Menu IconA vertical stack of three evenly spaced horizontal lines. There’s one big unanswered question buy domain names with bitcoin dogs Bitcoin: Why does it have any value?
Underpinning the value of gold is that if all else fails you can use it to make pretty things. Placing a ceiling on the value of gold is mining technology, and the prospect that if its price gets out of whack for long on the upside a great deal more of it will be created. Placing a ceiling on the value of the dollar is the Federal Reserve’s role as actual dollar source, and its commitment not to allow deflation to happen. If there is nothing underpinning Bitcoin, it could easily collapse to zero.
It would also seemingly negate the technological innovation that makes Bitcoin something special. We asked Chris Dixon for his take on why Bitcoin has value. Dixon is an investor in Bitcoin, and one of its most ardent supporters. He wrote an eloquent blog post explaining why he’s excited about it. If not for political reasons, why am I interested in Bitcoin? Like a lot of people, I was disturbed by the aftermath of the 2008 financial crisis. I thought the government did what it had to do at the peak of the crisis but missed an important opportunity afterwards to reform the financial system.
I started getting interested in Bitcoin about two years ago. At some point, I had an “aha! Bitcoin was best understood as a new software protocol through which you could rebuild the payments industry in ways that are better and cheaper. Nowhere in his post, however, did he address why Bitcoin has value. Without a reason for it to have value, it could lead to the same sort of disastrous outcome we saw with the financial crisis. I emailed Dixon and asked, “One criticism of Bitcoin, which Paul Krugman made, is that there is nothing in it that stores value.
What do you say to that? His response: “I think domain names are a good analogy. If someone proposed buying them in 1993, you could imagine lots of counter argument’s similar to Professor Krugman’s. When you buy Bitcoin’s you are reserving a slot on the Internet’s digital ledger.
I didn’t totally get his analogy, so I asked for a follow up. The best way to understand the value of Bitcoin is to think of other core internet resources that have a limited supply. There are markets for domain names and IP addresses. The prices tend to correlate to how useful people find those resources. Long term, if Bitcoin gains widespread adoption, I’d expect the Bitcoin price to correlate to how useful people think sending payments, property and contracts anywhere in the world instantly and reliably is. Personally I think this could be more useful than wearing jewelry, but maybe that’s just me.
I still didn’t fully get it, so we emailed him one more time, and he graciously wrote back. Keep in mind I was emailing on New Year’s Eve, so he was quite generous with his time. Happy to talk about it more. I might need to write a blog post to fully explain it.