It is very difficult to understand cryptocurrencies, we at InvestinETFs have been trying to for our readers for quite some time now. Whilst some of our articles offer an intriguing perspective on the use of cryptocurrencies and how they have been used as forms of payment in many companies around the world there are also many different opinions on the subject. In this article, we have the opinion of our guest author, Dr Jianin Lu, who is an expert in this area and is slightly more sceptical about the usefulness of Bitcoin. Enjoy the read!
Unveiling the Fallacy: Bitcoin as a Tradeable Asset, Not a Usable Currency
Cryptocurrency enthusiasts often assert that cryptocurrencies like Bitcoin offer intrinsic value and act as a type of currency. However, this perspective could stem from a basic misunderstanding, an erroneous equivalence between two distinct actions – trading and usage. Phrases such as “Bitcoin is used to transfer funds”, “Bitcoin is used for transactions”, or “Bitcoin is regarded as a currency” mistakenly conflate these separate concepts. The fact of the matter is that Bitcoin is traded within its network, not used. To gain a clear perspective, let’s explore a simple analogy.
Consider exchanging a bottle cap for a paper clip. The act is solely an exchange of ownership, devoid of any real usage. However, when you use the bottle cap to seal a bottle or the paper clip to hold papers together, that embodies usage. The fundamental distinction is obvious – trading an object does not equate to its usage.
Applying this reasoning to Bitcoin helps to clarify its true nature. Bitcoin is a virtual asset generated by a network of interconnected computing devices. These devices process data, establishing the quantity of Bitcoin each ID within the network holds. This data is represented numerically and can be accessed via Bitcoin wallet applications. Exchanging Bitcoin essentially means altering the data associated with these IDs.
Differentiating Trading and Usage: Exploring Bitcoin’s True Nature
From this perspective, it’s evident that there’s no actual ‘usage’ within the Bitcoin network, just changes in numerical representation tied to the IDs. Unlike the bottle cap and paper clip example, no palpable benefit is derived from Bitcoin for the ID. Consider the infamous Bitcoin transaction of 2010, where Laszlo Hanyecz traded 10,000 Bitcoins for two pizzas. The pizzas, with their tangible benefits of taste and sustenance, offered practical use. In contrast, the Bitcoin units only exist as an abstract network property, not offering similar tangible benefits to an ID.
Cryptocurrency enthusiasts may counter that all currencies essentially function in the same way. However, a closer look at fiat currencies highlights a significant contrast.
Every unit of fiat currency is born from bank loans and subsequently traded amongst owners – a pattern familiar to Bitcoin, bottle caps, or paper clips. However, fiat currencies diverge at the point of loan issuance; they serve the purpose of repaying loans. This generates a real-world benefit – safeguarding debtors from potential bank foreclosures.
Unlike Bitcoin, fiat currencies offer a quantifiable benefit. For instance, if a bank issues a loan of 20,000 units secured against a property like a motorcycle, we can comprehend the relative value. Paying off a loan of that magnitude essentially safeguards an asset equivalent to the motorcycle. This, in turn, enables us to determine how many units to trade for two pizzas, a paper clip, or a bottle cap.
However, Bitcoin lacks these dynamics as it isn’t issued against loans. Thus, its units cannot be used as a currency, they are only traded like one. Essentially, fiat currencies serve a dual purpose – they are traded and used, whereas Bitcoin embodies only the former characteristic.
This leads us to the question of labelling Bitcoin as money or valuable. Money is a term for something that can be both traded and used. Without any real-world usage, there is no measurable benefit, and thus, no benchmark for comparison when traded for goods or services. Given Bitcoin’s absence of this essential attribute, it can’t be regarded as money. The term ‘Bitcoin’s value’ is essentially a contradiction, as the notion of value is an estimation of the benefit an item can deliver through future use. If Bitcoin can’t be used, how can it possess value?
In conclusion, the critical differentiation between trade and use provides a compelling argument against the popular perception of Bitcoin. This distinction unravels the fallacy within Bitcoin narratives and uncovers its true identity as an entity meant for trade, devoid of practical use.
This fundamental understanding demands a radical shift in our approach towards cryptocurrencies. Trading Bitcoin – or any other cryptocurrency – should not be confused with it serving a practical, tangible purpose in everyday life. It’s crucial to comprehend that any trade within the Bitcoin network merely reflects a shift in digital ownership, not the actual use of the digital asset.
If we dissect the famous case of Laszlo Hanyecz again, the two pizzas exchanged for 10,000 Bitcoins were consumed, providing him with sustenance and satisfaction. This transaction involved both trading and using. However, on the Bitcoin side of this transaction, the 10,000 Bitcoins only shifted in digital ownership from Laszlo to the pizza seller. While the seller might have eventually traded those Bitcoins again, at no point were the Bitcoins ‘used’ in the same sense as the pizzas.
The comparison between Bitcoin and fiat currencies highlights this discrepancy further. Fiat currencies – like the dollar or euro – are tools facilitating everyday transactions, paying for goods and services, and settling loans. Each of these actions constitutes both a trade and a use. However, Bitcoins, while often compared to these fiat currencies, do not share this dual function.
The very nature of fiat currencies’ creation, through loans, embeds them with an inherent utility – the potential to repay those loans. This inextricable link to a tangible, measurable asset lends them value within our society. Bitcoin, on the other hand, cannot claim the same. It’s not born out of any tangible requirement or tied to a physical asset, and hence, cannot be ‘used’ in the traditional sense. Its value, thus, remains largely speculative and dependent on collective belief, rather than intrinsic worth.
This discussion is not intended to discount the innovations and possibilities offered by Bitcoin and other cryptocurrencies. Blockchain technology, the underlying foundation of Bitcoin, presents exciting opportunities for reshaping industries and challenging traditional systems. However, these potential applications shouldn’t blur our understanding of Bitcoin’s fundamental nature.
Therefore, when discussing Bitcoin’s value or utility, it’s critical to approach the subject with a clear understanding of these distinctions. It challenges the prevailing narrative and ensures more informed and balanced discussions around the future of cryptocurrencies. It also fosters a healthier financial environment, protecting investors and users from making decisions based on misconceptions. Ultimately, acknowledging Bitcoin for what it truly is – a tradeable asset rather than usable currency – could contribute to the sustainable evolution of this digital frontier.
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