Bitcoin at 10 – Money in a World of Tokens

On this very day ten years ago – January 3, 2009 –, the Bitcoin network went live. Bitcoin’s first block, the Genesis Block, includes a short message as a reminder that the world was, at the time, finding itself in the midst of the biggest financial crisis since the 1920s. The message refers to the headline of the British newspaper “The Times” of that day:

“Chancellor on Brink of Second Bailout for Banks”

And, in fact, at about the same time as the Bitcoin whitepaper was published (October 31, 2008), the failure of Lehman Brothers as an issuer and underwriter of mortgage-backed securities initiated the largest insolvency proceedings in U.S. history and, subsequently, led to a major economic and political crisis of global dimensions.

Bitcoin’s inventor Satoshi Nakamoto is said to have picked that newspaper headline not only to create an immutable time reference for the genesis of the network but also to make a political statement (his own writings support the claim). As announced a few months prior to this event in the whitepaper, Bitcoin was intended to become a peer-to-peer electronic cash system, thereby eliminating the intermediating middleman – probably the prime source of fragility in today’s financial industry.

Cryptocurrency as money

Now, given the stated goal, the question is essentially whether Bitcoin and its numerous variants have since become what is commonly considered to be sound money. A recent analysis of Bitcoin as money can be found at Alt-M. In his short essay, the economist Larry White summarizes the state of the cryptocurrency as follows:

“Bitcoin should not be regarded as the last word in private money, but should be appreciated as a remarkable technological breakthrough. […] The inbuilt volatility of its purchasing power makes it unlikely to displace the incumbent fiat currencies barring an inflationary explosion.”

It is perhaps unsurprisingly, then, that people have begun to look into building stable coins based on blockchain technology. While there are already various – technically and legally – different types of stable coins, they often make a reference to a fiat currency, such as the US dollar or Swiss franc. In other words, they replicate their strengths and weaknesses: While most fiat currencies are exceptionally well-suited as transaction media, many of them are highly ineffective when it comes to storing value over time.

This is a real issue for poor people with very few or no options to diversify their savings.

Money and politics

The control over money is a powerful tool. That is why money and politics tend to go hand in hand. For slightly more than one hundred years, money has come into existence as fiat, i.e., unbacked currency created by an authority – typically the central bank of a country. Fiat currency might be managed diligently in the interest of the “greater good” (whatever that is supposed to mean). However, the past has been anything but a good track record of sound monetary policy. Therefore, it must have been inevitable for F.A. Hayek to refer to the history of money as an “all too monotonous and depressing […] story [of inflation]” (1976, p. 33-34).

Tokenization may be the answer!

Were it not for the efficiency of money as a medium of exchange, our economic system would revert to a simple barter and gift economy. However, modern monetary systems have become purely instrumental, entirely reduced to a means of creating money out of thin air. We can then ask ourselves: Why not rather link money to economic output than political influence, to real wealth instead of decreed purchasing power?

The implementation of this idea may be facilitated by tokenization:

Bitcoin and Ethereum involve native tokens. Such tokens are digital assets without any connection to real-world assets. Now, by means of tokenization, you can basically link tokens tradeable on the blockchain to any asset, in particular shares and bonds; such tokens that leverage the Bitcoin or Ethereum network as underlying platform are called asset-backed tokens.

Tradeability, however, is only the first step. The true nature of a good being money, as the economist Fritz Machlup put it, lies in its moneyness. “Moneyness” can best be defined as something, inter alia, durableportable, fungible, and scarce. Furthermore, where a market exists, liquid trading of such good becomes viable.

Also, moneyness is a spectrum – some goods are better suited than others to be widely used as a medium of exchange. In other words, while some goods exhibit high degrees of moneyness – historically, this has been the case for precious metals such as gold and silver –, others only have modest levels of moneyness – services and bicycles are in a rather difficult position to gain widespread acceptance as a means of payment.

Tokenization of wealth

“But why use money to make transactions when computers offer the possibility to exchange goods and services for wealth?”

In his book “The End of Alchemy”, published in 2016, Mervyn King describes the transformation of the world of finance, the banking system, and money. The former Governor of the Bank of England, including during the period of the financial crisis, seems to envisage wealth being used as some sort of transaction medium.

What did he possibly mean by that?

As Swiss companies have recently begun to tokenize their stocks and bonds using blockchain technology, we will likely see in the future the emergence of freely tradeable and thus highly liquid stocks and bonds outside of traditional organized markets, such as a regulated stock exchange. To be fair: in most instances, such private offerings will unlikely succeed as a new means of payment, and, in many cases, this is not their intention anyway.

However, tokenization as a means to facilitate trade of shares and bonds on the blockchain, allows for a very simple solution that may eventually lead to a private means of payment.


A company – let us call it “Private Money Ltd.” – that seeks to reflect the value creation in a given economy (e.g., the Swiss Gross Domestic Product, GDP) can purchase assets of the said economy, such as stocks, commodities, real estate, and company loans. By selecting good “proxy assets” for the underlying economy, Private Money Ltd. may effectively emulate the total economic output produced within a given country’s borders on its balance sheet. Now, holding shares of Private Money Ltd. would allow people to participate in the total wealth creation of a country as if they were purchasing each asset of the company’s balance sheet directly.

The company’s value would ideally grow or contract at the same speed as the economy’s GDP, thereby more or less keeping share price and production growth (or contraction) in balance. Keeping money stock and production growth (or slow-down) in balance is essentially the policy objective of central banks. However, a private company tokenizing its shares would be less prone to special public and private interests, yet still be accountable to their shareholders.

As mentioned above, since such shares would be tokenized, they would become easily accessible to everyone interested. The use of blockchain technology would allow for peer-to-peer exchange (P2P) as if the shares were regular banknotes and coins issued by a nation state. Given sufficient demand for the shares of Private Money Ltd., people could eventually start using them as a private means of exchange.

New forms of money on the horizon

Such a development may seem contrary to Bitcoin’s claim to be a P2P electronic cash system. Indeed, tokenization necessitates a certain degree of centralization. However, cryptocurrencies have, compared to a tokenized balance sheet, one great disadvantage, as they are not backed by anything other than computing power and people’s confidence in its hard coded safeguards. In other words, people typically have only poor expectations as regards Bitcoin’s “fair value”, resulting in a highly volatile price and purchasing power, respectively. A well-diversified asset portfolio is likely superior in terms of stabilizing market expectations in the long run.

Having said that, Bitcoin eventually evolving into money and asset-backed tokens being used as such need not be mutually exclusive.

No tokenization without Bitcoin!

In any case, there would be no tokenization without Bitcoin and Ethereum, no asset-backed tokens without their native predecessors. It is only thanks to Bitcoin’s ingenious monetary network design and Ethereum’s progress in developing sophisticated smart contract-systems that we are now able to talk about the likely emergence of new forms of money.

This is not the only reason (see, e.g., social scalability; censorship resistance and free speech; access to finance for the unbanked), but it is an important one for us to celebrate Bitcoin’s “genesis block” today.


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Bitcoin’s Value Is Purely Subjective

While one Bitcoin token is currently approaching 5’000 US$, many people wonder why Bitcoin has «value» in the first place.

The first question that arises: Might those people actually mean «price» instead of «value»? Well, the concepts of price and value are entirely different. They cannot be the same logically. A person only sells, or buys, a good if the price that she can realize is higher, or lower, than her personal valuation of that specific good. Therefore, any identity of price and value would bring the economy to a halt.

Secondly and more importantly, the phrasing of the initial question is misled. Value is not something intrinsic that is part of an object. This becomes obvious when taking a closer look at Bitcoin. A Bitcoin token consists of nothing but digital data that are stored in an electronic wallet as well as in the distributed network. (That set of digital data confers on its holder the power of control over Bitcoin tokens.)

«Value is not something intrinsic that is part of an object.»

Think of bananas: They are beyond doubt highly nutritious. Most people enjoy eating them. However, imagine that humans couldn’t digest bananas. While bananas would still be the same physically, we wouldn’t crave them at all though. There is nothing intrinsic about the value of bananas. Yes, they make sense in our case but they may as well not!

Since value is not an «ontological» property of an object, value must be subjective (look up Austrian Economics). Value thus lies in the eye of the beholder. This has major implications: When I value an object dearly, this doesn’t mean that others do as well (or to the same extent). They may even assign a negative value to that object; hence they hate it. Therefore, interpersonal utility comparisons, widely spread in politics and academia nowadays, are literally of no value. This, in turn, means that the positive effects of policies must be limited. Politics, however, is a different topic I don’t want to delve into here.

So, we have to ask ourselves what those «properties» are that make Bitcoin tokens valuable to its users. This question cannot be answered conclusively (for the reasons mentioned above). At least let’s try a conceptual approach:

Libertarians probably use the network because they prefer «stateless» cryptocurrencies to legal tender and bank-issued money. They don’t like money that can be created at will and out of thin air.

Techies and academics may engage in it because the underlying distributed ledger technology has become a new interesting research area. It allows for «trustless systems», be it payment systems or «decentralized autonomous organizations» (DAOs).

Criminals may value the Bitcoin network’s capabilities to disguise their transactions. They presumably like that they are not forced to go through the banking system anymore.

Most people (e.g., venture capitalists) probably hold Bitcoins because they can either take part in «initial coin offerings» (ICOs) or they speculate for a rise in prices. This can also be described as Bitcoin’s «bubble economy».

Importantly, at the end of the day, the different categories of stakeholders in the Bitcoin network get something in return for their money and time invested in the venture. Obviously, the whole thing is not risk-free. In their eyes and minds, however, Bitcoins are sufficiently valuable to go with the risks associated with the cryptocurrency. To them, there exists a myriad of different reasons as laid out above though.

«In their eyes and minds, however, Bitcoins are valuable, for different reasons though.»

Some people argue that Bitcoin derives its «value» from the electricity put to work within the mining procedure. This, however, sounds like a slightly adapted version of the mistaken «labor theory of value» in classical and Marxist economics. Certainly, electricity is a prerequisite for the decentralized proof of work-approach, which eventually makes the Bitcoin network secure («electricity-turned-trust»). However, the amount of electricity, while undoubtedly contributing to a positive subjective valuation of users, is not the value of the network itself. In fact, current electricity costs are nowhere near the «value», or price, of a Bitcoin token. For the same reason neither does Bitcoin’s value stem from its «trustless» database (the «blockchain») nor from the algorithmic scarcity (∼21 million), which is embedded in the Bitcoin protocol. These features of the Bitcoin network are «only» reasons why people use the network.

Take gold as an example: Its useful properties (relatively scarce, malleable, durable etc.) have contributed to its use as money for thousands of years. However, people had to discover gold to be more beneficial than earlier kinds of media of exchange in the first place. «Discovering» value is a purely mental, or psychological, process. Once enough people had made this astonishing discovery, network effects unfolded and made gold even more attractive as a means of payment. Demand and supply rose… market prices went up, too.

«Discovering value is a purely mental, or psychological, process.»

So, next time when someone asks you whether it is the artificial scarcity, the electricity injected into the network, the «network effects», or even the pseudonymity of transactions, you know that these useful network features only act as potential reasons why people may assign some value to Bitcoin. However, those reasons are not the value of Bitcoin. Never! Valuation is always the subjective result of our mind.

Soaring market prices follow from there…