Why Bitcoin Has Value
Evaluating the evolving controversial digital currency.
pearing on my bill, I knew they were
fraudulent. This type of fraud is almost
impossible using bitcoins. No waiter
can pad bills, no proprietor can forge
new ones, and no one can delay a re-fund after both parties authenticate.
Not even credit cards, which indemnify you against fraud, offer this protection. Yet public transactions do not
mean Bitcoin infringes privacy. The
buyer/seller/amount tuple records an
account, not the identity of who owns
that account. When properly administered, the Bitcoin protocol guarantees
unauthorized parties cannot spend
from an account while ownership of
that account can remain private.
Fourth, and more practically, Bitcoin
has value because people accept it—the
same reason any form of money has value. “Money” is a medium of exchange,
a store of value, and a unit of account.
Bitcoin has all three properties. Money
can be wampum, shekels, yen, euros,
dollars, rubles or renminbi. Money can
be rock (gold), paper (notes), or scissors
as long as people take it in trade, keep
it as wealth, and measure it in prices.
Overstock.com became the first major
retailer to accept bitcoins as payments,
HOW CAN AN intangible cur- rency have tangible value? Bitcoin is a currency com- posed of nothing but bits. Unlike dollars or euros, bitcoinsa have no physical form, no government backing, and operate with
little more than technical regulation.
What value can a bitcoin have? If information can be copied or “wants to
be free,” and bitcoins are nothing but
information, why are they not free? As
Bitcoin enters popular consciousness,b
the digital economy offers this interesting question.
Consider four answers. First, Bit-
coin’s technical value lies in solving the
double spend problem. Each bitcoin
transaction uses public key cryptogra-
phy to create a permanent public re-
cord that registers a buyer, a seller, and
an amount as a tuple. This shows who
can and cannot spend a bitcoin. Even
someone who observes the transaction
a “Bitcoin” with a capital “B” refers to the net-
work protocol while lowercase “bitcoin” refers
to a unit of currency.
b Bitcoin entered the Oxford English Dictionary
in the summer of 2013.
cannot forge coin copies. Software keys
prevent anyone but the rightful owner
from spending them.
Second, the Bitcoin network enables
near frictionless commerce as transaction fees approach zero.
1 Credit card
companies and currency exchanges
can take a 2%–3% “rake” from the value
of each transaction so companies that
currently enjoy this rake might oppose
9 But any merchant competing
online and enjoying a 5% margin chafes
at losing half that margin to transaction
fees. These fees represent friction that
discourages trade and the movement of
money. Just think of your neighborhood
shop that refuses credit cards for small
transactions because of high fees. Reduce these fees, people will spend more
easily, and the economy will grow faster.
Third, Bitcoin is better than credit
cards at detecting fraud because each
transaction requires public authentication from buyers and sellers. Years
ago, I had the experience of a restaurant putting fraudulent charges on my
card. I dined there often, so I assumed
meal-sized charges were accurate. But
when I moved to a different city and
charges from this restaurant kept ap-