The Paradox of Bitcoin Valuation: What Are You Actually Paying For?

If you were to ask any Bitcoin buyer why they paid $80,000 for a single Bitcoin, the answer would almost always be the same: the market determines the value.

But that answer is circular. The market is not some abstract force or a law of nature. The market is made up of people, and that very buyer is part of it. Therefore, the question actually boils down to something much simpler: what exactly were you determining to conclude that it was worth paying $80,000?

Of course, there would be no answer because there is nothing to determine. Bitcoin is a computer system that displays and stores fractions of the number 21 million that an unknown programmer simply made up. Whether 1, 100, or 0.005 is displayed to a buyer, there is nothing to analyze to see if $80,000 is a good deal or a rip-off.

This becomes clear when we look at how value is determined in other cases, and how we know whether a market price is too high or too low.

If someone tried to sell you a share for $1,000, and that share only entitled you to $10 worth of assets in the event of liquidation while generating an annual profit of one dollar per share, you would know immediately that the price is unrealistic.

With money like the dollar or the euro, which is created through lending, you can determine value by the collateral behind it. No one can obtain a loan without an asset or a business project serving as security for repayment. If someone asked for your house in exchange for an amount of money that a bank created using a motorcycle as collateral, you would reject the offer. The reason is simple: the borrower can lose no more than the motorcycle itself. To repay the loan, they will provide goods, services, or labor to you roughly proportional to the value of that motorcycle, not the value of a house.

With tokens like PayPal’s electronic money or casino chips, you determine the value by the possibility of redemption. For one unit of such a token, the issuer will pay you one dollar or one euro, so there is no reason to pay more than that on the market.

With physical goods and digital products, we look at their function.

If someone asked you for $80,000 for a pound of wheat, you would reject them immediately. Not because you know some "true" price of wheat, but because you can get a similar nutritional function for a few dollars by buying other food. If Microsoft asked $20,000 for its operating system, you would reject that price because your computer can also be run by free operating systems like Linux.

In all these cases, you can analyze resources that produce future benefits and thus determine whether the market price is too high or not.

With Bitcoin, none of that exists. There is no capital, debt, or obligation-based resource, and no good or product with a function. There is only that number from the programmer's imagination and a peer-to-peer network that displays fractions of it to users and stores those records in a database.

Because of this, Bitcoin buyers cannot determine whether the market price is too high or too low, so buying comes down to a simple principle: pay and hope that someone else will pay more.

In this sense, the "Bitcoin market" is not actually a market, but a kind of participation-based scheme. In actual markets, prices are formed around determinations of a resource's future benefits. With Bitcoin, however, there is only the hope that a new participant will pay more. In other words, it is a scheme whose sustainability depends on the continuous participation of new buyers, rather than on the economic outcome of a resource.

So, when you pay $80,000 for Bitcoin, you, as a market participant, did not determine Bitcoin's value; you merely revealed the extent of your hope that someone else will eventually appear and pay even more for a piece of a number from someone's imagination.