The Value of Bitcoin: A Deeper Dive

Is Bitcoin valuable? On the surface, the answer is yes — people pay money for it. But to truly understand its value, we need to ask deeper questions: Is Bitcoin a bubble, a Ponzi scheme, or even a pyramid scheme? Does it rely on the "greater fool" theory?

And, most importantly, where does its value actually come from? This article will address these questions and explore why Bitcoin represents a revolutionary form of sound money, as well as its role as a store of economic energy.

Is Bitcoin a Bubble?

Many believe Bitcoin is just another bubble waiting to pop. To assess this, we can look at the Bitcoin Rainbow Chart, a well-known tool that plots Bitcoin’s price over time on a logarithmic scale.

This scale tracks growth in orders of magnitude (10, 100, 1,000, etc.) along halving cycles, filtering out short-term noise and volatility. The Rainbow Chart lays Bitcoin’s price action over colored bands, from “Basically a Fire Sale” to “Sell. Seriously, SELL!” — visually depicting Bitcoin’s long-term trend.

What this chart reveals is that Bitcoin’s price rises and corrects cyclically, but it consistently resumes an upward trajectory.

Unlike historical bubbles, such as the Dutch Tulip Mania, where prices collapsed and never recovered, Bitcoin's long-term growth is driven by technological innovation, increasing adoption, and its unique monetary structure.

The chart helps illustrate that Bitcoin's behavior doesn't follow the typical path of a speculative bubble, but rather shows a consistent trend of adoption and value appreciation. In comparison, the Tulip Mania looked something like this:

2. Is Bitcoin a Ponzi Scheme?

A Ponzi scheme lures investors with promises of high returns, which are paid using the funds from newer investors. Bitcoin does not operate this way. It is an open, decentralized network with no central entity promising returns.

Its price is determined by supply and demand — not by the actions of a central party. The transparency of the system and its decentralized nature make it fundamentally different from a Ponzi scheme.

3. Is Bitcoin a Pyramid Scheme?

In a pyramid scheme, participants must recruit others to earn money, with each new participant paying those above them. Bitcoin has no recruitment mechanism. People buy Bitcoin for its utility as a store of value, medium of exchange, or speculative investment, but there is no requirement or incentive to bring in new buyers.

Unlike a pyramid scheme, Bitcoin’s value grows through real-world use cases and network adoption — not by feeding new entrants into a system of payouts.

4. Does the Greater Fool Theory Apply?

The greater fool theory suggests that people buy an overvalued asset with the hope of selling it to someone else at an even higher price. Could this apply to Bitcoin? In some speculative cases, maybe.

But here’s the bigger question: Can the same argument not be made for stocks, particularly when valuations become excessive? Tech stocks during the dot-com boom were valued at unsustainable levels, but that didn’t mean all tech companies were without merit. Bitcoin, similarly, is not just speculation without substance.

Its value is rooted in its utility, scarcity, and increasing adoption. While some may buy it hoping to sell later for a higher price, Bitcoin’s long-term value proposition goes far beyond mere speculation.

Where Does Bitcoin Derive Its Value From?

Bitcoin’s value comes from two fundamental aspects: its function as sound money and its ability to act as a store of economic energy. Let’s break down both concepts and explore why Bitcoin is uniquely positioned to fulfill these roles.

Bitcoin’s Value as Sound Money

Bitcoin’s design closely aligns with the concept of sound money, a form of currency that holds its value over time and resists manipulation. To understand how Bitcoin achieves this, let’s first explore what makes money "sound" and how Bitcoin measures up.

What Makes Money Sound?

Sound money has historically been defined by three key qualities: Storehold of Value: Money should retain its purchasing power over time. Unit of Account: It should provide a reliable measure to compare the value of goods and services. Means of Exchange: It needs to be widely accepted and easily transferable.

These qualities ensure that sound money remains stable, trustworthy, and functional across generations. Bitcoin fulfills these qualities and even introduces modern enhancements.

How Does Bitcoin Fulfill These Qualities?

Storehold of Value: Bitcoin’s capped supply at 21 million ensures it cannot be inflated away, unlike fiat currencies that are designed to lose value over time. While Bitcoin’s short-term volatility may give the appearance of instability, its long-term trend reveals a more stable and reliable store of value. Fiat currencies, by design, depreciate due to inflation, whereas Bitcoin’s scarcity drives its long-term appreciation against fiat currencies.

Unit of Account: Although Bitcoin isn’t yet widely used as a unit of account, primarily due to its current volatility, this may change as adoption grows. In countries experiencing hyperinflation or currency instability, Bitcoin could offer a more stable measure of value in the future.

Means of Exchange: Bitcoin’s borderless and decentralized nature allows it to serve as an effective means of exchange, especially for cross-border transactions and in regions with limited access to banking infrastructure. Its utility as a medium of exchange is growing, though it is not yet ubiquotous.

Other Key Qualities of Sound Money

Beyond the basic functions of sound money, Bitcoin offers several additional qualities that make it a superior monetary tool:

Limited in Supply: Bitcoin’s supply cap of 21 million ensures its scarcity, protecting it from the inflationary risks that undermine fiat currencies.

Durable and Divisible: Bitcoin exists purely in digital form, so it cannot be destroyed or degraded over time. It is also divisible into tiny units (satoshis), making it highly adaptable for transactions of any size.

Portable and Recognizable: Bitcoin is easy to transfer and store. It can be held on a small hardware device or even memorized as a seed phrase. Its global recognition and ease of transport make it highly practical compared to physical money or assets like gold.

Free from Government Manipulation: Because Bitcoin operates on a decentralized network, no single government or central bank can control its issuance or manipulate its value. This independence from political influence makes it immune to the inflationary policies that debase fiat currencies.

Bitcoin’s Value as Stored Economic Energy

Beyond its function as sound money, Bitcoin offers something even more profound: it acts as a store of economic energy. What does that mean? Economic energy refers to the value created by human effort — our work, time, and resources. Bitcoin allows individuals to store this energy in a form that transcends borders, governments, and time it'self.

Conservation of Value Over Time: Just as a battery stores electrical energy for later use, Bitcoin stores economic energy. Once you convert your wealth into Bitcoin, it’s preserved and protected from the forces that erode the value of fiat currenices, such as inflation or reckless monetary policies. This makes Bitcoin an excellent vehicle for those looking to safeguard the fruits of their labor across generations.

Protection Against Wealth Erosion: Traditional savings in fiat currencies lose purchasing power due to inflation. Governments can print more money, diluting the value of existing currency. Bitcoin, with its fixed supply, serves as a hedge against this dilution. By holding Bitcoin, individuals can store their economic energy in a way that ensures its value remains intact over time, regardless of the policies of any single country or central bank.

Transcending Geopolitical Boundaries: Bitcoin is borderless. It doesn’t rely on a national economy or government policies for its value. This gives individuals a way to store and move wealth across the globe without relying on local financial systems. In unstable economies or authoritarian regimes, Bitcoin becomes a tool for people to protect and transport their economic energy, even in the face of capital controls or political unrest.

Intergenerational Wealth Transfer: By holding Bitcoin, individuals have the ability to transfer economic energy to future generations. Just as real estate or gold has historically been used to pass down wealth, Bitcoin provides a digital, more secure, and easily divisible form of transferring value through time.

Valuation Methodologies for Bitcoin

Valuing Bitcoin is more complex than traditional assets like stocks or real estate. However, there are several key models that provide insight:

Stock-to-Flow (S2F): This model was developed by PlanB, a well-known Bitcoin blogger, and compares Bitcoin’s existing supply to its annual production. The idea is that as Bitcoin becomes more scarce, its value should increase. Historically, Bitcoin’s price has followed this model with uncanny precision, particularly after its halving events.

Metcalfe’s Law: This theory suggests that the value of a network grows exponentially as its user base increases. As more people adopt Bitcoin, the value of its network—and, by extension, its price—should rise.

Market Dynamics: Like any asset, Bitcoin’s price is influenced by supply and demand. As institutional adoption increases and more people recognize Bitcoin’s utility, demand will likely continue to grow, further driving up its price.

Digital Gold Thesis: Many compare Bitcoin to gold, viewing it as a modern store of value. If Bitcoin’s market capitalization were to approach that of gold, its price would rise dramatically.

Conclusion

Is Bitcoin valuable? Absolutely. Its value comes not from speculative bubbles or recruiting new buyers, but from its ability to function as sound money — a tool designed to store and transfer value in a way that surpasses traditional fiat systems. Bitcoin challenges the very concept of money by offering scarcity, durability, divisibility, and freedom from government manipulation.

Additionally, Bitcoin serves as a store of economic energy, allowing individuals to protect the value of their labor and resources from inflation, political instability, and devaluation over time.

As the world’s financial systems continue to grapple with inflation, devaluation, and centralization, Bitcoin offers a solution that preserves both the monetary value and the economic energy of individuals across the globe. Its ability to function as both sound money and stored economic energy makes Bitcoin a unique and powerful tool in the modern financial landscape — and one that’s likely to grow in importance as more people recognize its true potential.

Disclaimer: The content of this article is for informational purposes only and does not constitute legal advice. The opinions expressed are the author’s own and do not represent the views of any organization the author may be associated with. Please consult a qualified legal professional for advice tailored to your individual circumstances before making any decisions based on this article.