Ford suggested a currency backed in kilowatt-hours (kWh) and this is exactly what was found for Bitcoin in Bitcoin’s Energy-Value Equivalence. Bitcoin is “backed” by energy input.
For the last 10 years, 80% of Bitcoin’s price history is explained by a 1-to-1 constant value against energy input. Like all markets, price fluctuates around value. But price and value are intrinsically linked and mean-revert. Bitcoin has a fixed value through time based on the mining energy exerted and its supply growth rate.
“Mr Ford proposes that this currency be issued only to a certain definite amount and for a specific purpose.”
In other words, you could only issue more energy currency if you put more energy-in, and this is exactly what Bitcoin does. All else equal, the more energy you put in as an individual miner, the more freshly minted Bitcoin you will receive. On the other hand, the more energy that all other miners put into mining Bitcoin the more difficult, and costly, it is for you to mine Bitcoin.
In the 20th century, there was no way to accountably and immutably link the value of energy to a unit of currency. Further, there was no motivation for the establishment to even consider a “energy currency” system which could make their existing sources of wealth and power redundant and would certainly remove their ability to pull the levers of monetary policy.
Today, this has changed with the invention of Bitcoin.
Bitcoin’s intrinsic value can be modeled simply by its relationship to energy and the dollar, assuming other costing variables are relatively constant. This model is valid particularly because of the macroeconomic phenomenon that commodities tend to gravitate towards their production costs. It’s also worth noting that the halving essentially doubles the production costs every four years by spreading the energy cost over fewer coins.
“The price of any commodity tends to gravitate toward the production cost. If the price is below cost, then production slows down. If the price is above cost, profit can be made by generating and selling more. At the same time, the increased production would increase the difficulty, pushing the cost of generating towards the price.”
-Bitcoin White Paper, 2009
Bitcoin’s fair value is a function of energy input, supply growth rate, and a constant representing the fiat dollar value of energy.
Below is the Energy Value derived over time compared to the bitcoin price. The anomaly in 2013 is explained by the introduction of ASIC-miners that rapidly increased the efficiency of mining bitcoins. The current era ASICs have energy efficiencies over 100,000 times greater than the average Bitcoin mining hardware of 2009. This means that a higher relative portion of the average miner’s electrical bill today is efficiently converted into hashing power.
The amazing part about Bitcoin is its aggressive independence and self-sufficiency. Economically, it has created a self-preserving economy in which miners can profitably supply users, inflation decreases over time to the point of deflation, and the price of the commodity weeds out inefficient miners and rewards the best performers. Technologically, it’s self-developing in that better mining hardware is incentivized, better features are self-serving to developers, and a better network is beneficial to all users. There are very few things in the world that operate without any governmental, bureaucratic, or political intervention. Bitcoin is a phenomenon.
Friedrick Hayek, one of the most famous economists of the 20th century plead for the denationalization of money, publishing his work “The Denationalization of Money” in 1976. In it he advocated for competitively issued “private money”, similar to Bitcoin. He believed that monetary policy instituted by central banks has not done any good for the world, people, or economies. It’s worth watching his interview if you’re interested in his theories here: https://www.youtube.com/watch?time_continue=1188&v=EYhEDxFwFRU
I suggest reading over the implications of the halving and its regards to the bitcoin micro-economy again now that we’re two weeks from the halving. Essentially, half of the selling pressure will evaporate as there will be half as many coins brought into circulation every day from the point after the halving. Since Bitcoin is inherently scarce, this will decrease the inflation of coins and historically has had positive pressure on the price. Here’s the chart from that original article. It’s been fun to see how it played out.
If there was ever any proof that Bitcoin is a commodity and one that has a place in the world economy, it was shown during this recent collapse of global markets. During this unprecedented economic scenario, Bitcoin has shown a high correlation to its physical sister-commodities: Gold and Silver. Traditionally Gold and Silver have been hedges against an inflationary currency, and are likely rallying on the risk of dollar inflation from the historical money printing and economic stimulus taking place currently.
Bitcoin has created digital scarcity, digital value, immutability, and a digital means of exchange backed fundamentally by energy itself and the network of people using it. It fits the definition of Ford’s “energy currency” and Hayek’s ideal of “Good Money”.