In a nutshell, bitcoin is GOLD in a metaphysical (i.e., beyond the physical) form. To understand why bitcoin is valuable, we need to understand why gold is valuable first.
I believe that there are two factors making gold "gold". The history of gold and the economic model that underlies it.
(1)Supply of gold generally is stable. People have clear expectations that the supply of gold is growing steadily and there are few possibilities that tremendous amounts of gold will pump into circulation.
(2)Great difficulty of faking gold. More than 2000 years of practice in alchemy have confirmed that making new gold in chemical ways is impossible, so the only way to increase the supply of gold other than by mining it is to counterfeit it. The attempts to mess with the circulation of gold, however, have been in vain due to the broader adoption of fiat currency and improved verification technologies. (3) infeasibility of creating new gold Although it is technically possible to create new gold by forging gold atoms in colliders, this is not practicable from an economic standpoint.
In general. The predictable and stable supply of gold empowers the gold the attribute of scarcity. But what is scarcity?
Two types of scarcity
I would divide scarcity into two types: subjective and objective. subjective scarcity needs background stories or narratives to fulfill its scarcity. Take your dreamgirl's first love letter as an example. the letter means nothing to others unless you put detailed information to strike chords with them. In general, unless relative narratives keep evolving and having an effect on people, this kind of scarcity is not universal and it fades away over time.
objective scarcity is universal. it is scarce because it does meet people’s demands. For example, human beings always have a great need for products that preserves value for a long period of time. (If the value could last forever, that would be much better ) People are economic men. They tend to weigh gains and losses and they really hate losing. No matter a person's nationality, ethnicity, age, or gender, things like gold represent a stable and predictable form of value, hence it is needed by everyone. （If humans could achieve communism or Utopia then we do not need an eternal store of value, but that is infeasible.）
However, is the "scarcity" sufficient to qualify gold as "the gold"? Of course not, there are countless things in the universe that are scarce, such as a spit of me on exactly 12:00 August 14th, 2022 but it means nothing unless people have demands on it. Even though gold has universal scarcity, it still takes time for scarcity to develop into valuableness.
(1)Gold's history demonstrates that it can hold value and maintains its value over thousands of years. In this part, firstly I need to talk about induction reasoning because it makes the “history” factor valid. Humans are not a rational species essentially because people use induction reasoning on a daily basis. How could you predict the future base on the past? Although something occurs repeatedly, it does not mean that it will continue to do so in the future. However, we have already formed the habit of using induction reasoning, thus almost every single person believes that history reflects the future. In this sense, historical data of gold “proved” that gold is unquestionably valuable.
(2) Some attributes empower gold with the capacity of serving as a general equivalent and store of value. Gold is easy to transport and store, and its physical attributes like high melting point and hardness help to preserve its value.
in general, the system of gold ran successfully for thousands of years. It passed the test of time. Given gold's history, people believe that gold will continue to perform well in the future.
Gold has objective scarcity and it stores value, fitting people’s eternal demands. Gold becomes “the gold” when combined with the history of the gold system operating successfully.
(1)Similar to the supply of gold, bitcoin has a fixed total supply, which is encoded into bitcoin’s whole system and backed up by over 10,000 pieces in real-time. its level of stability and predictability in supply is far beyond gold.
But how does this happen? why can bitcoin's supply be fixed?
Let’s go back to gold’s supply mechanism. What makes gold’s supply stable and predictable is the setting of Earth(finite amount of gold on Earth available for mining ) and the great difficulties of faking gold to increase supply. In general, you could say nature or the power over the universe centralize the power of creating gold, thus for human gold is decentralized. Gold is scared because its supply is decentralized and nobody can control its supply rules.
On the bitcoin side, the supply mechanism is ensured by technology like cryptography and blockchain. We'll talk about how technology ensures bitcoin’s fixed supply in detail later, but for now, just keep in mind that technology can determine supply, making bitcoin has a decentralized supply rule like gold. in a word, humans create scarcity rather than nature.
(2)Technology applied to bitcoin also ensures people can not fake bitcoin to mess with the supply.
PoW consensus serves as an incentive mechanism to facilitate bitcoin as a distributed network. right now there are more than 10,000 computer nodes distributed throughout the globe continuously copying and verifying bitcoin’s ledger/database. in other words, bitcoin is decentralized enough so there is no one entity that could manipulate its supply. Unless at least 51% of the nodes agree to fake together, it is impossible to fake a bitcoin. However, this won't happen. These nodes are deeply symbiotic with the entire bitcoin system; if they agree to fake the supply or distort the authentic ledger, they are destroying themselves.
By using hashing technology, it is simple to determine if a bitcoin is real or false. Anyone with a computer can check the hash of certain blocks in a matter of seconds. Consider verifying gold; you need professional devices and experience to do it.
human has the demand for a permanent store of value and this kind of demand is objective. you don't need to create some thesis to convince people that they need a store of value, because they have already learned that from their daily lives.
like gold, bitcoin offers a needy product for human beings— a store of value. Decentralized store of value, to be exact.
looking back, we can see that many assets were capable of storing value. however, only decentralized stores of value survived for hundreds or thousands of years. for example, gold. centralized store of value died with the collapse of the central authority, for example, fiat currency. The best way for assets to survive is through decentralization.
Bitcoin is trustworthy due to its wonderful track record. Having been through 14 years of operation, and several hard forks, bitcoin’s system remain secured and non-hacked to date. Take fiat currencies and precious metals as examples, they all have suffered from faking thus their systems were diminished, and some of them even totally collapsed.
In comparison to gold, 14 years is still a short period of time, and it's possible that bitcoin failed. but since humans tend to reason by induction, bitcoin’s flawless history has already established its reputation.
By using decentralized methods, bitcoin gain scarcity from a fixed supply. combined with the humans' eternal demands for a store of value, and the perfect 14-year operation history, bitcoin is valuable.
By Truman Yang
December 02 2022