“Bitcoin has no fundamental value” has long been the war cry for many traditional financial participants. This week we thought we could shed some light on this short-sighted mantra.

To highlight the clear value that Bitcoin affords, we first need to define what it is we are talking about.

So, what is Bitcoin?

Bitcoin is both a network and an asset. The Bitcoin network is a real-time gross settlement system comparable to Fedwire and Target. Settlement systems are the base layer of any financial system, and they leverage net settlement systems built on top to scale and provide utility to the day-to-day user.

The Bitcoin network requires participants called miners to contribute resources in order to process, execute and settle transactions. The process of performing these actions is costly, and miners are rewarded with bitcoin, the asset, for their participation.

Bitcoin, the asset, is a commodity on the Bitcoin network, it can be sent across the world, and you require it to pay the network’s fees. It is fungible, divisible, durable, portable, verifiable, scarce and has the additional properties of being censorship and seizure resistant.

Bitcoin also provides the user with high levels of certainty over its future dilution. Unlike fiat money, the issuance of bitcoin is codified and enforced by changes in the difficulty adjustment. This codified approach means bitcoins supply is impervious to changes in its demand.

Market Selected Forms of Money vs Fiat
No one reading this article has witnessed the rise of a market selected form of money; the money we use today is imposed on us and enforced by governments. A leader snapped his fingers and decided – “let it be done” (fiat’s direct translation) – that this paper we issue is now money and has value, backed by the promise of our government. It automatically served the role of being a medium of exchange, store of value and unit of account within that economy.

Market selected forms of money are different. They experience an evolution that challenges people’s perceptions of the money/asset. Historically, market selected forms of money have been commodities.

Gold is our best example. It initially started as a collectible, became a store of wealth, then widely adopted enough to be a medium of exchange and eventually became the very thing (or unit) we price everything in.

Bitcoin in its early days was merely a collectible that miners earnt for providing work to the Bitcoin network. The reason people wanted this collectible in its early days is different from why they demand it today. Initially, people would mine it or acquire it due to its perceived rarity and uniqueness; some, however, had incredible foresight and realised it may serve the role of money in the distant future.

The reasons people want it now are very different. Demand for Bitcoin today is driven by a market need for a non-discretionary, apolitical form of money. The price of Bitcoin is merely a lagging indicator of changing assumptions around money’s role in society. Market participants and institutions are buying bitcoin because it is superior to alternative monetary assets.

Even though market participants choose to store their wealth in Bitcoin, it doesn’t mean that Bitcoin is currently a safe or store of value asset. People are just voting (with their money) that Bitcoin will continue to succeed if demand for a non-discretionary apolitical monetary system continues to grow.

Will this demand continue?
The great financial crisis was a turning point for fiat money. This event — driven by the actions of irresponsible institutions caused an earthquake in financial markets. More importantly, the event caused interest rates all over the developed world to hit a zero bound.

When interest rates hit zero, monetary policy loses its effectiveness and even worse, the cost of money becomes zero. We have seen interest rates continue lower, and in some countries, even go negative. This transforms what is meant to be an asset for the buyer of a bond into a liability. The bond market is breaking in front of our eyes.

Total negative yielding debt is $18 trillion and growing. According to Bloomberg this means that 27% of the world’s investment grade debt is now sub-zero. Governments simply can’t afford to let rates go up.

Add quantitative easing to the mix, and the storm becomes that much harder to weather. Not only are bonds becoming liabilities, but governments are rapidly debasing the value of their currencies.

Read more: CITY A.M.