The gradual adoption of Bitcoin has sparked a lot of discussion about its usefulness over the past few years. Even today, people are wondering what the real value of this system is. Some see Bitcoin as useless and useless, while others see it as a monetary revolution.
In this two-part article, we discuss why Bitcoin is not useless. In this first chapter, we look at what Bitcoin is for. We also discuss the fact that judging the usefulness of an object is a subjective reflection based on the various theories of value.
Finally, in The second chapter, we will present concrete examples of how Bitcoin is used in the real world. Beyond speculation, we will question its marginal usefulness for certain groups of individuals.
➤ Discover Chapter 2 of “Bitcoin is not useless”.
What is Bitcoin for?
As its creator, Satoshi Nakamoto, indicates, Bitcoin is a peer-to-peer electronic cash system. It is a payment device that meets the need to carry out transactions without using the services of a trusted third party.
The initial problem that the Bitcoin protocol answers is thus double spending. In a peer-to-peer system, where there is no entity with more power than the others, you need to be able to ensure that no one cheats by using the same currency unit twice. Without this, money is no longer rare, and it can no longer play its role of storing value.
➤ Learn more about the characteristics of good money.
Indeed, when you give a coin to another person, by definition, you cannot spend it again. However, on the Internet, we only transmit information. However, the information is always duplicable. For example, if I am giving you information that the weather will be nice tomorrow, I have duplicated the information. You now have the knowledge of it, but I also still have the knowledge of it. In a centralized electronic payment system, this duplication of money is prevented by the central entity that determines who owns what. But since Bitcoin is a distributed network, mechanisms had to be found to prevent double spending.
All the mechanisms of the Bitcoin protocol were initially designed to respond to this problem in order to be able to implement a truly peer-to-peer electronic cash system. The distributed timestamp server, colloquially referred to as a “blockchain,” only allows everyone to ensure that no one has spent the same coin twice. Proof of work, on the other hand, makes it possible to protect this blockchain, while ensuring the establishment of a principle of consensus between each user.
➤ Learn more about how Proof-of-Work works.
What is Bitcoin for? It is used to carry out transactions.
Why use it instead of the traditional banking system? Because it is not based on trust, which implies multiple advantages for the user compared to the traditional system: incensurability, elusiveness, finite monetary offer, confidentiality, probabilistic irreversibility, probabilistic irreversibility, lower fees...
Basically, there's no point in Bitcoin anymore. It is a protocol that allows peer-to-peer payments to be made on the internet, without the need for trust. Now, knowing what Bitcoin is for doesn't necessarily answer the original problem in this article.
Does this function generate some form of utility? Is Bitcoin useful?
Judging the usefulness of an object is a subjective reflection
The claim that Bitcoin is useless implies that this system is devoid of any use for everyone. To confirm this argument, it would therefore be necessary to be able to know the judgment of each individual on Bitcoin. However, usefulness is a concept that can only come from a subjective judgment. This individual assessment is intrinsically linked to the estimation of the value of a property.
In economic analysis, value theory is the study of how individuals assess the usefulness of each object, whether it is a good or a service. It is often accepted that estimating the usefulness and value of an object is the result of individual reflection. However, there are differences of opinion about how this subjective thinking is used to assess value and usefulness.
According to the classical economist Adam Smith, known for his free trade theory, the value of a good results from the cost of the factors of production used to manufacture it. In other words, according to Smith, a good has an objective value that derives from the amount of work required to produce it. It's the idea of work value. This theory was later taken up and developed by the economist David Ricardo. However, this idea is open to criticism since it is based on a strict distinction between what they call “exchange value” and “use value”.
Karl Marx also supported the idea that the value of a good was derived from the amount of work needed to produce it. However, he added to this reflection that value was affected by the social relationships that existed between individuals in production. According to him, the objective value of a property was therefore affected by human relationships within society.
On the contrary, the Austrian school of economics supports the idea that the value and usefulness of a good are entirely subjective. According to thinkers from this school, such as Friedrich Hayek or Ludwig von Mises, the usefulness of a good depends solely on the individual and his personal judgment. According to them, value is based on feelings that cannot be compared between individuals. This theory is in contrast to that of the classical school, which maintains that the value of a good is based on the quantity of labor required to produce it. According to Austrian thinking, the assessment of the value of a good should consider the subjective preferences of the individual as well as the subjective costs that the individual is prepared to bear in order to obtain this good. This subjective approach to the valuation of value is also linked to Milton Friedman's theory of marginal utility, which emphasizes the importance of the additional satisfaction that the individual derives from an acquired asset.
In short, for the Austrian school, judging the usefulness of an object is a subjective reflection that emanates from each individual and depends on many complex factors. It varies for each person depending on the object, its environment, the moment, its rarity or the availability of substitutes.
To illustrate this theory of the value and utility of an object, we can use the example that I already mentioned in my article” 8 preconceived ideas about Bitcoin ”. If an individual is offered to pay for a bottle of water at the price of 10 bitcoins in a usual environment, he will surely refuse the offer. In this environment, he would feel that this price is far too high for a simple bottle of water. Now, let's imagine that he is lost in a desert, thirsty, and far from any water source. If a shepherd crossed his path and offered him a bottle of water in exchange for 10 bitcoins, the individual would certainly have accepted. Indeed, in this environment, he would have no substitute for the bottle of water offered by the shepherd, and his need would be absolutely vital.
This example shows that when one changes only one of the many complex factors that lead to the estimation of the utility and value of an object, the same individual would not derive the same satisfaction from the object. In my example, the changed factor is the availability of substitutes. This shows how the estimation of use value and exchange value are in fact the sole basis of value.
I did not invent this example. This is an exaggeration of the example mentioned by the French economist and philosopher Étienne Bonnot de Condillac in his book Commerce and Government Considered Relative to Each Other, published in 1776:
Something does not have value, because it costs, as is supposed; but it costs, because it has value. So I say that, even on the banks of a river, water has a value, but it is as small as possible, because it is infinitely superabundant to our needs. In an arid place, on the contrary, it has great value; and it is valued because of its remoteness and the difficulty of obtaining it. In such a case an altered traveller would give one hundred louis of a glass of water, and that glass of water is worth one hundred louis. Because the value is less in the thing than in the esteem we value it, and this esteem is relative to our need: it grows and falls, just as our need grows and decreases itself.
It is interesting to note that even in economic theories that advocate objective value, there is a certain amount of subjectivity used. For example, Smith's theory of the value derived from the amount of labor required to produce a good assumes that everyone agrees on what “work” is and how to measure it. Likewise, Marx's theory of the value arising from social relationships in production assumes that everyone agrees on what a “social relationship” is and how to evaluate it. In reality, these concepts are largely subjective and can vary considerably between individuals. This shows how difficult it is to determine objective usefulness for an object, as there is always subjectivity involved.
Like any other currency, bitcoin is just an asset. It naturally undergoes the same judgment specific to each person that represents its usefulness for an individual. Bitcoin may not be useful for you, maybe a bit more for your friend, and probably a lot more for me. This difference is explained by the subjectivity of our judgments on this object.
As we saw in the previous section, Bitcoin has some interesting characteristics when it comes to being used as a payment system. Bitcoins can be traded in an incensurable manner and they have a fixed monetary supply. Transactions on this system allow the user to enforce their fundamental right to privacy. Or else, bitcoins are elusive and offer the user strong private ownership of their currency. All of this is done on a peer-to-peer system, where each user has the same power as the others, and where the need for trust for a central entity is annihilated.
Obviously, if you don't feel the need as an individual to use a currency that has these characteristics, then you won't find any use for the Bitcoin system. However, as the example of Bonnot de Condillac demonstrates, your own judgment on Bitcoin can quickly change depending on your needs, and the availability of substitutes. It is therefore possible that in the future, you will suddenly find a use for Bitcoin.
Above all, this estimate is exclusively individual. You cannot apply it to all individuals since it is impossible to estimate the many complex and subjective factors of eight billion human beings. You cannot know their individual needs, the availability of substitutes in their environment, or the marginal utility that the object being judged would bring to them.
The statement “Bitcoin is useless”, which implies, by extension, that Bitcoin is devoid of value, is then intrinsically false since it is an invalid generalization: “I am an individual and I do not find any use in Bitcoin. So not all individuals find Bitcoin useful.” However, this thinking is a fallacy. It carries with it the appearance of the obvious, but in reality, it is not valid in the sense of logic.
Conclusion
Bitcoin is a peer-to-peer electronic cash system. It is thus used to carry out transactions, without the need to trust a central entity. The major problem it solves is that of double spending on a distributed computer monetary system.
The value and usefulness of Bitcoin are determined subjectively by each individual, based on their personal judgment and numerous complex factors.
That way I could put an end to this demystification. Indeed, the statement “Bitcoin is useless” stems from fallacious reasoning and remains an invalid generalization. However, it may be interesting to observe the marginal utility that some groups of individuals have attributed to Bitcoin.
So, in Chapter 2 of this reflection, we'll discuss the different uses of Bitcoin in the real world. We will not talk about Strasbourg or Brussels, but rather about Argentina, El Salvador, Venezuela, Afghanistan or even Lebanon. We will study all these uses of Bitcoin, from the tool of freedom to the safe haven asset, including the substitute for state currencies.
➤ Discover Chapter 2 of “Bitcoin is not useless”.
