Don’t let bitcoin be defined by its price
Considering price as Bitcoin’s best measure of value is just as nonsensical as valuing fiat according to the current exchange rate
Artwork by Crystal Le
Fiat currencies are evaluated on a variety of factors from usability and integrity to interest rates and demand; ultimately, bitcoin should be assessed on a wider set of criteria.
The price of bitcoin has long been a media obsession.
Every industry milestone appears defined solely by the price of bitcoin the following day: “Bitcoin price falls 15% following launch of ETFs,” crowed the Financial Times, following the US Securities and Exchange Commission’s bitcoin ETF approval in January.
This is slightly unfair.
Between July and November last year, the euro fell 7% against the US dollar, and no one questioned the validity of the former as a means of exchange. This is because the euro — even at a 7% depreciated value — remains a useful means of payment; it is universally accepted and requires no training, knowledge or equipment to use.
This is not (yet) the case with bitcoin, but considering “price” as its only measure of value is the same as valuing traditional currencies (only) according to the current exchange rate.
The latter certainly contains valuable information about the opportunity cost of holding other currencies, as well as the monetary and fiscal policies associated with the currency in question. However, there are plenty of other indicators that can define a currency’s value, including interest rates and prevailing inflation. It all depends on one’s perspective.
For instance, if you are a validator, Bitcoin’s value is tied up in gas fees — the commission independent validators receive for maintaining the integrity of the network. Last year’s gas fees for bitcoin reached a historical high of $40, reflecting unprecedented demand and transaction volumes.
Read more from our opinion section: If you still think bitcoin is scarce, you’re suffering from fiat brain
For corporations considering using bitcoin as a medium of exchange, the idea of value is associated with the levels of security associated with the currency. When examining bitcoin’s value then, for instance, one could look at the open letter penned by a member of the US Space Force on the possibility of using Bitcoin’s proof-of-work protocol in underpinning the country’s defense systems.
The security afforded by a currency is also partly measured in the cost of transacting in the same. With bitcoin, that would mean considering gas fees, which represent the cost of independently validating and protecting your transaction. While the correlation is not necessarily entirely linear, higher gas fees indicate greater levels of scrutiny and vigilance associated with a decentralized currency, in addition to demand.
The advent of Bitcoin staking will create yet another measure of Bitcoin’s value; the chance to earn interest (or a return) from the bitcoin tokens under management. While blockchains such as Tezos, Cosmos, Solana, Cardano and, most famously, Ethereum have traditionally enabled dormant tokens to be put to work (verifying transactions and the status of tokens, according to the corresponding smart contracts), this has never previously been possible with Bitcoin.
Bitcoin layer-2 technology will make it possible for unused bitcoin to be staked; in effect, put to work, just as fiat currencies are within a savings account. The more useful people find bitcoin (i.e. the more transactions in terms of volume and frequency), the more confidence people have in the currency. And the more uses they find for Bitcoin-denominated smart contracts, the higher the Bitcoin interest rate will climb. The opposite is also true — a plunge in confidence or sudden availability of a more convenient, safer, cheaper alternative will lead to a reduction in the Bitcoin interest rate.
All of the above represents different measures of Bitcoin’s value beyond its price on a given day, in exactly the same way that fiat currencies are evaluated according to different perspectives and uses.
Ultimately, the true test of any currency is its usefulness; the ease with which goods can be exchanged using it. Bitcoin is making steps towards becoming easier to use, despite — it must be added — unprecedented levels of hostility from legacy actors, including regulators and central banks. All this for a currency that no one is imposing on anyone else, requires no disclosure of personal information to third parties, and is cheaper and more accessible than most fiat-based transactions (particularly those cross- border).
To paraphrase one of traditional finance’s most enduring slogans — Mastercard’s, no less — for all these reasons, the true value of Bitcoin is “priceless.”
Get the news in your inbox. Explore Blockworks newsletters:
- Blockworks Daily: Unpacking crypto and the markets.
- Empire: Crypto news and analysis to start your day.
- Forward Guidance: The intersection of crypto, macro and policy.
- 0xResearch: Alpha directly in your inbox.
- Lightspeed: All things Solana.
- The Drop: Apps, games, memes and more.
- Supply Shock: Bitcoin, bitcoin, bitcoin.
