“… when I try to get them to explain to me why BitCoin is a reliable store of value, they always seem to come back with explanations about how it’s a terrific medium of exchange. Even if I buy this (which I don’t, entirely), it doesn’t solve my problem. And I haven’t been able to get my correspondents to recognize that these are different questions.”
Approaching bitcoin as a currency or store of value is focusing on a single and secondary application of the bitcoin network (analogous to analyzing a single feature built on top of the Internet, like email). The first application of the network which has gained broad adoption is payments, where it can be easily demonstrated that real money is being saved by harnessing the efficiency of the network. Since one must acquire bitcoin to use the bitcoin network, this has given bitcoin as a currency value as a secondary effect.
Krugman states that bitcoin does not act as a good store of value because it does not have some kind of inherent floor to its value. Looking at other examples, he implies, gold has decorative and commercial applications and fiat currencies have the backing of their respective sovereign entities. In contrast, bitcoin as a currency has no value unless people use the bitcoin network. If this lack of a clear floor is part of the strict economic definition of a “store of value,” Krugman may very well be correct that bitcoin is not one, but that does not mean the value is not real, nor does it mean that value is ephemeral.
We find the early days of the Internet to be an instructive example in demonstrating this long-term value creation through network efficiency. The Internet had a core innovation that made it valuable: The ability to disseminate data over a distributed network in a way that was significantly cheaper than the prior methods. Similarly, bitcoin has a core technological innovation: The ability to publicly verify ownership, instantly transfer that ownership and do so without the need for a trusted third party. Just as the Internet brought the cost of disseminating information down by an order of magnitude, bitcoin brings the cost of transferring ownership down by an order of magnitude.
Going back to Krugman’s acid test for store of value, there is no “floor” to the value of the bits traveling over the Internet, because people could stop using it at any time. However, the Internet will continue to be valuable so long as it is the most efficient mechanism for transferring data. Bitcoin’s value is the same: It will remain as long as it is the most efficient mechanism for transferring ownership.
In the present, the value of bitcoin as a currency can be viewed as the sum of the cost savings of using the bitcoin network for payments rather than alternative payment networks. If 1.00 bitcoin is currently used for 10 transactions a year with an average value of $100, the bitcoin network is three percent cheaper than the average next best alternative, and this dynamic is maintained for 10 years, multiplying these arbitrary sample inputs values 1.00 bitcoin at $300. This does not require bitcoin to replace existing local currencies.
Again, bitcoin as a payment system is just one of the potential applications of the network. To cap bitcoin’s value here would be like saying that the Internet, in the early days, was only as valuable as its ability to send email in a more efficient way than fax or snail mail. Bitcoin is valuable as a currency because of the economic efficiencies the bitcoin network is already creating as transactions flow over it. As with the Internet, more applications will flourish which will make the bitcoin network, and thus bitcoin as a currency, valuable.
We are content leaving the question of traditional and strict definitional “store of value” to economists better educated in their field than ourselves. That said, we are sufficiently convinced in the value of the bitcoin network. It is delivering tangible economic value first and foremost as a payment system in the present. This will continue to evolve in the future in ways we can foresee now — for example, securities clearing in a distributed, paperless and trustless manner — and in future applications we cannot, in the same way no one foresaw eBay or Airbnb in the early days of the Internet. This is the power and excitement of technological advancement at a low (in this case, protocol) level. It allows things to be built — and thus long-term value to be created — in ways which were not previously possible.
We’d like to thank Dr. Krugman for sparking healthy public discussion. We’re equally encouraged to see him iterate on his thoughts and be open to the thoughts of others shortly after his original article.
Fred Ehrsam is a co-founder and president of Coinbase. Prior to Coinbase, he was a foreign exchange trader at Goldman Sachs in New York; before that, he worked at BlackRock as a portfolio analyst. Ehrsam has been published in the Duke University Journal of Economics. Reach him on Twitter @FEhrsam.
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