I keep coming across articles about Bitcoin, and every time I read one of them I wonder what these people mean when they talk about Bitcoin fundamentals. They talk about hash rates and supply and demand and whatnot. But how is any of this fundamental to Bitcoin itself?
Maybe they think that because the law of supply and demand is a fundamental to markets, supply and demand is fundamental to Bitcoin as well. After all, Bitcoin is traded on exchanges. There's supply and there's demand. Ergo sum, Bitcoin has supply and demand as one of its fundamentals. But this is as silly as to say that a fundamental feature of a pig is supply and demand. It's not. Supply and demand are fundamental to markets, not pigs.
On the other hand, there's the hash rate, which is a fundamental feature of Bitcoin's hashing algorithm, and there's the block-chain, a fundamental feature of the Bitcoin network. Those are features that sound like they are fundamental to Bitcoin. However, they aren't. The block-chain is a distributed ledger. It's not Bitcoin itself. To mistake the ledger as somehow fundamental to Bitcoin is to repeat the mistake that was made back in tulip mania Holland. People mistook the ledger, which was then an exciting new way of registering ownership, as somehow fundamental to tulips.
Going on to Bitcoin hash rates we find these have to do with production cost, not Bitcoin itself. Bitcoin's is a token that trades on a distributed electronic ledger. The cost of it's production doesn't affect Bitcoin's fundamentals. A Bitcoin is a Bitcoin, no matter its cost of production. However, an increase in cost of production will limit supply, which in turn is fundamental to Bitcoin markets. What's being touted as Bitcoin fundamentals, are in fact market fundamentals.
But why should we care about this, we might ask ourselves. All that matters is the market anyway. Who cares about what Bitcoin is or isn't when there's opportunity to make a quick buck?
The answer to this is that fundamentals do matter at some point. Price will eventually reflect the inherent utility of what's being traded, which means that Bitcoin will go to zero for the simple reason that it doesn't possess any inherent utility. It's a collectible of sorts. It's a lottery ticket. But it has no inherent utility apart from this. From a purely fundamental viewpoint, it's a hard to calculate number. It's not a thing. It's an idea, moreover, it's an idea that nobody needs for anything.
Making matters worse is the fact that Bitcoin has a storage cost associated with it. This cost is unevenly distributed throughout the Bitcoin community. Some feel this cost more than others. But in sum, there's a need to sell millions of dollars worth of Bitcoin every month just to cover the cost of electricity and equipment.
This brings us back to the market fundamentals of supply and demand. Bitcoin has a steady supply from people needing to cover the costs of operating the Bitcoin network. This must be met by demand in order to keep prices elevated. Gold, on the other hand has a steady demand from jewellers and engineers. This must be met by supply in order to keep prices down. Anyone who truly cares about market fundamentals should keep this in mind before jumping onto the Bitcoin band waggon.
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