BTC is a currency based on a concept. It is also property like land, stocks and gold are property. It can be sold for dollars or purchased for dollars (or any other currency) on an open market. It has associated a futures market so it can be shorted. It exists in banks and people can lend and borrow against it and get paid interest. It is highly volatile. It is not a tulip. It is not worthless.
Gold has value and it holds its value because of its scarcity. Scarcity means you have to expend a lot of energy and capex to mine it, so there is intrinsic value, the cost of mining. It also hedges inflation since governments can’t debase it like dollars or bonds. It stands apart. Land is somewhat like that except land is under government control. Land has an advantage in that they aren’t making anymore of it so it too has a natural scarcity and therefore a natural means to store wealth.
It presently costs about $7500 in raw input to mine a BTC. The cost is a function of a miner’s efficiency and equipment and cost of electricity. So a single BTC is worth $7500 as a base cost, not nothing. It can go to nothing same as land can go to nothing, but it can also remain as worth something. BTC has a scheduled decline it what you get paid to mine one. This sets up a scheduled tension in supply and demand. In the beginning there weren’t many coins mined so it was fairly trivial to mine one. You could do it using a Raspberry Pi. Likewise the relative ease of mining made the value of a coin low so you could buy a cup of coffee for 10 BTC. As coins were mined the difficulty of mining rose since there are a total of 21M coins that will ever exist, so as coins get mined the cost to make more coins goes up. The cost however is not linear. It’s a power function. Every so often (about every 4 years) the amount a miner gets paid to mine a coin is cut in half. 1 goes to 1/2 goes to 1/4 etc so the cost of mining and therefore the base cost of a coin goes up. This occurrence is called the halvening. So theoretically in a binary BTC universe at the if it suddenly costs twice as much to mine a coin, the price on Tue may be $7500 and on Wed may be $15,000, because of the excess cost of production. It’s not a 2 x correlation but it’s a definite upward pressure on value. Value is set by trading in a market and just like gold or oil if the price gets cheap miners turn off their mining rigs, supply dwindles and demand over takes forcing price to rise.
You might say yea yea but who needs a BTC? I need gas to live my life but not BTC! Today there is severe financial manipulation and distortion in the markets. Interest rates are at a 5000 year low, a market peak (see what I did there?). This level of sustained government forced low interest coordinated around the world has never happened in recorded time. It defines an economic inflection point. Inflection points are when the local second derivative of a growth curve changes sign from + to – or – to +, so inflection points have a precise mathematical definition. If the inflection goes from + to – it means the failure of the growth curve is 100% assured unless another inflection occurs. The US stock market represents such a growth curve. The Japanese stock market also represents a growth curve. The Japanese market reached an inflection point in 1990 where growth went from + to – and despite the Japanese central bank’s wildest machinations to flip the inflection from +/- to -/+ they have failed. This is how important an inflection point is to an economy. Failure does not necessarily happen all at once. The Titanic took a long damn time to go down, a long time for people to get picked off one by one instead of a mass instant extermination.
Japanese debt is running 250% of GDP. Normally central banks reduce rates to the point such that relative deflation is replaced by inflation.
Inflation monetizes the government’s debt. You pay your debt in cheaper and cheaper dollars. Deflation does the opposite. You pay your debt in dearer and dearer dollars. Central banks manage this dearer and dearer conundrum by printing dollars. By increasing the money supply the value of each buck is debased. Why would the FED want 2% inflation and what does that mean to you? The government is 100 trillion shy in funding it’s liabilities so it would love 5% inflation or 10% inflation to inflate away it’s debt. Then it can pay you your SS check in dollars that are worth a dime. The problem of course is a loaf of bread worth $1 in today’s terms is worth $10 in “dime dollar” terms. The FED by it’s very policy of a 2% inflation rate is assuring your 1M nest egg will only be worth 500K in 50 years but the real cost of living will not be reduced.
So what’s this got to do with BTC? BTC’s value is based on the cost of mining, the same as gold. As such it’s price is not amenable to inflation. You can’t print BTC and there are 21M that will ever exist. Every time there is a halvening the base price of BTC has an upward bias based on it’s scarcity and cost of production, same as gold. Gold has been the metal because of its scarcity and cost of mining that has topped the scale in what is called “hardness”. Hardness means as fiat currencies fluctuate in value according to government manipulation (money printing) gold is set by scarcity and the cost of getting it out of the ground. If a $1 falls in half in an attempt to monetize the debt a bit of gold rises to 2$ based on it’s scarcity the fact it doesn’t rust and universality of acceptance as a store of value. After the next halvening in May 2020, BTC will attain a similar hardness to gold when viewed in terms of the intrinsic cost of energy used to produce it. In 2024 it’s hardness will surpass gold and the pressure on it’s price will further accelerate. If central bank’s game is to monetize debt owning something resistant to debasing is like getting paid a coupon on a bond. That will be the value of BTC and why it won’t go to zero. It won’t be amenable to inflation or government debasement. It can be stored on an encrypted thumb drive where as a kilo gold bar weighs 2.2 lbs and a 400 oz gold bar weighs 27 lbs. Try boarding a plane with a kilo or 400 oz gold bar. Try getting out of the airport without getting robbed. Try living in a country where the central bank is monetizing the debt without getting robbed. D o you think Venezuelans might have an opinion? Discuss among yourselves.