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Bitcoin Does Have Underlying Value – But Not What You Think #
It’s no secret: ECB President Christine Lagarde is no fan of bitcoin. The head of European monetary policy has repeatedly called the world’s largest cryptocurrency ‘worthless,’ ‘speculative,’ and ‘without underlying value.’ She’s not alone in this – as the bitcoin price falls again, the average conservative economist is enjoying the show with popcorn.
My fellow columnist Jordy den Toom was also ‘put in his place.’ He wanted to start a (legitimate) discussion with her about her assumptions regarding bitcoin. Bitcoin is now worth a considerable amount, is being bought by Wall Street, and is increasingly compared to ‘digital gold.’ But instead of letting him make his point, he was immediately asked to justify himself. ‘What do you think bitcoin is worth, then?’
Unfortunately, the discussion never took place. But we still have the written word!
A Tough Question and a Rejected Answer #
Jordy mentioned in his column that he would have liked to elaborate on his answer to that question. He wanted to give a strong, firm response with well-founded arguments about its potential as a store of value and its current market price. But to the average viewer, it seemed he didn’t even get the chance; he was cut off mid-sentence so Lagarde could pat herself on the back for her inflation policy.
Normally, I have a lot of respect for Lagarde. I appreciate her monetary policy and think she fulfills her role well as a ‘classic central bank economist.’ But I didn’t find this a fair and respectful discussion.
Therefore, Jordy, let me give you a leg up. Alongside your own arguments about the value of bitcoin, I’m offering a carefully worked-out argument about the real value of bitcoin – one you might not have considered.
The Value of Bitcoin Has Nothing to Do With Ideology #
‘What is the value of bitcoin?’ isn’t exactly a question you can answer off the cuff. You can’t just say ‘€75,000’ and expect Lagarde to give you a thumbs-up and thank you kindly. She wants to know the underlying value, even though she herself assumes it doesn’t exist.
Many people would then start an ideological story. That bitcoin has value because it’s decentralized money, available to everyone, and censorship-resistant. That the currency bypasses the unreliable banking system and sidesteps the inflation-sensitive monetary policies of central banks.
Others point to its value as a store of value. There are only 21 million bitcoins. So if more euros are printed, bitcoin becomes relatively more valuable. Hardcore bitcoiners therefore believe the value of bitcoin is infinitely large – it can only go up.
Then there’s a group that simply says: ‘look for yourself.’ They point to the numbers – bitcoin is larger than Facebook, with a total value of €1.5 trillion. As if that would rectify everything.
Personally, I think – why make it so complicated for yourself? This way, the crypto industry will never be taken seriously. Many of these arguments seem to fail when asked: ‘why bitcoin?’ There are plenty of other digital coins on the market. Many memecoins also have a limited supply and can be used as a means of payment and store of value.
If those memecoins eventually go to zero, then you hear those bitcoiners say: ‘see, those shitcoins are pure speculation – they have no underlying value.’ As if their own bitcoins are so much better. You can say what you want, but bitcoin remains a digital ‘invented’ coin that wasn’t taken very seriously in its early years.
The Real Underlying Value of Bitcoin #
Having underlying value seems to matter a lot for the professionalism of an asset. People want to see collateral, otherwise they don’t trust it. Many issuers of currencies use other assets to back their own. Commonly used products are precious metals, government bonds, and other debt instruments.
Today, however, this system has become much less relevant. Central banks can freely print money, and we have President Richard Nixon to thank for that when he abolished the ‘gold standard’ in 1971. But that’s a topic for another time.
Many institutions therefore use government bonds, gold, etc. But what is the ‘collateral’ of bitcoin? Is there another asset that gives bitcoin value? Yes, there is. But it’s not what you think. Here it comes. It’s energy. Energy in the form of electricity. Bitcoin is not just a digital currency; it’s digitized electricity.
What do I mean by that? Well, bitcoin miners create new coins every day, and they need a lot of electricity for that. In the early days of bitcoin, when you could still mine with your laptop, this was negligible. But nowadays, we’re talking about gigantic data centers that let countless computers calculate all day.
A Calculation for Bitcoin’s Value #
The entire industry is estimated to consume 160 terawatt-hours per year. And after the last halving, about 164,250 bitcoins (450 per day x 365) are added per year. This means that one bitcoin is equivalent to about one gigawatt-hour.
That electricity could have been generated with gas, geothermal, hydropower, but that doesn’t make any difference. For one bitcoin, one gigawatt-hour was simply needed, and that is now gone – digitized in the form of a currency. As much as we’d like it, we’ll never get that gigawatt-hour of computing power back. And that gives bitcoin quite a bit of collateral, because electricity is very valuable today.
A gigawatt-hour is equal to a thousand megawatt-hours, and a million kilowatt-hours. The average price of electricity worldwide is $0.170 per kilowatt-hour. That would mean that one bitcoin is worth $170,000 in energy. Pretty good news for the average bitcoin investor.
If you’re thinking now – ‘great, then I got my bitcoin at a hefty discount’ – you should read on. Of course, it’s not that simple. In practice, it’s much more nuanced. Those gigawatt-hours were probably consumed in countries where the energy price is much lower. In Libya, for example, where a lot is (illegally) mined, the electricity price is only $0.007. That would give bitcoin a value of $7,000.
Still, the point stands. One bitcoin is, and remains, equal to one gigawatt-hour, wherever you are in the world. It’s a comforting feeling that bitcoin at least seems to have a real minimum value. And the beautiful thing is – electricity is in many ways the same as gold. It’s a global commodity, usable by everyone, and you can exchange it with anyone. No wonder, then, that electricity is often called ‘the new gold.’
So, Jordy, if you ever get questioned again by the President of the European Central Bank (I don’t think the chances are high), you can answer that bitcoin is backed by gold. A new kind of gold, with which people charge their mobile phones and run their cars.
‘Bitcoin worthless?’ Then Lagarde should reconsider her own policy. Bitcoin at least has collateral – she can’t exactly say that about her own euros. A whole gigawatt-hour! If she doesn’t find that relevant, then I’d advise her to take a serious look at whether her own solar panels don’t belong in the trash. Thanks for reading, and until the next column!