Travis Patron is a digital money researcher and author of The Bitcoin Revolution: An Internet of Money. Here he explains why bitcoin may be an intrinsically valuable form of money because it is regulated through time-bound algorithms.
One of the most common criticisms of bitcoin is it is not backed by anything, nor is it intrinsically valuable. However, pundits have long been arguing that the US dollar has no intrinsic value and neither does gold.
The utter misconception of this economic principle as it relates to bitcoin is too large, and too important to ignore. Everything from Dutch tulips in the 17th century to stacks of paper USD notes have had some degree of intrinsic value. What we need to debate is the quality of intrinsic value attributed to each.
What cryptocurrency investors and enthusiasts must understand is that bitcoin is not only a financial asset with considerable intrinsic value, but it is regulated by a universal constant unlike any man-made money system that has come before it – time itself.
This universal construct allows us to plot the supply schedule of bitcoin, meaning it is highly predictable while also being uncheatable through the manipulation found in traditional monetary policies.
The argument goes that dollars are backed by the US government and the largest force of military might on the planet, but what is backing bitcoin? Even if programmable, digital money brings intrinsically valuable capabilities, how can we have faith in it if there is no core party overseeing its acceptance and adoption?
At the very root of what makes the bitcoin network tick is a regulatory algorithm determining that new blocks of bitcoin will be mined on average every 10 minutes. This 'uncheatable' maths which is intelligently constructed by system design, ensures that nothing can alter the predetermined issuance rate, nor the block size halving rate, of bitcoin.
Every 10 minutes, more bitcoin becomes available at a disinflationary rate. This mathematical guarantee formulated by a crude form of artificial intelligence is exactly what backs a system that boasts remarkable intrinsic value.
Friedman's k-percent rule
American economist, statistician and writer Milton Friedman once posed the idea of replacing central banking institutions with a computer capable of mechanically managing the supply of money.
He proposed a fixed monetary rule, called Friedman's k-percent rule, where money supply would be calculated by known macroeconomic and financial factors, targeting a specific level or range of inflation.
Under this rule, a central reserve bank would have no leeway as money supply increases could be determined by a computer and the market (and its citizens) could then anticipate all monetary policy decisions.
Will we ever see Friedman's computerized banking institution put into action? Considering the mining network is the closest thing to an authority within bitcoin, and mining will only get more specialized and thus centralized in the future, we may well already be on the path towards it.
An intelligent force
Bitcoin boasts the economic backing of a force magnitudes more intelligent and pervasive than the promise of men and military might: an uncheatable, highly predictable, chronological supply schedule enabled by Friedman’s k-percent rule.
Friedman predicted the rise of a computer capable of automatically adjusting the inflation rate of money, and this is precisely what we see in the case of bitcoin, as a regulatory algorithm intelligently adjusts the mining difficulty to make the issuance of blocks more or less easy depending on the demand for network hashing power.
The computerized function of the bitcoin system boasts intrinsic value which will continue to grow as more users join the fold and the network becomes more valuable for every participant.
No money system we have seen to date can claim it is chronologically regulated. The universal construct of time is the backing of the bitcoin digital economy.
Time image via Shutterstock