Why Is Bitcoin Valuable?
By: Taylor Pearson
Tags: Btc, Blockchain, Bitcoin Price, Why Is Bitcoin Valuable, Bitcoin

On almost every dimension, Bitcoin is worse than it’s centralized counterparts like Paypal or Chase.

This is true not just of bitcoin but almost all decentralized cryptocurrency protocols.

They are slower, more expensive, harder to scale, and offer worse user experiences.

So why is bitcoin valuable? Why are other decentralized applications valuable?

Transactions on the Bitcoin network are unstoppable. If I have an internet connection and agree to pay the network’s fee, nothing can stop me from sending Bitcoin to anyone I want.

That is to say, bitcoin is censorship resistant.

What is Censorship Resistance and Why Would It Make Bitcoin Valuable?

Cryptography is one of the very few fields in the 21st century [1] which continues to heavily favor the defender. Using cryptography, an average person can defend themselves from even governments and large companies.

Ross Ulbricht, the founder of the illicit Silk Road marketplace, was never cracked cryptographically by the FBI. In fact, they had to wait to arrest him until he was at a public library with his computer open where they could snatch it before he was able to close it and lock the computer cryptographically.

This asymmetry in favor of the defender, sometimes called the defender’s advantage, is a key property of cryptocurrencies, such as Bitcoin. Using the most powerful computer in the world, it would take .065 billion billion years to crack a person’s private Bitcoin key.[2]

That makes it sufficiently difficult to crack an individual’s private key, but what about taking down the network?

For starters, the bitcoin network is the most powerful computer network in the world.[3] In 2015, it was 11000 times faster than the top 500 supercomputers combined so there is no single entity which controls more computing power. [4]

The bitcoin network is the most powerful computer in the world because it pays so-called “miners” in bitcoin to lend computing power towards securing the network. As the price of bitcoin increases relative to fiat currencies, miners receive higher fees, incentivizing them to devote yet more computer power, which makes the network more powerful and creates a positive feedback loop.

As of November 16, 2017, the cost of building a supercomputer powerful enough to corrupt the bitcoin ledger (also known as a 51 percent attack) would be around $3.14 billion in hardware and $5.6 million in electricity every day.[5]

There is also a game theory component here.

Because the vast majority of bitcoin users believe the network is only valuable, if it remains decentralized; a 51% attack would likely mean that as soon as the attacker gained control of 51% of the network, it’s value would drop to zero.

More significantly, if you you had 51% of the hashpower you stand to make ~$15–20M per day mining honestly. So, even if you have dishonest ambitions, it’s more profitable to just play by the rules.

This combination of the defender’s advantage and the positive feedback loop in mining creates a property called censorship resistance.

Censorship resistance means the cost of trying to censor, steal, or otherwise coerce is so high as to be impractical bordering on (but not reaching) impossible. In the case of bitcoin, anyone who wants to steal your bitcoin from your bitcoin wallet by cracking your private key or to perform a 51% attack would have to bring such an enormous amount of computing power to bear that it would cost far more to steal the bitcoin than to simply buy it themselves.

All other asset classes, like fiat currencies, precious metals, and real estate, are easier to destroy or seize than a cryptocurrency such as bitcoin. They do not enjoy the same asymmetric defender’s advantage and the censorship resistance it affords.

Why might this matter?

Protect Yourself From Governments and Companies

The most common way that the defender’s advantage is discussed in the context of bitcoin is citizens protecting themselves from irresponsible or malicious governments and companies.

With all of the crazy things going on in the world, the demand for censorship-resistant wealth storage is high and growing. Current markets which exist largely because of their censorship resistant properties include the gold market (est. $6 trillion) [6] and the offshore banking industry (est. $20 trillion) [7].

Citizens of countries like Argentina and Venezuela have been quick to adopt Bitcoin as a savings vehicle because their economic history made the value of censorship resistance more obvious.

Due to poor governance, the inflation rate in Venezuela averaged 32.42 percent from 1973 until 2017. [8]

Argentina was even worse; the inflation rate there averaged 200.80 percent between 1944 and 2017. [9]

Both countries also have a history of politicians seizing the private property (land, companies, etc.) of political opponents or even seemingly arbitrary targets.

Censorship-resistant wealth storage in general, and bitcoin specifically, may sound like a strange libertarian or anarchist perspective if you’ve grown up in a stable country.

Since WWII, the developed world has lived through a remarkably peaceful and stable era, but that has not always been the case and is not true everywhere even today. So even if the idea of censorship resistance sounds crazy to you, it’s worth considering that about $26 trillion dollars (in the form of gold and offshore banking) thinks censorship resistance is pretty important. [10]

However, let’s skirt the libertarian doomsday planning scenarios and assume you are an upstanding citizen in a stable country. Is the censorship resistance created by the defender’s advantage present in cryptocurrency still important and valuable under more “normal” political conditions?

To see why that could be the case, we need to take a brief detour to Bell, California, circa 1993.

How to Make $787,000 per year as a Small Town Mayor

Robert Rizzo served as mayor of the city of Bell, California from 1993 to 2010.

When he left his office in 2010, he was earning $787,000 a year. For context, the President of the U.S. earns $400,000 a year, and the Governor of California earns $200,000.

How was the mayor of a 35,000 person town able to make nearly $1 million per year?

After his election in 1993, Rizzo held a special vote to make the city of Bell a charter city.

The vote meant Bell was no longer subject to the scrutiny (and accountability) of state legislators. This was done under the pretense that local leaders (like Rizzo) knew what was better for Bell than faraway state politicians.

The vote didn’t take place alongside state or general elections, where people would be voting anyway, but in a special election. Of the 36,000 residents of Bell, only 400 (1% of residents) voted in the election where the charter passed.

Effectively, the provision made Rizzo a dictator who could then proceed to cook the books.

Rizzo was elected on the promise to balance the budget, and balance the budget he did. He raised the property tax to 1.55%, higher than almost anywhere else in Los Angeles County — including affluent suburbs like Beverly Hills and Malibu.

This generated an enormous budget surplus for Rizzo, which he gradually used to give himself raises of 15% each year, going from the $72,000 salary he got when he took office in 1993 up to $787,000 by the time he left in 2010.

Rizzo was not a warlord — he was an elected official in a city within one of the most historically stable, democratic countries in the world

Selectorate Theory: Democracy Is Censorship Resistant

Bell’s temporary case of near-despotic rule is a good case study for understanding politics and power dynamics through Selectorate Theory.

Selectorate Theory breaks down the political landscape into three tiered categories of those who have the power to ‘select‘ the final outcome of a given election.

The three sections of the Selectorate are:

The nominal selectorate — everyone who can, nominally, influence the outcome. In the city of Bell’s case, this is the city’s sum of Registered Voters.

The real selectorate — the group that actually chooses the leader. In Bell’s case, this was those who actually voted during the special election.

The winning coalition — the subset of the real selectorate whose decisions are truly influential. In Bell’s case, this was the six city council members and Rizzo himself.

In a U.S. presidential election, the same categories might look like this:

The nominal selectorate — all eligible registered voters.

The real selectorate — the people who actually voted (or, one could argue, the electoral college).

The winning coalition — major media, influential public figures (talk show hosts, prior presidents, celebrities, social media influencers), and high-level campaign staffers.

Selectorate theory undermines how democracy is taught in a high school government class: that everyone has an equal say in the form of “one person, one vote.” It gives a more accurate framework that having more followers on social media, viewers of your TV show, or money to buy political ads makes someone more able to influence the outcome of an election than a person who can merely vote.

The lesson of Selectorate Theory and the case of Rizzo is that what matters isn’t who the individual running the system is but the distribution of the selectorate.