patron

      25 07 2016

      Thanks for your contributions Jon. I am encouraged that you are pursuing a dynamically adjusted supply with your cryptocurrency. Such a thing is a natural and progressive experiment in the economics of digital money.

      I do however, disagree that a fixed (or predictable) supply of money exacerbates volatility. I think bringing near-perfect awareness of deviations in the supply of bitcoin to the market is a great step forward for price stability. If accessibility to the information concerning the supply of bitcoin is made accessible to all who use it, and changes are known well in advance, this affords the market an opportunity to adjust demand dynamically. Indeed, this is what we are seeing in anticipation of the block reward halving every 210,000 blocks (~4 years).

      Already, we are seeing a remarkable stabilization effect taking hold with bitcoin. This will continue to a point where bitcoin will become a more stable form of account than the Euro, the Pound Sterling, and I even daresay the US dollar.

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