Bitcoin

Bitcoin as a Long-Term Investment Vehicle

Part V of The Value of Financial Products and Assets

Part V of The Value of Financial Products and Assets

Previous Parts

In Part II ( The Value of Long-term Savings Products and Assets) we outlined the instrumental and/or intrinsic value of assets typically held as long term investments. With that out of the way, let’s turn to bitcoin and see how it compares with the assets discussed in Part II to see if it shares any common themes or instrumental and/or intrinsic values with the long-term investment assets discussed.

Financial Securities

The first theme we identified is that assets such as stocks and bonds (financial securities) are used to raise money for specific ends, and they represent ownership in or a claim on an institution conducting activities and providing goods and services.

Bitcoin is clearly not a financial security since it does not serve a purpose that overlaps with what stocks and bonds do. Bitcoin is not used to raise capital for a specific purpose or end, is not a representation of ownership in a business that produces goods or services, and is not a claim of some sort on an institution conducting certain activities.

The only shared theme that bitcoin has with financial securities is that it is tradable on an exchange and has a ticker price that goes up or down based on trading activity. Nonetheless, the trading of financial securities is underpinned and driven, for the most part, by the fundamentals of the productive entities that the stocks and bonds represent a claim on. Whereas bitcoin's price in the market is not driven by fundamentals relating to an entity providing services or goods.

The point that Bitcoin is not a financial security is clear and straightforward. Almost everyone agrees that bitcoin does not function as a security, so no need to spend much time on this point.

The takeaway here is that bitcoin does not share the instrumental value that underlies financial securities such as stocks and bonds.

Real Estate

As for the value of real estate, we illustrated how land is valuable in and of itself and is used for productive and valuable activity that we rely on – hence why people value land and why real estate is an asset that people invest in.

Bitcoin is a digital asset, and it does not enable productive activity to take place on it. Even if we want to approach it as a form of digital property, one cannot effectively build scalable applications on the bitcoin blockchain. There are better “operating systems” and alternative blockchains out there that are used for building programs or applications that would perform much better than applications on bitcoin. Bitcoin, in any case, does not aim to serve that purpose – albeit, there are projects trying to build smart contracts and the sort on the bitcoin blockchain.

Nevertheless, bitcoin is perceived as an investment or digital asset, and the argument that is typically leveraged in defense of bitcoin as an asset in comparison to real estate is that the value of real estate is driven by supply and demand and by the scarcity of land. It is this scarcity that makes land a good investment. From that point of view, the argument concludes that bitcoin is scarce and is driven by supply and demand similar to real estate, hence why it is valuable – even more valuable than real estate.

The above point on bitcoin ignores all the instrumental and intrinsic value of real estate and takes the shallowest or surface level attributes of real estate to be the main features to why we ascribe value to it. Real estate, as illustrated in Part II, has value and significance that goes beyond scarcity and beyond supply and demand. In fact, the demand for real estate is at its root due to the instrumental and intrinsic value it provides. There would be no supply and demand dynamics if real estate did not provide the productive use case and value we seek from it.

Clearly, there is no link or similarity between real estate and bitcoin in terms of instrumental and intrinsic value. Real estate allows us the space and resources to use the land for a specific use case that we need and value, build stuff, and sustain our needs. Bitcoin, on the other hand, provides no such thing as it is an abstract, digital asset that also lacks any effective foundation to allow the building or development of scalable applications or digital property that is of any productive or valuable use.

Commodities

(Note that we are comparing bitcoin with base commodities, not precious metals, in this part. We'll compare and contrast the instrumental/intrinsic value of gold and bitcoin later in this series.)

The base commodities we discussed in Part II are used to sustain our lives and are vital natural resources. Moreover, the financial contracts and derivatives of those commodities (also sometimes considered financial securities) were established for risk management and as a tool to provide some form of stability or security for farmers and commodity producers and buyers.

While speculators actively trade on commodity markets, the root of this speculative market is based on, or rather, developed from the function that those markets aim to serve. In other words, the market around commodities and their derivatives stemmed with a purpose or intention to serve the producers and purchasers of commodities as previously mentioned. In other words, the speculation in this market developed as a byproduct, and as a means for market making and liquidity.

Bitcoin is in no way a natural resource and is not vital for our sustenance. This point is straightforward and doesn't require further discussion. Also, bitcoin isn’t a financial contract that serves a function or purpose that enables a more effective market as financial contracts such as futures and forwards do. Bitcoin isn’t tied to any contractual agreement between parties and isn't a derivative with an underlying asset.

The only shared theme here is that bitcoin has a ticker price similar to how commodities have, and is traded according to supply and demand dynamics. Yet, the supply and demand and trading price attributed to base commodities is rooted in our need and consumption of them, since they are resources that sustain our lives and serve our needs; the demand is based on the instrumental/intrinsic value that commodities provide us. Whereas bitcoin offers no such purpose and the demand for it is detached from any fulfillment of human need. The demand for bitcoin, unlike base commodities, is rooted in speculation of the potential price of bitcoin in the future, regardless of the instrumental/intrinsic value it provides or holds.

While bitcoin is considered a commodity, it clearly doesn't share any common themes with the base commodities that we touched on in Part II in terms of the instrumental and/or intrinsic value they provide and hold.

Beyond Traditional Financial Assets

As a long-term “savings technology”, the only shared theme with some of the assets we looked at is that bitcoin has a ticker and is traded on an exchange with its price either moving up or down. Other than that surface level attribute, bitcoin does not share any common themes in terms of instrumental/intrinsic value with the assets that typically constitute long-term savings. Using the term “savings technology” for bitcoin, even from a long-term savings perspective, still seems to be a misnomer.

Nevertheless, one can argue that bitcoin does not need to share attributes that are similar to traditional assets, and that it is a new, innovative asset that has its own unique instrumental and/or intrinsic value that we haven’t fully appreciated so far.

The two following parts will be dedicated to evaluating bitcoin as a standalone innovative and inventive asset class that is offering something completely new to us.